The Real State of the State Budget

By Beacon Staff

One of the most frequently asked questions of legislators these days is, “Why are there conflicting reports on Montana’s financial state of affairs?” The Legislative Fiscal Division reports that expenditures are greater than revenues and significant action will be necessary in the future to balance the budget as required by law. Meanwhile, the governor touts a balanced budget. So what is the real story?

The governor submits to the Legislature a biennial “Governor’s Budget,” which is a proposed budget to run the state. This becomes the basis for House Bill 2 (HB2), the main responsibility of the Legislature. The budget must be balanced and remain so throughout the biennium. To determine the revenue available, a “revenue estimate” is derived from revenue forecasts by Legislative Fiscal Analysts and finalized by the Legislature. If actual tax revenue becomes less than budgeted, spending must be adjusted accordingly.

During the 2009 session, the economy was faltering and the Legislature cut from the governor’s budget approximately $90 million. Soon after the session, the state’s economy began to perform worse than expected. Personal and corporate income tax, Montana’s primary revenue source, was lagging. General fund revenues declined by 7.5 percent in FY 2009, and are forecasted to decline another 12 percent for FY2010; a historic amount. A resulting $65 million deficit was projected for the end of the biennium and this was after spending $282 million of reserves. In the last 40 years, the only other period of two consecutive declines was in FY 2002 and FY 2003 with a modest .3 percent and 1.5 percent, respectively.

The governor was required by law to cut expenditures to meet certain “gates” in the timeline (currently requiring a balance of $36 million). Things changed when the state Land Board approved the sale of Otter Creek coal and the $81.5 million from the sale was used to pay down the remaining deficit. Although this left a positive ending fund balance for this biennium, it took the $282 million reserve plus $81.5 million from Otter Creek to do so; money not available for the next budget cycle. And it left a budget where expenses still exceed revenue.

This budget gap will carry into the next biennium (FY2013) with an expected shortfall of about $400 million (10 percent of the general fund budget). A 10 percent reduction is substantial. If, for example, no cuts are made in education, corrections, or health and human services, it would require totally eliminating the funding for all other state agencies to account for this amount. Even though the economy is showing modest signs of recovery, we may not see 2008 dollars again until 2015.

The FY2013 governor’s budget will be submitted in November for the next Legislature. The Legislature must deal with real, unbiased numbers, based on sound economic projections, and unencumbered by political or personal motives, because in the end the money will either be there or not. It’s a difficult process, with many unknowns, especially in these uncertain times.

The 2011 session will require short term action to deal with a substantial budget gap. Long term, Montana must learn to live within its means. Spending has grown faster than the state’s economy. so in the future we must capitalize on our economic potential and find a more modern and efficient way of doing business.

Mike Milburn is a state representative from Cascade.

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