The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Tuesday, June 22, 2004, at 1:00 p.m., in Room 131 of the Capitol Annex. Senator Richard Sanders, Jr., Co-Chair, called the meeting to order, and the secretary called the roll.
Members: Senator Richard Sanders, Jr., Co-Chair; Representative Harry Moberly, Jr., Co-Chair; Senators Brett Guthrie, Ray Jones, II, Dan Kelly, Alice Kerr, Robert Leeper, Vernie McGaha, Gerald Neal, R.J. Palmer, II, Joey Pendleton, Dan Seum, Robert Stivers, and Jack Westwood; Representatives Royce Adams, John Arnold, Jr., Joe Barrows, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Jack Coleman, Bob DeWeese, Jon Draud, Danny Ford, Joni Jenkins, Jimmie Lee, Mary Lou Marzian, Thomas McKee, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, Tommy Turner, John Vincent, Jim Wayne, and Robin L. Webb.
Guests Appearing Before the Committee: Dr. Merl Hackbart, Professor, University of Kentucky, and member of the Consensus Forecasting Group; and Bob Cox, Executive Director, Governor's Office for Economic Analysis.
Guests: Representatives Rocky Adkins, Tom Burch, Dottie Sims, and Kathy Stein; Bob Babbage, Burley Growers; Clyde Caudill, KASS/JCPS; and Mike Carr, KABA.
LRC Staff: Terry Jones, Louis Pierce, and Kathy King.
Chairman Sanders opened the meeting and asked for a moment of silence in memory and honor of late Senator Paul Herron, Jr., who represented the 4th Senate legislative district.
Chairman Sanders recognized Dr. Merl Hackbart and Mr. Bob Cox to discuss the revenue forecast and economic outlook for Kentucky. Dr. Hackbart said the Consensus Revenue Forecasting Group is required by statute to provide the General Assembly and the administration with three forecasts prior to the regular budget session. The first forecast, a planning forecast, occurs in August. The second forecast, called the preliminary budget planning forecast, is provided in October, and the third forecast, the official forecast for the budget session, is provided in January. Since last January, when the Consensus Revenue Forecasting Group presented its official forecast for budget preparation, state revenues have exceeded expectations and the economic outlook has changed. Because of the unanticipated growth in the state's economy and its potential impact on the future outlook, the State Budget Director requested a reforecast for fiscal years 2005 and 2006. The Consensus Revenue Forecasting Group met and reforecast the revenue outlook for fiscal years 2005 and 2006 based upon the 2004 adjustment from increased revenues.
Dr. Hackbart said a number of positive trends occurring nationwide and in Kentucky have led to three or four consecutive months of strong economic activity. Global Insight, a national economic forecaster, characterizes the economic activity as a period of transition from policy-supported economic activity to a period of sustainable growth. The policy-supported activity is based upon the assumption that the federal government has promoted economic self-sustenance by offering low interest rates. Corporate profits have increased. Retail sales and consumer optimism have improved, and employment growth is stronger. The national unemployment rate is about 5.7 percent, while Kentucky's unemployment rate has remained stationary at about 5.5 percent. There is some concern about Kentucky's employment growth because it is mainly in the nonmanufacturing sector which are typically low-wage jobs. Dr. Hackbart said energy prices and possibly some other factors may result in an increase in the consumer price index. Oil and gas prices have risen but forecasters are not predicting that the higher prices will derail economic expansion. Global Insight anticipates petroleum prices to recede in the next several months possibly back to 2003 levels. Dr. Hackbart said there has been modest but steady improvement in both the national economy and Kentucky's economy almost across the board since last January.
In 1991, there was a nationwide recession with slow economic growth and a decline in employment. Beginning in 1993 throughout the 90s and into the beginning of 2000, there was substantial growth in the economy and in employment, but in July 2000, the U.S. economy and Kentucky's economy began declining. Dr. Hackbart said Kentucky has lost 45,000 to 50,000 jobs since the recession began in 2000.
When the official forecast was done last January, first quarter revenue receipts for FY 2004 were down as compared to the previous year, and there was only a slight increase in the second quarter of the fiscal year. The growth rate for FY 2004 was projected at 0.8 percent which was in-line with modest growth expectations. The revenue forecast also included about $190 million of one-time money from special tax receipts, amnesty and a number of other factors which artificially raised the base for FY 2003. Third quarter revenue receipts increased significantly to 4.5 percent compared to the first two quarters and even though current quarter totals have not been finalized, an eight-plus percentage growth is expected for the final quarter of FY 2004. The final General Fund revenue growth for FY 2004 is expected to be about 2.8 percent, which is about $140 million more than the official forecast made last January in preparation for the budget. Based on the increased growth rate for FY 2004, the reforecast growth rate for FY 2005 is about 3.9 percent, and about 3.8 percent for FY 2006. Dr. Hackbart said Kentucky's revenue is dependent on receipts from the sales and use tax and the individual income tax. Those two taxes represent about 75 percent of Kentucky's revenue income. Lottery receipts were better than anticipated and the coal severance tax has improved, and the outlook for the coal severance tax for FY 2005 and FY 2006 is more optimistic because of price changes and new mine start-ups.
Dr. Hackbart said to put economic growth in perspective, actual growth of the General Fund on a base of about $7 billion is about 1.2 percent, or 1.3 percent above expectation. Looking at FY 2005 and 2006, the new forecast would produce $95 million in FY 2005, which is slightly above one percent, and $70 million for FY 2006, which is about one percent.
Dr. Hackbart said Road Fund receipts have not changed significantly since the official forecast in January. The Consensus Revenue Forecasting Group reduced the outlook for FY 2004, predicts a slight increase for FY 2005, and a decline for FY 2006. The slight increase for FY 2005 is because of an increase in petroleum prices and gasoline prices. Current law states that if the wholesale price of gasoline stays above $1.11 for a quarter period then the current tax on gasoline and fuels will increase up to ten percent for the following quarter. The increase amounts to an additional $18 million for FY 2005. The increase is expected to be temporary, however, lasting probably two full quarters and then begin to drop back down because long-term projections for petroleum and gasoline prices are predicted to decline.
Chairman Sanders asked about the ITW decision and the Governor's Executive Order to uphold legislation passed by the General Assembly. Dr. Hackbart said the Governor's Executive Order allows temporary action relating to ITW for one year, and the revenue forecast is assuming that the temporary action will expire on April 15, 2005, so a partial year adjustment was made to remove ITW money from the first three fiscal quarters of FY 2005. Mr. Cox said a bill was passed by the General Assembly in the 2004 Regular Session to remedy the ITW situation for financial institutions and the figures in the forecast are consistent with earlier estimates minus the timing and minus the financial institution impact. He said $24.4 million is added for FY 2005, and $47.2 million for FY 2006 to reflect ITW.
Representative Wayne asked if the 2.1 percent inflation rate is factored into the estimated growth rate. Dr. Hackbart said inflation is included in the forecast.
Senator Kelly said the reforecasted estimates for FY 2005 and FY 2006 include factoring in the ITW receipts. If an ITW fix is made then the figures for FY 2005 and 2006 would be reduced. Dr. Hackbart said that is correct.
Senator Kelly said if individual and corporate tax changes are enacted in January and do not become law until July, the tax year is halfway over. For simplicity purposes and administrative purposes, the individual and corporate income taxes should be aligned to the calendar year when sales taxes and other types of revenue are not as critical. Mr. Cox said it is difficult to know if timing is the issue with relation to corporate taxes. He said when it was believed that the ITW decision was going to stand early in the fiscal year, corporate license tax receipts were down significantly. Ironically, as soon as the Governor announced the temporary action relating to ITW, corporate license tax payments increased. He said he believes a lot of companies were waiting to see what was going to happen and what the resolution was going to be before deciding their liability.
Senator Neal asked if the unemployment figures used for the forecast are accurate. Dr. Hackbart said the figures used in the unemployment forecast represent a trend rather than the actual number of each unemployed person.
Chairman Sanders asked for committee consideration of a resolution asking the President and Kentucky's Congressional delegation to support the federal tobacco buy-out. Representative Wayne said the current proposal being considered in Washington favors big tobacco farmers and multi-agribusiness rather than small farmers. He made a motion to amend the resolution by striking through language in the fourth "WHEREAS" clause after "WHEREAS" and inserting "a proposed tobacco buy-out would bring additional money into Kentucky and would stimulate the economy thus producing jobs." The motion to amend was seconded by Representative Barrows and adopted by voice vote.
Representative Marzian asked how much taxpayers are paying for the tobacco buy-out. Chairman Sanders said staff would provide that information.
Representative Draud said an article in today's paper about the tobacco buy-out stated that the total federal buy-out was $9.6 billion of taxpayers' money. In addition, the article said a number of Kentuckians would become instant millionaires. Chairman Sanders commented that the tobacco buy-out covers the entire burley belt. Kentucky's portion will be about one-third of that amount.
Representative Webb said resolutions urging a tobacco buy-out have been sent to Washington for several years now and the issue is simply being used as a political football every time an election season rolls around. She said it is time for Congress to act on the resolution.
Representative Ford said the amount of money farmers are going to receive is based upon their tobacco quota.
A motion having been made and seconded, the resolution was adopted as amended by voice vote.
There being no further business, the meeting was adjourned at 2:00 p.m.