Idaho’s state budget is a dynamic, continuously evolving financial framework for the public services provided by state government. August is a significant month in Idaho’s budget process because it brings new information that sheds light on the conditions that underlie the state’s budget.
Since the end of the 2013 legislative session that set the initial FY 2014 state budget, two major things have happened that bear upon the state’s budget: fiscal year 2013 has ended, so we now have actual rather than forecast revenue for that budget year (along with actual rather than budgeted expenditures for that year), and we have an updated FY 2014 General Fund revenue forecast from the Division of Financial Management (DFM, the governor’s budget office).
Relative to the budget that was set during the 2013 legislative session, Idaho now faces a fiscal situation that is characterized by significantly more financial resources than state policymakers (the governor and the legislature) estimated would be available in the current fiscal year. Among other things, this will have considerable consequences for the budget decisions to be made in the 2014 legislative session. The rest of this paper will delineate the changes that have occurred, and put them into the context of Idaho’s overall budget situation.
FY 2013 ended on June 30, 2013 with $98.3 million more in General Fund revenue than was forecast by both the governor and the legislature in the 2013 legislative session. This figure is based on comparing the actual revenue result to the forecasted revenue from the legislative session, with an adjustment for law changes that were not reflected in the revenue forecast but are reflected in the actual revenue result. (The sole law change affecting FY 2013 General Fund revenue is a reduction of $6.0 million associated with HB 001, Tax Conformity.)
This FY 2013 revenue surplus of $98.3 million was reported by the Legislative Services Office (LSO) in the June 2013 General Fund Revenue Monitor. DFM reported in the July 2013 Idaho General Fund Revenue Report that actual FY 2013 revenue exceeded the January 2013 forecast by $92.3 million. The DFM report compares the ‘pre-law change’ forecast from January 2013 to the ‘post-law change’ actual revenue result from June 2013. DFM’s report in effect mixes apples and oranges.
An apples to apples (or oranges to oranges) comparison needs to either adjust the January 2013 forecasted revenue amount to add in the effect of law changes, or adjust the June 2013 actual revenue result to subtract out the effect of law changes. DFM’s report does neither. Unfortunately, news media coverage was based on the DFM report and understated the FY 2013 revenue surplus by $6.0 million.
The details of the FY 2013 year-end outcome are presented in the following table. It uses the format presented on page A-26 of DFM’s 2013 Budget Activities Summary, a document produced each year after the legislative session ends that presents the results of the legislature’s budget decisions.
DFM reported actual revenue growth from FY 2012 to FY 2013 was 6.3%, and this is $92.3 million higher than the January 2013 forecast. This is technically correct, but it combines the revenue forecast error of $98.3 million with the $6.0 million revenue adjustment that is due to law changes (i.e., HB 001)
The table above shows 6.5% actual revenue growth (see line 4 under “Revenues:”) based on adjusting the actual FY 2013 revenue outcome for the estimated $6.0 million impact of HB 001.
Several other budget elements changed between the end of the 2013 legislative session and the end of fiscal year 2013. An unanticipated transfer of $3 million into the General Fund from the CAT Fund occurred per the provisions of HB 615 from the 2012 legislative session, $0.5 million of other transfers were made into the General Fund, and year-end reversions reduced expenditures by $3.5 million.
All combined, FY 2013 would have had an ending balance $105.3 million higher than was anticipated were it not for HB 345. Instead, the FY 2013 ending balance is just $20 million higher than was anticipated at the end of the 2013 legislative session. That’s because HB 345 provided that any FY 2013 ending balance above $80 million (i.e., $20 million higher than the expected ending balance) would be swept into the Budget Stabilization Fund. In fact, $111.3 million was swept into the Budget Stabilization Fund in FY 2013 – $25.9 million that was scheduled, plus $85.4 million that was due to the FY 2013 revenue surplus.
The following table presents the changes that have occurred to the FY 2014 Idaho General Fund budget since the end of the 2013 legislative session. Once again, this table is formatted to be consistent with the corresponding table in DFM’s 2013 Budget Activities Summary (see page A-30).
There are four changes reflected in this table. First, the FY 2014 beginning balance is $20 million higher. The beginning balance is the same as the FY 2013 ending balance that was discussed in the previous section on FY 2013. To reiterate, it is only $20 million higher because an extra $85.4 million was transferred into the Budget Stabilization Fund in FY 2013.
Second, the FY 2014 revenue forecast was increased by $33.8 million. Unfortunately, this was not reported in DFM’s August 2013 General Fund Revenue Report that presented the new FY 2014 General Fund revenue forecast, but it was reported in the July 2013 General Fund Budget Monitor produced by LSO.
DFM reported the FY 2014 updated revenue forecast of $2,808.8 million as a 2.1% increase over FY 2013 revenue, and noted it superseded the $2,799.1 million projection from January 2013. To the casual observer this implies the revenue forecast for FY 2014 increased by $9.7 million, but that would be incorrect. Missing is $24.1 million of downward revenue adjustments related to law changes enacted in the 2013 legislative session. That negative $24.1 million is NOT reflected in the $2,799.1 million General Fund revenue forecast from January 2013, but it IS reflected in the $2,808.8 million General Fund revenue forecast from August 2013. The apples to apples forecast comparison is not between $2,808.8 million and $2,799.1 million, but between $2,808.8 million and $2,775.0 million – a $33.8 million difference.
Revenue related law changes also impact revenue growth rates, and need to be properly handled to make valid growth rate comparisons between different revenue forecasts. The 2.1% FY 2014 revenue growth rate reported in the August 2013 General Fund Revenue Report is not directly comparable to the 5.3% FY 2014 growth rate from January 2013.
Again, the August 2013 revenue forecast includes the effects of law changes (i.e., negative $24.1 million), whereas the January revenue forecast does not. In order to compare the August 2013 General Fund revenue forecast to the January 2013 General Fund revenue forecast, one or the other of those forecasts needs to be adjusted for the effects of 2013 legislative session law changes.
This is done on a “pre-law-change” basis in the table above on line 2, where $2,832.9 is shown as the current (i.e., August 2013) General Fund revenue forecast. This is the actual DFM August 2013 forecast with the effects of 2013 legislative session law changes subtracted. It yields a growth rate of 2.8%, which is directly comparable to the January 2013 forecast of 5.3% revenue growth.
The table above does not have a line item for “post-law-change” revenue forecast numbers, but it is a simple matter to subtract $24.1 million from the January 2013 forecast to obtain $2,775.0 million. That represents a 4.6% increase over January’s FY 2013 forecasted revenue (also adjusted for 2013 legislative session law changes), and is directly comparable to the current forecast of 2.1% revenue growth.
Third, there is a small ($2.4 million) transfer out of the General Fund into the Budget Stabilization Fund (BSF). This transfer is considerably less than it would otherwise be because the very large transfer in FY 2013 nearly topped-out the BSF. With the $2.4 million transfer in FY 2014, the BSF reaches a value of $137.1 million, its statutory maximum level.
Fourth, there are $11.9 million in estimated deficiency warrants in FY 2014 that reflect firefighting costs and other unanticipated costs the state must pay. These are treated as nonrecurring costs, and so are not reflected in the End of Session budget.
The bottom line is FY 2014 has a projected ending balance of $90.5 million, which is $39.5 million higher than was expected at the end of the 2013 legislative session.
One final issue related to the updated FY 2014 General Fund revenue forecast is its impact on the structural balance of the FY 2014 budget. At the end of the 2013 legislative session the amount of ongoing revenue estimated in FY 2014 was $2,775,281,100 (see FY 2014 Executive Budget, page A-29; and 2013 Budget Activity Summary, page A-17), and the amount of ongoing expenditures were set at $2,762,445,800 (see 2013 Budget Activities Summary, page A-24), yielding an ongoing General Fund surplus in FY 2014 of $12,835,300, or $12.8 million.
Neither DFM nor LSO has updated their assessment of the structural balance associated with the FY 2014 budget, but assuming the increase to the FY 2014 General Fund revenue forecast consists of ongoing revenue, and treating the deficiency warrants as one-time expenditures (which may not be technically correct, but it is the way deficiency warrants are treated in Idaho’s current budgeting practices), the current estimate of the FY 2014 ongoing General Fund surplus is $46.6 million. That is the amount of ongoing “excess capacity” in the FY 2014 General Fund budget based on the latest DFM revenue forecast.
The Revised FY 2014 Revenue Forecast
The revised FY 2014 General Fund revenue forecast released by DFM in August 2013 contains a substantially weaker growth rate than the forecast it replaces. This section examines the changes in that forecast.
In January 2013 General Fund revenue was forecast to grow 2.7% in FY 2013. In July 2013 we learned FY 2013 revenue actually grew by 6.3%. However, the January 2013 forecast did not include the effects of law changes enacted in the 2013 legislative session, so the two growth rates are not directly comparable. Either the January 2013 forecast must be adjusted to add in the effect of law changes, or the actual growth rate must be adjusted to subtract the effect of law changes. The table below shows the adjusted January 2013 forecast growth rate of 2.5% and the actual revenue growth rate for FY 2013 of 6.3%.
Similarly, the January 2013 forecast of FY 2014 General Fund revenue growth (5.3%) is not directly comparable to the August 2013 forecast of FY 2014 revenue growth (2.1%). Law changes enacted in the 2013 legislative session are included in the August 2013 forecast, but are not included in the January 2013 forecast. One or the other must be adjusted to make them comparable. The table below makes the adjustment to the January 2013 forecast, yielding an adjusted growth rate of 4.6%.
Now we have numbers that are comparable, and here’s what they show:
- FY 2013 revenue was forecast to grow 2.5% last January, but six months later came in with actual growth of 6.3%.
- FY 2014 revenue was forecast to grow 4.6% last January, but eight months later in August the FY 2014 revenue growth rate forecast was lowered to 2.1%.
- The Individual Income Tax was forecast to grow by 2.6% in FY 2013, actually grew by 6.5%, then the FY 2014 forecast of 5.9% growth was lowered to 2.2% growth.
- The Corporate Income Tax was forecast to decline by 1.7% in FY 2013, actually grew by 6.2%, then the FY 2014 forecast of 5.4% growth was changed to a decline of 2.7%.
- The Sales Tax was forecast to grow by 5.4% in FY 2013, actually grew by 8.0%, then the FY 2014 forecast of 4.5% growth was lowered to 4.2% growth.
These changes to the FY 2014 growth rate forecasts, particularly the Individual Income Tax and the Corporate Income Tax, are quite significant and do not appear to be consistent with the state’s own economic forecast issued in July 2013. (The General Fund revenue forecast issued by DFM in August 2013 is based in part on the July 2013 Idaho Economic Forecast, also issued by DFM.)
Here’s how DFM explained the forecast changes (from the August 2013 General Fund Revenue Monitor):
“Idaho individual income tax receipts are forecast to grow 2.2% to $1,312.6 million in FY 2014. This subdued growth rate results from a filing collections surge in FY 2013, and not from a weak outlook for this fiscal year. April 2013 filing collections topped its forecast by $35.6 million, as taxpayers moved income into CY 2012 from CY 2013 in anticipation of higher federal income tax rates. No major increases to federal income tax rates are foreseen for CY 2013, so the filing collections spike should not be repeated in FY 2014.”
“Idaho corporate income tax receipts are projected to decline 2.7% in FY 2014 to $193.2 million. As with the individual income tax, this drop reflects the unanticipated strength in FY 2013. The corporate income tax receipts expanded 6.2% last fiscal year thanks to refunds that were much lower than expected. Refunds are forecast to return to more historical levels in FY 2014, and this will take a bigger bite out of this category’s bottom line.”
This is DFM’s explanation for taking 3.7 percentage points (equivalent to $47 million) out of the FY 2014 individual income tax forecast, and 8.1 percentage points (equivalent to $16 million) out of the FY 2014 corporate income tax forecast. When sales tax, product taxes and miscellaneous revenues are factored in, the total reduction in the FY 2014 General Fund revenue forecast is 2.5 percentage points (equivalent to $69 million).
There is a well known issue (increased federal income tax rates in 2013) that justifies scaling back a state’s FY 2014 individual income tax growth rate forecast, but it is difficult to obtain concrete information on the magnitude of this effect. Since the beginning of this calendar year most states with individual income taxes have observed unexpectedly strong collections related to the 2012 tax year. To the extent this strength is related to income acceleration (i.e., pulling-forward income that would have otherwise been realized in 2013 and beyond) it should be considered a one-time impact and not be considered a part of the revenue base going into FY 2014. However, to the extent the strength is due to simply under forecasting income tax revenue based on economic factors, that part should be included in the revenue base going into FY 2014. DFM’s August 2013 forecast appears to assume virtually all of the unexpected strength in FY 2013 individual income tax revenue ($47 million) is due to accelerated income, and not to under forecasting of base revenue.
The FY 2014 corporate income tax adjustment (from 5.4% growth in the January 2013 forecast to a 2.7% decline in the August 2013 forecast) is a bit harder to understand. DFM’s explanation is that refunds will be larger in FY 2014 – so much larger that FY 2014 corporate income tax revenue will be lower than the January 2013 forecast. This view is not supported by any other documentation, and in fact appears to be contrary to forecast updates in other states that have the corporate income tax, and with DFM’s own economic forecast update.
Here’s a summary of the Idaho nonfarm personal income and Idaho dividend, rent, interest components of the current DFM economic forecast (July 2013) and several prior forecasts (bold numbers are actual values as of the date the forecast was produced, italics numbers are forecast values):
Clearly there is a small bump in actual 2012 Idaho Nonfarm Personal Income in the July 2013 Idaho Economic Forecast relative to the January 2013 Idaho Economic Forecast (3.2% vs. 3.0% growth). This was driven by Idaho Dividend, Rent, Interest Income that actually grew 6.2% in 2012, versus the forecast of 4.7% growth in the January 2013 Idaho Economic Forecast. However, it is not at all clear how much of this unexpected increase is due to income acceleration versus plain forecast error. Income acceleration versus forecast error is important because it bears on the issue of how much of the FY 2013 unexpected increase in the individual income tax is one-time versus ongoing.
Also interesting is the change in the 2013 income forecast. Idaho Nonfarm Personal Income growth is down 1 percentage point from the January 2013 forecast (from 4.0% to 3.0%), but it is not due to a change in the forecast of Idaho Dividend, Rent, Interest Income, which is up 0.2 percentage points (from 4.2% to 4.4%). These changes do not seem to correlate with the quite substantial changes to the individual income tax and corporate income tax forecasts.
This apparent inconsistency is important because the forecasted growth rate in FY 2014 General Fund revenue has a major bearing on the real and perceived fiscal health of the State of Idaho. One percentage point of revenue growth in FY 2014 is worth $27.5 million.
In the previous section (FY 2014), it was noted that under the current DFM revenue forecast (2.1% revenue growth in FY 2014, down from 4.6% revenue growth in the January 2013 forecast) the Idaho budget would have a $46.6 million ongoing surplus. At 3.1% revenue growth in FY 2014 the ongoing surplus would be $74.1 million, and at 4.1% revenue growth in FY 2014 the ongoing surplus would be $101.6 million.
Understanding these numbers is important because they represent the “slack” in the FY 2014 budget, the amount of resources available to the state that are not being put to productive use. This slack will roll forward into the FY 2015 budget (to be considered in the upcoming 2014 legislative session) in the form of a new baseline revenue forecast and an MOE (maintenance of effort) baseline spending plan that represents the cost of continuing to provide the public services reflected in the FY 2014 budget.
However, a caution concerning MOE is in order. MOE is a short-term framework for assessing budget decisions, i.e., it only looks at data for a single year. Substantial cuts were made in the state budget in FY 2009 and FY 2010, and very few of these cuts have been restored. The cumulative condition and health of Idaho’s budget, and the public services it reflects, are not represented in the MOE concept, and are not presented in the current budgeting practices of the state of Idaho.
FY 2013 had $98.3 million more in revenue than was anticipated just four months ago, plus an additional $7 million in combined unanticipated transfers and reduced expenditures, for an unanticipated excess of $105.3 million in General Fund resources available in FY 2013.
When combined with the anticipated FY 2013 ending balance of $60.0 million, this would have brought the actual FY 2013 ending balance to $165.3 million. However, $85.3 million of the FY2013 ending balance was swept into the Budget Stabilization Fund, bringing it to within $2.4 million of its statutory maximum balance of 5% of the prior year’s General Fund receipts. This leaves an actual FY 2013 General Fund ending balance (and FY 2014 beginning balance) of $80.0 million.
The revised FY 2014 General Fund revenue forecast released in August 2013 is just $33.8 million higher than the forecast used to set the FY 2014 expenditure budget. This appears to be unduly pessimistic, but taken at face value it yields FY 2014 General Fund resources that are $53.8 million higher than expected when the FY 2014 budget was set. After allowing for a $2.4 million transfer to the Budget Stabilization Fund and $11.4 million in deficiency warrants, the projected FY 2014 ending balance of $90.5 million is $39.5 million higher than was expected at the end of the 2013 legislative session.
Idaho has an estimated ongoing General Fund surplus in FY 2014 of $46.6 million based on the August 2013 General Fund revenue forecast. This is up considerably from the $12.8 million FY 2014 ongoing surplus estimated during the 2013 legislative session. However, it is based on an FY 2014 revenue growth rate of just 2.1%, which appears to be unduly pessimistic. At 3.1% growth the FY 2014 General Fund ongoing surplus estimate is $74.1 million, and at 4.1% growth the ongoing surplus estimate is $101.6 million.
A pdf version of this report formatted for printing can be found using this link.
This report was produced by the Idaho Center for Fiscal Policy. For further information contact:
Michael Ferguson, Director
Idaho Center for Fiscal Policy