I attached the instruction and the article to read in PDF format. Make sure to answer all questions and each question has to have 5 answers.

Thank you,

r 2010 Public Financial Publications, Inc. Budget Decits in the States: Georgia THOMAS P. LAUTH INTRODUCTION This article describes and assesses the manner in which the state of Georgia responded to the 2008-2009 recession. It begins by describing Georgia's culture of scal conservatism, depicts a pattern of declining revenue and corresponding budget reductions during FY 2008 and FY 2009, portrays uncooperative political relationships among the state's governor and legislative leaders, assesses the state's overall nancial condition and potential for falling into structural imbalance, and suggests the need for a comprehensive review of the state's tax system. FISCAL CONSERVATISM In scal matters, Georgia is a conservative state where policy makers favor balanced budgets, low taxes, limited debt and limited government spending. On the revenue side, policy makers resist tax increases and rely sparingly on bond revenue to pay for government spending. In FY 2007, Georgia ranked 50th in state revenues per capita, 42nd in state tax collections per capita, and 48th in state debt per capita.1 On the expenditure side, policy makers prefer private spending over public spending and within public sector spending prefer infrastructure projects and economic development over transfer payments. In FY 2007, Georgia ranked 43rd in state spending per capita.2 Fiscal conservatism in Georgia state government is manifest in at least six ways.3 First, the state has a constitutional balanced budget requirement. This means that the An earlier version of this article was presented at the Western Social Science Association Conference, Public Finance and Budgeting Section, Albuquerque, NM, April 17, 2009. Thomas P. Lauth is Dean of the School of Public and International Affairs at the University of GA, 204 Candler Hall, Athens, GA 30602. He can be reached at tplauth@uga.edu. 1. Tax Foundation, Washington, DC, February, 2009. www.taxfoundation.org/taxdata/ 2. Ibid. 3. Thanks to Henry M. Huckaby for helping me frame this topic. Lauth / Budget Decits in the States 15 state cannot incur a decit or borrow to obtain operating funds. The General Assembly is prohibited from appropriating funds in excess of an amount equal to the sum of anticipated revenue collections and any surplus remaining in the state treasury at the beginning of the scal year.4 Second, the state has low debt limits and low use of debt. State debt is limited to 10 percent of the net revenue receipts in the scal year immediately preceding the year in which debt is incurred.5 In most recent years, the state's debt has been 5-6 percent, well below the constitutional limit. Third, the state requires reserves. The Revenue Shortfall Reserve, established in 1976 in response to a severe revenue shortfall in the previous year, is Georgia's ''rainy day'' fund. All surplus funds at the end of a scal year are added to the Revenue Shortfall Reserve, which may not exceed 10 percent of the previous year's net revenue collections. The General Assembly may appropriate up to 1 percent for funding K-12 education needs and the governor may release for appropriation an amount that is in excess of 4 percent, but an amount not less than 4 percent must be retained in the reserve fund to cover any decit in the amount by which total annual expenditures exceed net annual revenues. The purpose of the rainy day fund is to enable the state to absorb decreases in revenue collections due to an economic recession without having to reduce the adopted budget. Fourth, the state has low taxes, a graduated income tax with a top rate of 6 percent and a sales tax of 4 percent. Fifth, the governor has the sole authority to set the state's revenue estimate. The state economist6 calculates a range of likely revenue yields under various assumptions, but the selection of a specic gure that becomes the ofcial state revenue estimate is a policy decision of the governor. This revenue-setting prerogative is the keystone of the governor's budget power. Prior to 2009, revenue estimates have been conservative, leading in most years to an underestimation of actual revenue collections.7 An advantage of conservative revenue estimates is that they reduce the risk of revenue shortfalls. An ''incorrect'' estimate that underestimates the actual revenue yield is also politically preferable to one that overestimates collections. Of course, if revenue estimates are too conservative, there is insufcient new revenue projected to permit the funding of gubernatorial and legislative initiatives. Nevertheless, the traditional practice in Georgia of underestimating revenue collections contributed to the presence of a surplus in most years.8 However, as will be seen, FY 2009 became a very notable exception to this pattern. 4. Constitution of the State of Georgia, 1983, Article III, Section IX, Paragraph IV[b]. 5. Constitution of the State of Georgia, 1983, Article VII, Section IV, Paragraph II[b]. 6. The state economist is a contract employee of the Georgia Ofce of Planning and Budget. 7. The recession years of 1991, 1992, 2003 and 2004 are the notable exceptions. 8. Thomas P. Lauth, ''Budgeting During a Recession Phase of the Business Cycle: The Georgia Experience,'' Public Budgeting & Finance 23 (2003): 31. 16 Public Budgeting & Finance / Spring 2010 FIGURE 1 Georgia Revenue Collections: FY 1975-FY 2009 Percent Change from Previous Year 20% Percent Change 15% 10% 5% 0% -5% -10% -15% Fiscal Year Source: Georgia Department of Revenue, June Revenue Figures, FY 1975-FY 2009. Sixth, conservative nancial management practices in combination with a relatively robust economy, have earned for the state AAA bond ratings. A long-time chairman of the Senate Appropriations Committee frequently spoke of the connection between conservative nancial practices and the state's ability to achieve AAA bond ratings.9 The balanced budget requirement, reserve requirement, low debt limit and low use of debt, low tax rates, conservative revenue estimating practices, and nancial management practices that earn AAA bond ratings, taken as a whole, are manifestations of the culture of scal conservatism in Georgia government.10 In a message to the Georgia General Assembly in January 2009 Governor Sonny Perdue stated, ''Throughout my administration, my budget recommendations have been based upon a conservative scal policy.''11 FISCAL YEAR 2009 For more than a quarter century, from FY1975 to FY 2001, Georgia revenue collections exceeded collections of the previous year. In FY 2002 and FY 2003 that pattern was interrupted when revenue collections were actually less than those of the previous year. However, beginning in FY 2004 revenue collections seemed to be returning to the state's traditional pattern (Figure 1). 9. George Hooks, Biennial Institute for Georgia Legislators, University of Georgia, Athens, Georgia, December 1994, December 1996, December 1998, December 2000, and December 2002. 10. This section on scal conservatism is adapted from my chapter on Georgia in Budgeting in the States: Institutions, Processes, and Politics. eds., Edward J. Clynch and Thomas P. Lauth, (Westport, CT: Praeger Publishers, 2006) pp. 33-35. 11. Governor's Budget Report, FY 2010, p. 8. Lauth / Budget Decits in the States 17 Recession in Georgia Georgia's FY 2009 economic problems were nested in the national recession. As late as January 2008, Governor Sonny Perdue's economic report to the General Assembly12 stated: Georgia's economy will be heavily inuenced by the trends in the national economy. However, several factors suggest that the local economy should fare somewhat better than the nation as a whole. Job growth in Georgia slowed signicantly beginning in mid-2006 but has shown signs of acceleration in recent months. Job growth in Georgia, whether measured on a year over year basis or on an annualized monthly basis, is stronger than for the U.S. Georgia's unemployment rate is low and in line with that of the U.S. Georgia's housing market is also going through a correction . . . However, housing prices . . . have remained essentially stable during the previous year. This suggests that the housing correction will have less impact in Georgia than in other states . . . The state has seen a signicant slowdown in tax revenue in recent months . . . Low sales tax collections, in part due to decreasing housing construction, have been a key cause of the slowdown. Given slowing growth in the U.S. and the elevated risk of recession, Georgia's economy is expected to grow at slower rates than experienced in the last two scal years. This was a cautious economic forecast perhaps suggesting that appropriations should be increased at a decreased rate, but it was not a forecast that warned the governor and General Assembly to adopt no growth or reduced spending. This led the governor to recommend and the General Assembly to appropriate an FY 2009 budget that increased spending over FY 2008 by $635 million.13 The chairmen of the House and Senate Appropriations Committees stated that although they were somewhat skeptical at the time of the governor's revenue estimate, in the end they went along with it. Knowing that the state's Revenue Shortfall Reserve was at full capacity gave them condence to do so.14 Six months later, end-of-year revenue collections for FY 2008 had declined below FY 2007 by 1.1 percent, providing the rst signal of the state's current scal crisis. The gathering storm15 in the summer and fall of 2008 was characterized by requests that state agencies hold back spending, followed by directives for agency budget reductions and downward revisions of the ofcial state revenue estimate for FY 2009. Early Budget Reductions States generally respond to economic downturns in one or more of the following four ways, by raising taxes, reducing expenditures, borrowing for operations, and drawing 12. Governor's Budget Report, FY 2009, pp. 8-9. 13. The FY 2009 appropriation was $21.2 billion and the amended FY 2008 appropriation was $20.5 billion. 14. Interviews with Jack Hill, Chairman of the Senate Appropriations Committee, August 10, 2009, and Ben Harbin, Chairman of the House Appropriations Committee, August 17, 2009. 15. This expression is adopted from the title of Winston S. Churchill's rst volume on the history of World War II (1948). 18 Public Budgeting & Finance / Spring 2010 Percent Change Year-to-Date FIGURE 2 FY 2008 Georgia Revenue Collections Year-to-Date Compared with FY 2007 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% 10.50% 8.20% 5.40% 5.00% 4.20% 4.70% 4.20% 1.90% 2.00% JUL AUG SEP OCT NOV DEC JAN FEB 1.60% MAR APR MAY JUN Month Source: Georgia Department of Revenue, July-June Revenue Figures, FY 2008. down reserves.16 In Georgia, scal conservatism keeps tax increases off the table17 and borrowing is only permitted for capital projects. Reducing expenditures and drawing down reserves were the only options in play in FY 2009. In July 2008, Governor Perdue drew down $600 million from the state's Revenue Shortfall Reserve to offset the 1.1 percent revenue shortfall at the end of FY 2008 (Figure 2). Before that action, the Revenue Shortfall Reserve contained approximately $1.6 billion. In the middle of June, as FY 2008 was coming to a close, Governor Perdue instructed state agencies to begin thinking about possible budget reductions on the order of 3-4 percent. Ironically, in the 2008 session of the General Assembly, House and Senate leaders had been advocating tax cuts, proposing to use the state's rainy day fund to pay for them. Governor Perdue had resisted such tax cuts. In August 2008, state agencies were instructed to reduce their budgets by 6 percent through the end of FY 2009. The Medicaid program would be subject to a 5 percent reduction, K-12 education would be subject to a 2 percent reduction, and approved but not yet implemented state employee raises were placed on hold. Governor Perdue also announced his intention to withhold funding for the Homeowners Tax Relief Grant 16. Michael J. Dougherty and Kenneth A. Klase, ''Fiscal Retrenchment in State Budgeting: Revisiting Cutback Management in a New Era,'' International Journal of Public Administration 32 (2009): 599-601. 17. Interviews with Jack Hill, Chairman of the Senate Appropriations Committee, August 10, 2009, and Ben Harbin, Chairman of the House Appropriations Committee, August 17, 2009. Lauth / Budget Decits in the States 19 (HTRG),18 a program initiated 10 years ago to cushion the impact on taxpayers of increasing property values, assessments and taxes, estimated at a cost of approximately $428.3 million. State agencies restricted hiring, travel and equipment purchases, and some implemented furloughs for employees. Education and law enforcement agencies were exempt from furloughs. In general, agencies reduced what was available to them.19 For example, at the University of Georgia vacant faculty and staff positions were relinquished, travel was cut, construction projects were delayed, library subscriptions were reduced and campus police activities were curtailed. The Board of Regents of the University System of Georgia sought to offset its loss of state funding by imposing a temporary fee on students during the 2009 spring semester and reducing employer contributions to heath insurance plans from 75 to 70 percent. As the General Assembly was coming into session in January 2009, revenue collections for the rst six months of FY 2009 had decreased by 2.7 percent compared with the same period in FY 2008 (Figure 3). At the beginning of the session, Governor Perdue presented a midyear budget that reduced state spending by nearly $2 billion, based upon state agency budget reductions of 8 percent.20 The Appropriation and the Amended Appropriation State government in Georgia is funded through a single appropriation act, but by tradition that act is amended approximately half way through the scal year. In practice, the General Assembly which meets for 40 legislative days each year (January-April) enacts two appropriation measures, an amendment to the scal year budget that has been in force for approximately eight months and the initial appropriation for the next scal year budget which begins July 1. The original FY 2009 appropriation (effective July 1, 2008) was $21.2 billion,21 the governor's proposed amendment for the FY 2009 budget (announced January 14, 2009) was $19.2 billion, and the further reduced amendment enacted by the General Assembly (March 13, 2009) was $18.9 billion. Late in the scal year, withheld allotments reduced the budget even further to $18.6 billion.22 State agencies made corresponding spending reductions. As can be seen in Figure 3, year-to-date revenue collections fell substantially short of each of the governor's revenue estimates, even after several downward 18. Atlanta Journal-Constitution, August 2, 2008: A-8. 19. In this connection, see, Katherine G. Willoughby and Thomas P. Lauth, ''Cutback Management in Georgia: State Agency Responses to Fiscal Year 1992 Budget Reductions,'' in Case Studies in Public Budgeting and Financial Management, Second Edition, eds., Aman Khan and W. Bartley Hildreth (New York, NY: Marcel Dekker Inc., 2003) pp. 377-391. Such approaches seem not to change. 20. Governor's Budget Report, Amended FY 2009 (January 2009). 21. The total state budget including federal and other funds was $40.8 billion. 22. Information provided by Trey Childress, Director, Ofce of Planning and Budget, July 26, 2009. 20 Public Budgeting & Finance / Spring 2010 FIGURE 3 FY 2009 Georgia Revenue Collections Year-to-Date Compared with FY 2008 and Three Gubernatorial FY 2009 Revenue Estimates Compared with FY 2008 Budget 6% 4.70% Percent Change Year-to-Date 4% 2% 0% JUL -2% AUG SEP OCT NOV DEC JAN -1.3% -2.0% -2.7% -2.6% -4% -6% FEB MAR APR MAY JUN -4.8% -6.6% -6.8% -8% -5.00% -6.50% -7.3% -8.0% -9.5% -10% -10.0% -10.5% -12% Revenue Collections Governor's Amended Estimate $19.2B Governor's Revenue Estimate $21.2B Governor's Revised Estimate $18.9B Source: Georgia Department of Revenue, Monthly Revenue Figures, and Ofce of Planning and Budget, Revenue Estimates. Revenue estimate percentage dened as FY 2009 estimate as amended and revised over FY 2008 budget. revisions.23 Accurate revenue estimates are difcult to achieve in normal times and especially difcult in more turbulent economic times. However, acknowledging the inherent difculty of revenue estimation, Georgia FY 2009 revenue estimates were nevertheless signicantly wide of the mark. The actual revenue collection for FY 2009 fell short of the governor's original revenue estimate by 26.2 percent, of the amended estimate by 18.7 percent and of the amended estimate as revised by 17.4 percent. With hindsight, state legislative leaders expressed a lack of condence in the state's revenue estimates.24 As noted earlier, Georgia's balanced budget requirement takes the form of a constitutional provision25 that prohibits the General Assembly from appropriating in a given year an amount greater than (a) the total of surplus funds in the treasury at the beginning of the scal year and (b) anticipated treasury receipts for the scal year as 23. Thanks to Carolyn Bourdeaux, Director, Senate Budget and Evaluation Ofce, State of Georgia for suggesting an enhancement to an earlier version of this gure. 24. Interview with Ben Harbin, Chairman of the House Appropriations Committee, August 17, 2009. 25. Constitution of the State of Georgia, 1983, Article III, Section IX, Paragraph IV[b]. Lauth / Budget Decits in the States 21 estimated in the governor's Budget Report, which must be submitted to the General Assembly within 5 days after its convening each year.26 As also noted, revenue estimation is the exclusive prerogative of the governor's ofce. In practice, budget reductions in Georgia take the form of the governor reducing his revenue estimate and instructing state agencies to reduce spending so as to maintain a balance between anticipated treasury receipts and authorized agency spending. Summary of Reductions Georgia responded to the FY 2009 scal crisis by reducing the revenue estimate, cutting agency spending (including furloughs for some state employees), tapping its rainy day funds, reducing reserves in its health insurance program, and incorporating federal stimulus dollars, as well as by enacting a few minor revenue enhancements such as increasing employee health insurance contributions and imposing temporary fees for university system students. No general tax increase was enacted, although a $1 increase per pack in the cigarette tax, and a new 1 percent sales tax earmarked for transportation projects27 were proposed. The General Assembly, consistent with its preference for smaller government and its belief that greater agency and program efciencies can be achieved, has relied upon agency budget reductions rather than the elimination of various income and sales tax breaks or the termination of assistance grants to local communities to keep the state's budget in balance. The FY 2009 amended budget signed by Governor Perdue included the controversial $428.3 million designated for continuing the HTRG program for one more year. The receipt of Medicaid stimulus funds enabled the state to move funds previously committed to the Medicaid formula match to other uses including the HTRG. Distribution of Reductions Table 1 shows the percent of total FY 2009 appropriations represented by ve relatively large state agencies and debt service, and the percent of total midyear appropriation reductions absorbed by each agency. Each of these ve agencies and General Obligation (GO) Debt Service accounts for 5 percent or more of total FY 2009 appropriations and together they constitute approximately 80 percent of total FY 2009 appropriations. They did not, however, fare equally well in the allocation of midyear budget reductions. The Department of Corrections and the Board of Regents of the University System of Georgia are approximately the same percentage of the total midyear budget reduction as they are of the total FY 2009 appropriation. The Department of Education 26. Constitution of the State of Georgia, 1983, Article III, Section IX, Paragraph II[a]. 27. The House version would have been a statewide tax and the Senate version would have permitted counties to join together to levy a regional tax; voter approval of a constitutional amendment would have been required. 22 Public Budgeting & Finance / Spring 2010 TABLE 1 Distribution of FY 2009 Appropriation Reductions Agency Community Health Corrections Education Human Resources Board of Regents GO Debt Service Other Total FY 2009 % Total Appropriation Appropriation Amended FY 2009 Appropriation % of Appropriation Total Reduction Reduction $2,514,291,820 11.9 $1,930,530,487 $583,761,333 25.8 $1,157,668,132 $8,195,597,771 $1,661,556,492 5.5 38.7 7.9 $1,043,637,575 $7,506,343,096 $1,405,926,236 $114,030,557 $689,254,675 $255,630,256 5.0 30.5 11.3 $2,300,517,851 10.9 $2,062,511,673 $238,006,178 10.5 $1,009,675,013 4.8 $969,990,354 $39,684,659 1.8 $4,326,575,437 $21,165,882,516 20.4 100.0 $3,984,760,110 $18,903,699,531 $341,815,327 $2,262,182,985 15.1 100.0 and GO Debt Service absorbed less of the total midyear appropriation reduction than their percentage of the total FY 2009 appropriation. The Department of Human Resources, an umbrella agency with a broad array of social service programs, absorbed proportionally more of the total midyear appropriation reduction than its percentage of the total FY 2009 appropriation. Midyear budget reductions favored K-12 education over higher education. Debt service was protected to provide funding for current debt obligations and to take advantage of new low-interest debt opportunities. Community Health absorbed a relatively small percentage of the total budget reduction in the governor's midyear recommendation to the General Assembly, but when federal stimulus funds became available for Medicaid, state funds were shifted from Community Health to other purposes including the $428.3 million HTRG program thereby increasing the Community Health share of the total midyear reduction adopted by the General Assembly. The 2009 Session in Retrospect The 2009 session of the General Assembly adjourned on April 3, 2009. After amending downward the FY 2009 appropriation act from $21.2 billion to $18.9 billion, it adopted the FY 2010 appropriation act which further reduced projected state spending to $18.6 billion. It also enacted two tax reduction bills. Lauth / Budget Decits in the States 23 Tax Actions Consistent with Georgia's political culture of scal conservatism, tax reductions promoted as stimulus devices,28 rather than tax increases for revenue enhancement, were adopted in the 2009 legislative session. The Jobs, Opportunities and Business Success Act of 2009 (HB 481) provided a $2,400 corporate income tax credit for each unemployed person a business would hire prior to July 1, 2010 and retain for 24 months. An eleventh hour amendment to this bill also reduced the state's capital gains tax by 50 percent over a period of 2 years. A second Act provided a temporary moratorium between January 2009 and January 2011 on increases in the assessed value of all classes of property which are subject to an ad valorem tax. Several other tax reduction proposals had some traction during the session, but in the end were not adopted: a proposal to gradually reduce the state's 6 percent corporate income tax and eventually eliminate it by 2012; a proposal to double the statewide homestead exemption from $2,000 to $4,000; and a proposal to eliminate the ad valorem tax and sales tax on new vehicles (ad valorem tax would have remained on currently owned vehicles). Governor Perdue Vetoes HB 481 Governor Sonny Perdue vetoed HB 481, citing as the principal reason that the General Assembly had passed a budget that did not take into account the short-term revenue loss caused by the tax reduction. He stated that while such legislation may be supportable in different economic times, it cannot be afforded at the present time. During a period of growth in our economy, the budget may be able to absorb tax cuts that result in short term revenue reductions but provide long term economic benets. We are not, however, experiencing a growing economy at this point. Accordingly, the current budget environmentFwhere revenues are continuing to decline and not expected to recover in the near termFthe short-term revenue reduction resulting from large tax cuts cannot be sustained in a manner consistent with the budgets passed by the General Assembly. According to the state budget director, Governor Perdue is not opposed in principle to tax cuts, but believes they should be ''gradual, measured and practical.''29 FY 2009 Revenue Collections Although tax revenue collections for the rst six months of FY 2009 had decreased by only 2.7 percent compared with the same period in FY 2008, tax revenue collections for 28. See House Majority Leader Mark Burkhalter's editorial opinion in the Athens Banner-Herald, March 18, 2008. 29. Conversation with Trey Childress, Director, Ofce of Planning and Budget, July 26, 2009. 24 Public Budgeting & Finance / Spring 2010 FIGURE 4 Georgia Revenue by Source, FY 2009 ($15,466,291,000) Alcohol Beverage 1% Property Motor Vehicle 1% Corporate Income Tobacco 2% %1 4% Motor Fuel 6% Sales 35% Individual Income 50% Source: Georgia Department of Revenue, June Revenue Figures, FY 2009. the entire scal year were down by 10.5 percent (Figure 3) compared with the same period in FY 2008. The individual income tax (50 percent of the state's total tax collections) was down 12.2 percent, the sales tax (35 percent of the state's total) was down 7.6 percent, the motor fuel tax (6 percent of the total) was down 14.8 percent, the corporate income tax (4 percent of the total) was down 26.3 percent, the tobacco tax (1 percent of the total) was down 4.2 percent and the motor vehicle tax (2 percent of the total) was down 2.7 percent; only alcoholic beverage and property taxes (each 1 percent of the total) were up by 1.2 and 1.9 percent, respectively (Figure 4). The General Assembly appropriated an additional $200 million from the Revenue Shortfall Reserve to balance the budget at the end of the scal year. UNCOOPERATIVE POLITICAL LEADERSHIP Compounding recent budget reduction problems in Georgia is a pattern of political leadership that at times has been highly uncooperative. For 125 years, from the end of Reconstruction until the beginning of the 21st century, Georgia state government, including the governor's ofce and both houses of the General Assembly, was controlled by the Democratic Party. In 2002, the Republican Party gained control of the governor's ofce and state Senate and for a brief period Georgia experienced divided party government. In 2004, Republicans also gained control of the House of Representatives, returning state government to unied party control. Since that time, Republicans have maintained control of the governor's ofce and both houses of the General Assembly. However, unied party control has not translated into a common vision for the state's budget. Lauth / Budget Decits in the States 25 For most of the twentieth century, Democratic Party control was so dominant in Georgia that competition in the budgetary process was largely between the executive and legislative branches rather than between political parties. During the last quarter of the twentieth century, Zell B. Miller, as Lieutenant Governor (1975-1990) and as Governor (1991-1999) competed and occasionally collided with Speaker of the House of Representatives Thomas B. Murphy (1974-2002) over various public policy issues during the administrations of Democratic governors George D. Busbee (1975-1983), Joe Frank Harris (1983-1991) and Miller himself. Although often on a collision course, Miller and Murphy generally avoided political train wrecks. In contrast, Republican leaders, Governor Sonny Perdue, Lieutenant Governor Casey Cagle, and Speaker of the House of Representatives Glenn Richardson, in their early years of control, seem not to have been able to avoid major collisions as their party makes the transition from a minority party accustomed to opposing and blocking to a majority party responsible for leading and facilitating. Four examples30 serve to illustrate. During the 2007 session of the General Assembly leaders of the House of Representatives and the Senate arrived at an impasse over the appropriate use of the state's midyear budget amendment. The House, following time-honored practices, included in the midyear amendment funding for a number of special projects, i.e., what might be called pork barrel projects.31 The Lieutenant Governor and Senate leaders seeking to seize the high road said that the midyear budget amendment should be used only for funding education, i.e., providing funds for local school systems to cover the increased costs of unanticipated enrollments resulting from population growth in the state, but not for special projects. The Senate eviscerated the House version of the amended budget. It funded greater education enrollments but not the top priorities of House leaders and the governor. Senate leaders were making a statement that the midyear amendment should be restricted to emergencies but not used for special projects. House and Senate leaders eventually resolved their impasse over the midyear amendment by agreeing at the eleventh hour to return funds (including some slated for special projects) to taxpayers in the form of a $142 million one-time property tax rebate. The Atlanta Journal Constitution called upon the governor to veto the midyear budget amendment because of the irresponsible manner in which the impasse was resolved, killing not only pork barrel projects but also many serious gubernatorial priorities.32 Governor Sonny Perdue vetoed the midyear amended budget containing the $142 million property tax rebate saying that the budget amendment does not meet the current needs of the state.33 The House overrode the governor's veto (163-5) but the Senate did not consider an override. Lieutenant Governor Casey Cagle said the governor had not transmitted his veto to the General 30. The events described in these examples can be documented through numerous daily accounts published in the Atlanta Journal-Constitution, especially in insightful articles by James Salzer. 31. For a discussion of the midyear appropriation, see: T. P. Lauth, ''The Midyear Appropriation in Georgia: A Threat to Comprehensiveness?,'' State and Local Government Review 34 (2002): 198-204. 32. Atlanta Journal-Constitution, April 17, 2007: A-12. 33. Atlanta Journal-Constitution, April 20, 2007: A-5 26 Public Budgeting & Finance / Spring 2010 Assembly as required by the Constitution (the governor announced his intention to veto at a press conference) therefore there was not a veto to consider.34 The House versus Senate standoff was mostly about the Lieutenant Governor and Speaker attempting to position themselves as more scally conservative in anticipation of the 2010 gubernatorial election. Approximately three weeks after vetoing the midyear budget amendment, Governor Perdue rescinded his veto but line-item vetoed the $142 million property tax refund as he signed the bill. The $142 million initially intended for tax refunds reverted to the state reserve fund. Speaker Glenn Richardson accused the governor of ''showing his backside.''35 In January 2008, the Georgia Senate voted 47-7 to override one of Governor Sonny Perdue's 2007 vetoes. At the end of the 2007 session of the General Assembly, Governor Perdue vetoed several bills and some line-items in the appropriation bills. On the rst day of the 2008 session of the General Assembly, the House of Representatives voted to override 12 of Governor Perdue's vetoes. One of the bills created a Senate Budget Ofce. Between the two sessions, legislators had become upset over the governor's instructions to state agencies to ignore some spending directions the General Assembly attached to appropriation items. The House veto overrides were a form of payback, reecting political tensions between the governor and Speaker of the House. The Senate referred the House overrides to its Rules Committee and subsequently reported only one override (the one involving the proposed Senate Budget Ofce) to the full Senate for a vote. Lieutenant Governor Casey Cagle said the Senate had more important business to conduct and need not devote time to consider the other House overrides.36 The Senate action demonstrated symbolic solidarity with the House, but did not immerse that body in the scufe between the governor and the House. The governor thanked the Senate for the ''respectful'' manner in which the override was handled.37 In the closing days of the 2008 session of the General Assembly, House and Senate leaders presented competing tax cut proposals. The House proposed elimination of the ad valorem tax on automobiles, the Senate proposed reduction of the state income tax rate by 10 percent over ve years and both supported a cap on local property tax assessments. Local governments opposed the elimination of the car tax and the cap on property tax assessments. During the summer and fall leading up to the 2008 session, Speaker Glenn Richardson had been touring the state initially proposing the elimination of all local government property taxes to be offset by increasing the state sales tax and extending it to a wide array of services, later proposing the elimination of local school district property taxes and nally proposing the elimination of the ad valorem tax on automobiles. Governor Sonny Perdue criticized the leadership of both houses for proposing tax reduction/elimination measures that would reduce state revenues at a time 34. 35. 36. 37. Athens Banner-Herald, April 21, 2007: B2. Atlanta Journal-Constitution, May 19, 2007: B1, B4. Atlanta Journal-Constitution, January 29, 2008: A-10. Atlanta Journal-Constitution, January 29, 2008: A-10. Lauth / Budget Decits in the States 27 when the state was already experiencing revenue shortfalls, calling their actions political pandering.38 The 2008 session ended with House and Senate leaders being unable to reach a compromise tax reduction/elimination plan. House leaders criticized the governor for faulty revenue estimates saying he should get new economists.39 Speaker Glenn Richardson told voters that they should elect a new lieutenant governor.40 One interpretation of this event is that Lieutenant Governor Cagle, a potential candidate for governor in 2010, did not want Speaker Richardson, another potential candidate, to gain political advantage as a tax cutter. In the 2009 session of the General Assembly, House and Senate leaders opposed Governor Perdue over continued funding of the state's Homeowner Tax Relief Grant (HTRG). The HTRG, initiated in 1998 by Governor Roy Barnes and implemented in 1999, was a grant from the state to local governments enabling them to provide homeowners with property tax relief. Local governments were required to show the amount of tax relief on tax bills stating, ''this reduction is the result of the HTRG enacted by the Governor and General Assembly.'' Governor Perdue opposed the HTRG in principle as not effective in alleviating tax burdens for citizens and as not affordable in light of state revenue shortfalls. His FY 2009 budget assumed that the HTRG would no longer be funded and that an estimated $428.3 million would be available for other budget priorities.41 Legislative leaders framed the issue as a tax increase for constituents if local governments were forced to rescind the property tax relief they had been funding through the HTRG. If the General Assembly prevailed, the governor had a $428.3 million hole in his budget. The stalemate was broken and a major crash was avoided when federal stimulus dollars became available to ll the potential hole in the budget and fund the HTRG for another year. Legislative leaders agreed that future funding of the HTRG program will depend upon the availability of funding. Governor Perdue's FY 2010 budget did not fund it. Sonny Perdue was elected governor in 2002 as a Republican, but early in his political career he was a Democrat. He was elected to the state Senate as a Democrat in1990 and was reelected three times before changing parties in 1998. He was reelected to the Senate twice as a Republican before being elected governor in 2002. Like many southern Democrats, he changed parties during the period when the Republican Party was gaining state-wide electoral strength. However, some conservative Republicans still perceive him to be a Democrat, albeit a conservative Democrat, not a true Republican who shares all of their conservative values or policy preferences. This no doubt partially 38. Atlanta Journal-Constitution, April 2, 2008: A-1; April 4, 2008: D-1. 39. Atlanta Journal-Constitution, March 26, 2008: A-1. 40. Atlanta Journal-Constitution, April 6, 2008: A-1; Athens Banner-Herald, April 6, 2008: A-9. 41. The Homeowners Tax Relief Grant was included in the Governor's Budget Report, FY 2009 (January 2008): 354, and was included in the Appropriations Act, FY 2009 (April 2008): 183. However, it was not recommended in the Governor's Budget Report, Amended FY 2009 (January 2009): 214, but was included in the Amended Appropriation Act, FY 2009 (March 2009): 130. 28 Public Budgeting & Finance / Spring 2010 accounts for some of his policy disagreements with Republican leaders in the General Assembly. The somewhat uncooperative relationships among legislative leaders and the governor are paradoxical. In these difcult nancial times they no doubt blocked seemingly imprudent actions but they also led to some hastily cobbled together decisions. A more cooperative set of legislative-executive relationships might have produced better public policies for the state. OVERALL FINANCIAL CONDITION Georgia's overall nancial condition is relatively sound. However, like most states it has been negatively impacted by the national recession. At the end of FY 2008, the State of Georgia's combined assets exceeded liabilities by $22.2 billion. However, the State's net assets decreased during FY 2008 by $194 million, attributed largely to governmental fund revenue estimates exceeding tax revenues. Net assets had increased by $1.9 billion during FY 2007 and by $1.3 billion during FY 2006, mostly attributable to tax revenues exceeding revenue estimates.42 At the end of FY 2008, the state's unreserved fund balance was $3.0 billion, compared with $3.7 billion in FY 2007 and $2.1 billion in FY 2006. At bond rating agencies, the most important information for rating decisions is how states fund debt and pensions. As noted earlier, the Georgia Constitution limits annual debt service to 10 percent of the previous scal year's revenue collections.43 For FY 2008, the annual debt service requirement was 5.5 percent of the previous scal year's revenue collections; for FY 2007 it was 5.7 percent and for FY 2006 it was 6.0 percent, all well under the constitutional limit.44 Nearly all of the state's bonded debt is general obligation debt backed by the full faith and credit of the state, and the state's GO bonds are rated AAA. The state's two major retirement systems, the Employees' Retirement System and Teachers' Retirement System are dened benet plans. During periods of scal stress, state governments can indirectly utilize pension funds by reducing the percentage of annual employer contribution and increasing the percentage of annual employee contribution. Pension funds may also be utilized by extending the amortization period to a maximum of 30 years which reduces the state's required annual contribution. Georgia 42. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2008: 11 and 14. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2007: 11 and 14. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2006: 11 and 14. 43. Constitution of the State of Georgia, 1983, Art. VII, Sec. IV, Par. II[b]. 44. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2008: 17. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2007: 16. State of Georgia, Comprehensive Annual Financial Report for the scal year ended June 30, 2006: 16. Lauth / Budget Decits in the States 29 utilized this technique in the late 1990s, intending to increase the state's contribution in future years but recessions in the current decade have prevented it from doing so. The Employees' Retirement System and Teachers' Retirement System are now at approximately 90 percent of full funding.45 In FY 2008, the state's Employees' Health Benet Plan reported that current year employees' contributions plus interest revenue exceeded employees' health benet expenses. In the FY 2009 budget, the state did not fund its share of employer/employee contributions, covering current spending obligations from accumulated reserves. Post employment health care benets are the most important form of other than pension employee benets (OPEB). GASB Statement 45 on OPEB accounting by governments recommends that such benets be accounted for as a liability. Traditionally they were funded on a pay-as-you-go basis. Georgia funded post employment health care benets in FY 2008, but ceased making payments as part of its FY 2009 budget reduction. The hope is to catch up with payments during recovery from the recession.46 In short, Georgia's overall nancial condition is relatively sound, even though it cut some nancial corners to cope with the effects of the national recession in FY 2009. CONCLUSION Georgia's current scal problems are mostly cyclical, albeit deeply so, as part of the national recession. Because of the state's long history of scal conservatism, believing in balanced budgets and rainy day funds, using debt almost exclusively for capital projects and not for operating expenses and generally adhering to nancial management practices that earn AAA bond ratings, it has until now avoided the structural imbalance problems encountered by several other states. However, Georgia may be approaching the brink of structural budget imbalance. Facing national recession conditions, Georgia legislators in 2009 enacted some tax reductions, and seriously considered other tax reductions, on the premise that lower taxes will stimulate the state's economy. Of course, state tax reductions may have minimal impact as anti-recession measures, but because of lost revenue they will also inhibit the capacity of state agencies to address mounting recession-induced problems in education, employment, health care and economic development.47 If this occurs, as seems increasing likely, the state will have to decide how far it is willing to go in reducing government services to keep pace with declining revenues. Presumably, there is some minimal level of services below which even the most conservative policy maker would not want to go. At 45. Russell W. Hinton, State Auditor, June 30, 2009. 46. Russell W. Hinton, State Auditor, June 30, 2009 and Ben Harbin, Chair, House Appropriations Committee, August 17, 2009. 47. This was the rationale Governor Sonny Perdue offered for his veto of HB 481. 30 Public Budgeting & Finance / Spring 2010 this level, the revenue side of the budget equation must be addressed because the state will be in structural imbalance with available revenues unable to meet minimal service levels. By FY 2011 the state's Revenue Shortfall Reserve (rainy day fund) will be depleted,48 and in FY 2012 the federal stimulus funds for Medicaid, education stabilization and general stabilization will be gone. The conservative values of low taxes and small government are important in Georgia, but at some point maintaining the revenue-expenditure balance at declining levels of equilibrium begins to signicantly constrict the state's ability to invest in the future economy, education, human capital and infrastructure of the state. It may well be time for Georgia to take a comprehensive look at its tax system, not simply with an eye to reducing taxes but with the objective of making its tax system more productive. The present state tax system consists of an individual income tax (52 percent of total collections), a sales tax (33 percent of total collections), a motor fuel tax (6 percent of collections), a corporate income tax (5 percent of collections), as well as taxes on tobacco, alcoholic beverages, motor vehicles and property. The income tax, rst enacted in 1929, is graduated from 0 to 6 percent, but the bracket thresholds place married persons ling a joint return in the top bracket if their taxable income is over $10,000, and single persons and married persons ling a separate return in the top bracket if their taxable income is $7,000 and $5,000, respectively. Somewhat greater progressivity in the income tax would not only increase revenue but also enhance vertical equity. The sales tax, rst enacted in 1951 and increased in1989 from 3 to 4 percent, excludes food for at-home consumption and prescription medicine to reduce regressivity, and is applied mostly to commodity transactions. Expansion of the sales tax to nancial, legal, medical and tonsorial service transactions would not only increase revenue but also improve equity to the extent that middle and upper income individuals tend to use such services more frequently than lower income individuals. The motor fuel tax is 7.5 cents per gallon and a 4 percent sales tax that is adjusted twice per year based upon the state's current gasoline prices. The higher per gallon rate in most neighboring states might make it possible for Georgia to increase its rate (e.g., to 13 cents) without loss of border sales so as to increase motor fuel tax revenue. Georgia has a long history of providing tax incentives to attract business to the state, based upon a conventional wisdom that the economic benets of new business outweigh lost revenue. Perhaps the conventional wisdom is correct, but possibly Georgia's generally low tax system would be sufcient incentive to attract new businesses without tax breaks. If so, such breaks may not be wise policy. Benet-cost analysis of tax 48. Rainy day funds are rarely large enough to accommodate severe nancial downturns. While rainy day funds are a prudent nancial management practice, it is politically difcult to sustain a large reserve fund. Large funds are likely to be the target of tax payers and their representatives who believe ''excess'' revenue collections should be returned to tax payers to be used for consumption, investment or saving. The conict between good nancial management and good politics inevitably results in rainy day funds that are useful but insufcient. Lauth / Budget Decits in the States 31 incentives might be one of the items included in a comprehensive study of the state's tax system. As Georgia moves closer to the brink of structural imbalance, now may be a propitious time for a systematic review of the state's tax system. Within an overarching system of relatively low taxes, it is possible to envision a modernized tax system that generates sufcient new revenue to enable the state to end budget reductions and resume investment in the economy, education, human capital and infrastructure. 32 Public Budgeting & Finance / Spring 2010 Copyright of Public Budgeting & Finance is the property of Blackwell Publishing Limited and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Thought Paper Name: _____________________ KSU ID #______________ Net ID _________________ The purpose of this assignment is to encourage and allow critical engagement with recent topics in the field of Not-for-Profit and Government Accounting and how these structures play out in our current environment. Reading this article involves carefully determining the audience, identifying the argument and understanding the significance (making links to larger ideas, trends, and events). Thought papers are intended to give you space to thinkto consider how this piece contributes to our understanding of Not-for-Profit and Government Accounting. Thought papers must be typed (single-spaced, 12pt Times New Roman font, 0.5\" margins, maximum 2 pages), and turned in via D2L on the day due by 9pm. Be ready to discuss your findings during class. Due dates for thought papers are clearly marked on the syllabus. NO LATE WORK. 1. What is the purpose of this article? Why is the article written? (Min 5 sentences) 2. Why is this topic important? Who is affected by this information? (Min 5 sentences) 3. What is the problem/s described in the article? Does the author address possible solutions? If so, explain. (Min 5 sentences) 4. What are the incentives of the discussed parties? (Min 5 sentences) 5. How does this article fit into ACCT 4600? What do you conclude or take away from this article? (Min 5 sentences)