The Arkansas Budget & How The Game Is Played

Posted on October 20th, 2009

In January, 30 states reported 2010 budget projections projecting revenues less than originally anticipated. Governor Beebe and the Arkansas Department of Finance and Adminstration was one of only six states projecting a shortfall less than 5 percent, according to a Center on Budget & Policy Priorities report. In the center’s report the average projected shortfall among reporting states was 16.6 percent; and six states projected shortfalls greater than 20 percent. Six months ago, during the session, Republicans were warning that we were heading into this exact situation. So, given that… just how was Beebe’s budget projections “conservative”?

projections Now Beebe says that “There are still positive signs in the revenue numbers, and we maintain hope that the recovery will accelerate.” Hope is indeed a good thing and I hope that a recovery will happen as well, but we don’t create our budgets based upon hope. In February of 2008, Metroplan Executive Director Jim McKenzie said, “If there is going to be a recession, Arkansas typically lags going in and lags coming out.” That is true. From the budget histories that I have seen and what has been communicated to me from old-time legislators, that lag is approximately 18 months. This held true for Arkansas going into this economic downturn, and so far the Beebe administration has not given a solid reason why that a recovery will not lag as well. Whatever positive signs that the Beebe administration sees, for some reason most of the other states are not forecasting those same positive signs… most states are predicting 2011 budget shortfalls to be worse than 2010. See graph at left. So, given that… just how are Beebe’s budget projections “conservative”?

On September 3, 2009 (just last month), Rep. Andrea Lea asked Richard Wiess why after being below projections 7 of 8 months that he made the statement that they do not intend revise the forecast. He answered that this administration believes that although monthly numbers are low that the forecast will be fine on an annual basis. So, given that… just how was Beebe’s budget projections “conservative”?

Often modern politicians in Arkansas claim the mantle of “conservative” when talking about what “they” did to balance the budget in Arkansas. There are two problems with this claim. First, the person making the claim did nothing to merit the claim beyond obey the law, and even then often in letter but not spirit. Second, the Arkansas budgeting system, while less liberal than most, can at best be described as “moderate.”

I will tell you why I think it is “moderate” rather than “conservative”. But first, let’s take a look at this nifty little powerpoint presentation simply describing the budget and appropriation process.

On the conservative side of things, our State Constitution requires a balanced budget. Who gets credit for that? Certainly none of the elected officals alive today.

The Revenue Stabilization Act, passed in 1945 under Gov. Ben Laney, provides for a systematic simple model for funding Arkansas’ programs within the Constitutional confines that require a balanced state budget. The model sets up basic funding priorities determined by the legislature which guide the governor to cut funding should the state generate less revenue than expected. Just reading that you would think it sounds conservative right? You would be wrong. In actuality, it enables the legislature to do an end around on balancing a budget based upon forecasts by passing appropriations (permission to spend) far in excess of expected revenues based upon the outside chance that excess money would come in. This leads legislators to vote for any and all appropriations because “it isn’t real money” as the saying at the Capitol goes. I have been as guilty of this as anyone, I won’t make excuses for my failure to stand up against the cultural momentum at the State Capitol. However, the failure to limit appropriations to revenue forecasts cause every ounce of surplus to be sucked into an ever increasing size of state government. It virtually insures that tax cuts are rare. It almost always means that the state government will grow at a rate equal to the fastest rate of growth of the economy during the good times and forces tax increases to maintain the current rate of spending during the bad times. This fact leads me back to the current budget situation.

What if I am wrong and the Arkansas economy does turn around like Governor Beebe predicts? Instead of appropriating pie-in-the-sky-if-dreams-come-true amounts, what if we simply appropriated amounts according to independently created and dynamically scored forecasts? My mom always said, “If a frog had wings, it wouldn’t go around bumping it’s rump all the time,” so lets assume for a moment that frogs have wings. If we did things as described above, then the state would often generate surpluses that could be used to create a rainy day fund that would cover periods of genuine need. (In the current appropriation style, any rainy day fund would be raided to simply grow government and voters are rightly suspect of creating one.) Even better, the surpluses could be used to eliminate the grocery tax as Governer Beebe so ardently promised a mere 3 years ago. Best of all, we could eliminate capital gains on new capital investment in the state, launching Arkansas out of the gate at the first economic uptick and putting us on target to gain significantly on the rest of the United States in economic development. Wouldn’t that be great? But alas, I guess frogs will never have wings and the Arkansas press will never provide in depth critical analysis of the Beebe Administration.

Here is a line to a summary of the fiscal legislation during the 2009 session. Here is a link to the 2009 to 2011 Biennial Budget Manuals

The Arkansas Times Blog has posted links to the Governor’s: