State expects new revenues of $2.1 billion through mid-2021

A new report from the state Department of Administration (DOA) suggests that despite positive growth in state tax collections, incoming governor-elect Tony Evers would need an additional $1.1 billion to meet all state agency budget requests.

The report released yesterday (Nov. 20) and entitled Agency Requests and Revenue Estimates for FY2020 and FY2021 compares 2019-21 budget requests submitted by state agencies and estimated state revenues leading up to and continuing within the 2019-21 biennium.  The report provides guidance likely to be used by Evers as he assembles the 2019-21 state budget likely to be introduced in early February.

According to the report, the state is projected to end the current 2017-19 biennium on June 30, 2019 with a higher than earlier anticipated balance of $622.6 million.

While the report projects the state will take in an additional $2.1 billion in tax collections over the next two and a half years due to increased economic activity, that revenue growth will not be enough to cover all the additional funding requested by state agencies, including the $1.4 billion boost Evers requested for schools.

Overall, the report indicates agency budget requests for the 2019-21 budget, if granted, would exceed revenues by $286.6 million in 2019-20 and by nearly $1.35 billion in 2020-21, a total of more than $1.63 billion over the biennium. A portion of the state’s carryover balance could be used to offset some, but not all, of those requests.

Evers told reporters it was “premature” to say exactly how he would address the projected shortfall in his first state budget, which he will have to introduce early next year.

State agencies rarely get all the funding they ask for, and the shortfall could be closed by paring back those requests, or by raising taxes or other revenues, or a combination of both.  However, both Evers and the Republicans who control both houses of the legislature will have to agree on whatever solution is ultimately adopted.

One of the bigger assumptions made by the report is that an estimated $149 million less will be spent by the state’s Medicaid program than what had previously been estimated.

Based on economic forecasts by the private consulting firm IHS Market, the report estimates real gross domestic product (GDP) for the U.S. economy will grow by 2.7 percent in calendar year 2019, 2.1 percent in calendar year 2020, and by 1.6 percent in calendar year 2021.

The report projects personal income will grow by 4.5 percent in calendar year 2019, 4.9 percent in calendar year 2020, and by 4.4 percent in calendar year 2021.

It will be interesting to watch how much the revenue (and spending) estimates in the report will change between now and when Legislature debates a budget.  The non-partisan Legislative Fiscal Bureau typically releases its own estimates in late January or early February. Those projections will be highly instructive to the legislature’s budget writers amid signs the economy may be cooling more rapidly than previously assumed.

On Nov. 19 investment banking firm Goldman Sachs issued a report projecting gross domestic product (GDP) growth will slow to 1.8 percent and 1.6 percent in the third and fourth quarters of 2019, respectively, sooner than anticipated.  According to the bank’s chief economist, Jan Hatzius, “tighter financial conditions and a fading fiscal stimulus” from the 2017 (federal) tax reform and spending packages will be “key drivers of the deceleration.” Escalating trade tensions between the U.S. and China are also seen as putting the brakes on economic growth.

A Congressional Budget Office (CBO) projection from August called for GDP growth to slow to 2.4 percent next year and then 1.6 percent in 2020.