NASHVILLE — Gov. Phil Bredesen is set to unveil a four-year budget plan Monday he believes will steer Tennessee through its worst financial straits in years and put the state in a “perfect position” to move forward once the national economy recovers.
The spending plan anticipates using some of the nearly $5 billion in federal stimulus funds Tennessee will get to help cushion impacts of a state revenue shortfall expected to balloon to $1 billion, Gov. Bredesen said.
“What I’m going to try to do is say it makes no sense to look at this budget in terms of a single year because you have all this stimulus money coming in and you’ve got all these shortfalls ... look at it in context,” Gov. Bredesen told reporters last week.
While large chunks of the federal funding coming to Tennessee are for federal programs such as food stamps ($608 million) or direct spending for specific state programs, enough remains to help the state in areas ranging from higher education to roads and largely offset the immediate need to cut as many as 2,000 positions, Gov. Bredesen said.
“It’ll be pretty easy this first year because the stimulus puts away the need to lay off a bunch of people this spring,” the governor observed. “We still have to get it down substantially between where we were last year and where we need to be three years from now. But we can do it over a period of time. We can use attrition rather than layoffs.”
He expects tax growth to be weak — about $40 million — in the 2009-10 fiscal year that begins July 1. Revenue growth in the following year and the year after that will be about half of what it usually is, he said.
While the state still faces “tough” decisions, Gov. Bredesen said “we’re not going to run through all our reserves, and we’re going to keep K-12 education fully funded.”
But elements of Democrat Bredesen’s budget are already proving controversial and generate friction in the General Assembly where Republicans firmly control the Senate. The House is nearly evenly divided between Republicans and Democrats.
Lt. Gov. Ron Ramsey, R-Blountville, the Senate speaker, said he worries what happens in two years once most of the one-time federal dollars run if the recession hasn’t lifted. Moreover, state revenue growth is likely to remain weak, he said.
“What I’m more concerned about than anything is I want to make sure we don’t hit a brick wall or fall off a cliff in two years,” Lt. Gov. Ramsey said. “I believe they (Bredesen administration) are going to do the best they can to keep this from happening, but with the way (federal) strings are attached ...”
House Republican Leader Jason Mumpower of Bristol agreed, noting, “I just want to be sure that we use the funds in such a way that they actually solve a problem and not create a bigger problem down the road. I think the governor agrees and understands that.”
Meanwhile, administration officials said Gov. Bredesen plans to renew a push to close what he considers a tax “loophole” by removing commercial real estate activities from an exemption favoring family-owned, noncorporate entities, known by the acronym FONCE.
Eliminating the provision would bring in an additional $25 million a year in new revenue, Revenue Commissioner Reagan Farr said, even though some may change their business structures to other non-taxed organizations.
“The governor’s budget does include that provision,” acknowledged Bredesen spokeswoman Lydia Lenker.
The Bredesen administration also has been considering raising an existing 2 percent premium tax paid by HMOs, according to lawmakers. It was unclear whether federal stimulus funds, which include $1 billion for Medicaid over the next two years, have killed the idea.
“This information will be discussed at Monday’s budget briefing,” Ms. Lenker said in her e-mail.
House Democratic Caucus Leader Mike Turner of Nashville, who is sponsoring most of the governor’s package of bills, said, “‘I’m not sure what’s going to happen on that (HMO premium tax increase). It’s been discussed.”
He cited no figure.
Lt. Gov. Ramsey said Senate Republicans may be “boxed in” with regard to the FONCE provision.
Because the governor is building his budget on the $25 million, Lt. Gov. Ramsey said, “we’re going to have to find $25 million from somewhere else” if the FONCE provision is not closed off. “In this budget climate that becomes tough to do.”
A newly released Revenue Department study shows 3,235 entities are using FONCE exemption to shield more than $5 billion of commercial real estate properties from state franchise and excise taxes.
Revenue figures show 1,208 of all FONCEs hold properties appraised at $1 million or more with a total appraised value of $4.3 billion. Other taxpayers, including incorporated businesses, are helping subsidize “wealthy” owners of FONCES, Commissioner Farr said.
Some 712 FONCES are valued at less than $250,000 with a combined value of $93 million, figures show. The commissioner hinted at a possible compromise, noting FONCEs valued at less than $250,000 could be excluded with a “very negligible impact.”
Lt. Gov. Ramsey is reluctantly weighing that.
“Maybe we end up exempting out the truly small business owners and work towards some compromise like that,” Lt. Gov. Ramsey said, adding that while Senate Republicans “are solid against wanting to do away with the FONCE, I think our members are also realistic.”
As for the HMO premium tax, he said, “I don’t know the details on that.” But he recalled Tennessee in the past has used taxes on health care providers to generate funds to draw federal matching dollars for Medicaid.
Meanwhile, Lt. Gov. Ramsey said he is worried about the impact of federal stimulus money on the food stamp program. He said in order to use the money the state would have to increase benefits, allow more people onto the program or both.
“What do you do two years from now when that money runs out? I know how politically hard it is to take something away once it’s been voted in.”
That prompted House Democratic Caucus Chairman Turner to liken the lieutenant governor’s statements to an utterance widely attributed 18th-century French Queen Marie Antoinette.
“Let them eat cake. That’s what he thinks,” Rep. Turner said as the state’s unemployment rate hit 9.1 percent. “Our first priority in hard times like these is to make sure that people can eat. There are a lot of poor people in Ron Ramsey’s district, and he needs to be looking out for the poor people in his district.”
Andy Sher is a Nashville-based staff writer covering Tennessee state government and politics for the Times Free Press. A Washington correspondent from 1999-2005 for the Times Free Press, Andy previously headed up state Capitol coverage for The Chattanooga Times, worked as a state Capitol reporter for The Nashville Banner and was a contributor to The Tennessee Journal, among other publications. Andy worked for 17 years at The Chattanooga Times covering police, health care, county government, ...