NASHVILLE - Planned state worker and teacher pay raises in July disappeared Monday into a revenue sinkhole with Gov. Bill Haslam announcing he will disrupt his own plans on salaries and make other cuts to address shortfalls largely in business tax collections.
The Republican governor told reporters he also is eliminating $12.9 million in proposed improvements in higher education. That means students attending Tennessee's public colleges and universities likely will see higher-than-expected tuition jumps.
State finance officials are expected this morning to outline cuts in the current budget year and Haslam's proposed 2014-2015 spending plan to House and Senate finance committees.
The governor told reporters Monday the drop in anticipated revenue has added another $150 million in shortfalls that need addressing in the current budget that ends June 30. That translates into $160 million in the new budget, which lawmakers have yet to approve, that starts July 1.
Haslam's proposed $32.6 billion budget plan, unveiled to lawmakers Feb. 3, already had provided for $126 million in cuts. The new cuts push the total into the $300 million range.
With just three months left in the current fiscal year, the governor plans to raid several reserve funds and make cuts in some departments to address shortfalls. Haslam and Finance Commissioner Larry Martin characterized it as "right-sizing" reserves built up over time. It's a time-honored strategy among governors struggling with shortfalls on short notice.
The administration also intends to immediately recognize and use savings already generated by previous changes or cuts in some areas.
Nearly half of next year's proposed cuts -- $72 million -- will come from eliminating the governor's own recommended 1 percent pay raise for state employees and 2 percent increase for teachers.
As he runs for re-election, Haslam has pledged to make Tennessee teacher raises rise at the highest percentage rate nationally during a second term.
"The goal hasn't gone away," the governor told reporters. "But we have to deal with the realities we have."
Unaffected is the state's Basic Education Program funding formula for schools. That will increase $63 million, consuming most of the meager $73 million in new tax revenues now projected for the next fiscal year.
Sales tax revenues are down $33 million, a problem Haslam attributed to a combination of lackluster Christmas sales collections, unseasonably cold weather in January and February and the continued migration of the selling of goods from brick-and-mortar stores to the Internet.
That's grown to be a $332 million problem over the years, Haslam said.
But the $215 million mystery is what has happened to business franchise and excise taxes. Collections are way below estimates -- a 20 percent one-year drop.
Haslam said it isn't clear whether the issue is "cyclical" or what he characterized as a "fundamental systemic issue."
The economy is doing decently, the governor said, and it's unclear what the problem is. The taxes are notoriously "volatile," Haslam added.
Companies pay based on estimates and the following year may claim refunds or credits because they paid too much. But there's been a big uptick in such claims, Haslam said. His administration is scrambling to figure out the cause with Revenue Commissioner Richard Roberts, state Treasurer David Lillard and others digging into the issue to "try to figure that out," Haslam told reporters.
Companies in the past have proved deft in discovering and then exploiting loopholes. Speculation is mounting in some legislative circles that this is exactly what's happened on the franchise and excise taxes: businesses have figured out one or more ways to reduce their tax obligations.
Asked about the possibility, Haslam said if that's the case, "I think we'd move to correct that. "
Haslam emphasized that cuts won't impact troubled areas like the Department of Children's Services and the Department of Intellectual and Developmental Disabilities.
Nor will they impact funding for the Basic Education Program school funding formula's salary equity fund.
Other reductions include:
• $6.5 million in savings from automating TennCare's eligibility determination system.
• $4.75 million in contract payment cuts to vendors in the Families First welfare program.
• $18.5 million in payment cuts to TennCare providers.
• Reducing planned funding for the Rainy Day reserve fund by $4.8 million.
• Cutting $5 million from a "growth fund" for school districts in the state's school funding formula.
• Recognizing $4 million in savings in the state's rapidly dwindling Career Ladder program for educators.
Contact staff writer Andy Sher at firstname.lastname@example.org or 615-255-0550.