Recession may force revisions to the operation of state government

Recession may force revisions to the operation of state government

August 10th, 2009 by Andy Sher in News

Candidates speak out

Here is what Tennessee gubernatorial candidates are saying about how they will deal with the recession's expected lasting impact on state revenues.

* Democrat Ward Cammack: Could not be reached.

* Republican Bill Gibbons: Assuming there is no growth, "I would set some clear priorities for state spending. My priorities would be making sure we have the infrastructure for economic growth, safety and public schools."

* Republican Bill Haslam: "I would argue that the next governor, whoever it is, has to be prepared to take a whole new look at state government because the revenues are not going to be there. You're not going to raise taxes, and there's no choice but to come back and look at the expense structure."

* Democrat Roy Herron: "I think the economy will rebound, but if it's slower than I believe it will be, then we'll look and see where we are then. You're talking a year and a half from now, and that's a long time."

* Democrat Kim McMillan: "I don't think we need a tax increase. ... You figure out what's the most important to the state and to the people to spend your money on."

* Democrat Mike McWherter: Could not be reached. Campaign manager Kim Sasser-Hayden said that "in tough economic times you have to have someone who can manage in tough economic times. ... It's a challenge he's aware of, and he's certainly taken on tough economic challenges in his own business."

* Republican Ron Ramsey: Could not be reached.

* Republican Zach Wamp: "We've got to get (government) down to the most limited place to start with and then have an ambitious economic development agenda centered in production. ... We're going to grow our way out of this problem. If I'm governor, I'm not going to tax our way out."

NASHVILLE - The worst economy since the Great Depression could leave state government finances in the ditch for years to come, ultimately forcing painful decisions by Tennessee's next governor about the services the state provides, fiscal experts say.

"We'll begin to experience revenue growth again, but it won't offset this huge reduction in tax revenues relative to the economy," said Dr. William Fox, an economist and director of the Center for Business and Economic Research at the University of Tennessee.

While there are signs the recession is beginning to level off, Dr. Fox said Tennessee in its recently completed 2009 fiscal year experienced an "unprecedented" revenue decline - as much as a $1 billion loss in year-over-year state revenues. That comes to about a 9 percent to 10 percent loss, he said.

Latest revenue figures could be released by Gov. Phil Bredesen's administration as early as this week.

The state's tax structure, heavily reliant on sales taxes, tends over time to grow more slowly in relation to the economy, although state revenues do increase faster in some years, Dr. Fox said.

"In years they (revenues) go down, they really go down, and we don't recover from that unless we have some kind of rate increase," Dr. Fox said. "Government will be smaller at the other end of this (recession) without a rate increase."

Dr. Stan Chervin, an economist and analyst at the Tennessee Advisory Commission on Intergovernmental Relations, offered a similar assessment. He also said he believes the "likelihood of a tax increase is probably close to zero right now."

Gov. Bredesen, who leaves office in January 2011, and state lawmakers have grappled with the recession's impact on revenues. But the situation gets rougher in the future as federal stimulus funds for the state run out, Dr. Chervin said.

"So they're going to have to make some hard choices. And that's going to be the next governor and the next legislature," he said. "Fiscal year 2012 and 2013 are probably going to be when it really hits the fan. They're going to have to make some really tough decisions."


Such gloom-and-doom scenarios, however, don't seem to be deterring the state's 2010 field of would-be governors. In fact, Knoxville Mayor Bill Haslam, a Republican hopeful, is embracing the challenge.

"I would argue that the next governor, whoever it is, has to be prepared to take a whole new look at state government because the revenues are not going to be there," said Mr. Haslam, citing his mayoral experience. "You're not going to raise taxes, and there's no choice but to come back and look at the expense structure."

The state will have to prioritize, he said, noting he believes K-12 education should continue as a top priority.

"I don't think the answer either is, nor can we afford for it to be, to throw more money at it because we don't have the money to do that. So we're going to have to be much more strategic," he said.

U.S. Rep. Zach Wamp, R-Tenn., cited his background in real estate commercial development and work creating the Tennessee Valley Corridor, a multistate regional economic development organization.

"I think this is a time for someone who does have a history in economic development to be the next governor," he said.

"We're going to grow our way out of this problem. If I'm governor, I'm not going to tax our way out," the Chattanooga congressman said, noting he would set up a "blue ribbon" task force before taking office to recommend where to cut.

Former state House Majority Leader Kim McMillan, D-Clarksville, cited her experience in the General Assembly and as an adviser to Gov. Phil Bredesen, saying, "I think what we need from the next governor is someone who is ready to start on Day One ... creating jobs, bringing in new jobs. That's what creates an increase in our tax base."

In 2002, Ms. McMillan voted for then-Republican Gov. Don Sundquist's proposed tax reform package, which included a general state income tax. She hastened to add that it included tax cuts such as eliminating the sales tax on food and lowering the existing 6 percent Hall income tax on certain investment income.

The tax reform passed failed to pass. Instead, lawmakers enacted a $1 billion tax increase that included a 1 cent sales tax hike and business tax increases.

Ms. McMillan said she does not support a state income tax these days, noting, "I do not believe that we are ready in the state of Tennessee to change our tax structure."

There has been no increase in the state's sales tax since 2002. Since 1971, Tennessee has raised its sales taxes every five to 10 years. Under Gov. Bredesen, the state has raised some smaller taxes and closed off tax loopholes. By the time Mr. Bredesen leaves office, it will have been over eight years since the last sales tax rise.


The recession and accompanying revenue shortfalls have bedeviled Tennessee Gov. Phil Bredesen and other governors across the country for more than a year.

Just last week, the Bredesen administration ordered state agencies to slash another $56.1 million in spending on top of $151 million in forced savings for the current 2009-10 budget that took effect July 1.

"There's just fewer people to answer the phone calls and process the services," Finance Commissioner Dave Goetz told reporters as the administration announced it was withholding the additional $56.1 million.

The state is being helped by federal stimulus funds, but they are expected to run out over the next two years. The governor's long-term budget scenario calls for $750 million in planned cuts over the next two years. In the 2010 fiscal year that began July 1, the budget calls for eliminating 653 vacant positions and cutting 717 actual workers.

Even if economic recovery is in the offing, its impact on states' revenues likely will be slow to occur, according to Arturo Perez, a fiscal expert at the National Conference of State Legislatures.

"Our past information records show that following the end of a national recession, state finances tend not to bottom out for an additional 12 to 24 months," he said.

States such as Tennessee "would likely to be under continued stress for a period of time," he said.

UT's Dr. Fox said the ultimate impact in Tennessee is "it will be hard to implement new programs - or maybe put the other way, to implement new programs one will have to clearly find savings somewhere else. It's not reasonable to think that we'll be able to fund new programs from revenue growth."