With the state’s revenues lagging and officials scrambling to come up with nearly $800 million reductions in state general revenue fund (GRF) dollars from the Ohio administration’s budget proposal introduced in February, the Ohio Senate is expected to make a slew of changes to the House-passed version before voting the bill out later this month.
Below are five key factors that will likely shape the Senate’s version before it heads to conference committee and ultimately to the governor’s desk by June 30.
1. Revenue is Slipping
Officials announced in April that revenue shortfalls were necessitating a need for $800 million worth of spending reductions of state GRF over the course of Ohio’s two-year budget, cuts amounting to approximately 1 percent per fiscal year of the state GRF. According to the Legislative Service Commission, a non-partisan agency, Ohio’s two largest drivers for the state’s lagging revenue are shortfalls in the personal income tax (PIT) and sales tax.
Let’s take a closer look: The Office of Budget and Management (OBM) said that April revenues slid again by $108 million under estimates, bringing the year-to-date (YTD) total to a staggering $554 million or 8.1 percent below what officials originally estimated. However, the PIT is only $183 million YTD, or 2.9 percent, below fiscal year 2016 revenue collections. There is an effort to identify what is causing the decline in revenues, specifically the PIT to come in lower than FY2016 year collections and way below current estimates. Speculation over the past several months has been growing that the decline is a result of tax policy changes implemented in previous budgets that increased the exemption for small businesses from 75% to 100% of income up to $250,000, which officials estimated at the time would cost the state $600 million a year.
According to OBM, the tax policy changes were taken into account when building the forecast, assuming much lower refunds in its estimates for SFY 17. The state’s estimated lower payout of refunds for FY 2017 was a recognition ofdecline in estimated payments throughout the year in FY 2016, which suggest that taxpayers had begun to take the small business deduction into account while making those payments, rather than overpaying on their estimated taxes. However, refunds as a percentage of withholding are running far ahead of what they would be in an average year. The variance in year to date is a comination of withholdings and refunds.
On the sales tax side, receipts through April were $47.6 million below estimates for April, following a loss of $40.5 million in March. For the fiscal year, the sales tax is currently under estimates by $208.4 million, bringing the year-to date-variance down from 2.3 percent growth to 1.9 percent growth. OBM has stated they anticipate this number holding and suspect it is related to underperforming brick and mortar retail stores. Yesterday OBM released the preliminary numbers for May and confirmedthe decline continued with revenues coming in $67 million below estimates for a total shortfall of $870 million for the current fiscal year. However, the commercial activity tax (CAT) came in over 10 percent higher than estimates for the month, and has performed according to estimates for the fiscal year. Auto-sales also came in ahead of projections for May, again pointing to two issues: non-auto tax revenue is continuing to underperform and higher than estimated refunds.
2. Deeper Across-the-Board Cuts
The House version of the budget included 1.5 percent across-the-board cuts to many programs in the administration’s proposal. It is expected that these cuts may go deeper before the budget makes its way to the governor’s desk. Given the hundreds of line items in the budget, deeper reductions here will have an even greater impact on programs and constituencies across the state.
3. Medicaid Spending
With Medicaid being the largest portion of the state budget, it is often looked to for the largest amount of reductions. However, the state share of Medicaid is relatively small, since there is a federal match component. For every state dollar spent on Medicaid, Ohio receives approximately 62 percent federal match. Anytime there is a reduction to the state’s share of Medicaid, it results in a corresponding reduction in the federal match, thereby having unintended consequences across the entire program.
In particular, hospital and nursing home reimbursements are a larger portion of the Medicaid budget. The House budget essentially freezes the current rate of reimbursement for both hospital and nursing home providers, but caps the amount Medicaid can spend. If those caps are met, then cuts will be implemented likely in the second half of the second year of the biennium. This is not a traditional budget concept utilized in the past; however, advocates for both groups believe it provides certainty for the program, providers and recipients.
Should the current revenue decline continue or if the federal government begins making reductions to Medicaid over the biennium, there would be time to determine how to adjust spending. The administration has said it’s concerned that if there is a downturn in the economy resulting in an increase in Medicaid caseloads; there are no safeguards in place to deal with the uptick.
The Senate is reportedly likely to seek an additional $200 million reduction in the Medicaid budget from the House-passed version of the bill.
4. School Funding
The one bright spot for many, relative to the rest of the budget, may be in school funding, which has historically been spared deep cuts in economically challenging times. Recent comments from leadership indicate this may continue, as there appears to be a willingness to further reduce the number of school districts that currently see net reductions in state funding. In other words, even though there will likely be some school district cuts, Senate leadership appears willing to make sure that happens to as few districts as possible.
5. Ohio’s Opioid Crisis
Much has been made of Ohio’s efforts to combat the opioid crisis in the state, including an additional $170 million investment proposed in the House version of the budget to go toward issues related to treatment, support of children affected, mental health, prevention and workforce. It is likely that the Senate will prioritize dollars to combat the opioid crisis, but it remains to be seen if they will remain the same investments laid out in the House version.
The Senate plans to announce a substitute bill on June 12 after deliberating on the nearly 1,500 amendments submitted for consideration. By that date, Ohioans, employers and all interested parties should have a clearer picture on the state’s fiscal health and the Senate’s changes to the budget. The administration will have the final numbers for the current FY available on June 24 for the Conference Committee’s consideration. To avoid disruptions in services and operations, the state budget must be signed by the governor no later than June 30 to become effect July 1, the beginning of the state’s fiscal year.