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Budget imbalance
One month into the new fiscal year, the state budget is already in trouble
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The state of Georgia is only a few weeks into its new fiscal year, but the new budget could already be several hundred million dollars short, according to a report released last week by the Georgia Budget and Policy Institute.

To counter the new shortfall, state agencies will see another round of budget cuts starting this month.

"As the state begins its 2011 fiscal year it is facing a potential budget shortfall of between $413 million and $613 million," writes Alan Essig, Executive Director of the GBPI. "This shortfall is on top of the $2.5 billion in budget cuts already implemented since FY 2009."

With the General Assembly not returning to session until January, withholding funds and looking at cuts to agencies' budgets is the only available course of action for the Governor.

"All he can do is withhold spending in the budget that's passed. Until the legislature comes in, there's really no option to do anything but this," says Brantley.

Although Governor Perdue only has a few months left in office, he and his staff are taking proactive measures to avoid leaving a giant hole in the budget for the next governor and legislature by ordering the Office of Budgets and Planning to withhold four percent of allocated funds from a majority of government agencies starting August 1, and requesting amended budgets from agencies that show cuts of four, six and eight percent in case state revenues don't improve before the new year.

"I think there's going to be a menu of cuts on the table so that the governor, or the next governor, has options of choosing depending on the revenue situation at the time," says Essig.

Retirement benefits, workers compensation, and debt service are exempt from cuts at this point. The education system is also being spared, having already shouldered painful cuts last year.

Basic education and the state schools won't have anything from their allotment withheld, and will only have to plan for a potential two percent cut, rather than four percent.

The national debate over federal government spending is having a very real impact on the state's budget, and if Congress chooses not to extend Medicaid enhancement funds starting in January 2011, the state of Georgia will have to make up for $375 million it had planned on receiving - the largest portion of this potential budget shortfall.

"Given the way the discussions have gone in Congress and the debate over deficits and spending, we couldn't be confident any more that they were going to pass a Medicaid extension," says Bert Brantley, Director of Communications for the Governor's office.

The Governor is trying to prepare agencies for the worst possible outcome, because until Congress makes final their decision about the Medicaid extension, whether to approve all, some, or none of the funding, nothing is certain.

"That's not to say that there's no chance they'll approve an extension," Brantley says. "It's much easier to adjust upward than it is downward, that's really what this comes down to."

There are several variables left in the equation, but the GBPI report states that besides the $375 million from the Medicaid match, other budgetary concerns include $37.7 million in stimulus funds scheduled for FY2011 but used in FY2010 to help balance the previous year's budget and as much as a $200 million shortfall in the state's Health Benefit Plan.

In a worst case scenario, the total shortfall could total more than $700 million. Although the number wasn't included in the GBPI report, the State Treasury has found that there could be as much as $121 million in outstanding deficit from last year's budget, although that number won't be confirmed until a final audit is completed later this Fall, and it could be significantly smaller.

The state's fiscal outlook shows no signs of improving at the moment either. The FY2012 budget could be short as much as $2 billion according to a report released last week by Georgia State University, who analyzed the state's structural deficit.

"The basic reason is there are a lot of one-time revenues that are in the base of the budget in 2010 and 2011 that go away in 2012," says Essig.

Among the reasons for the growing deficit will be the expiration of federal stimulus funds which had been propping up sagging revenue, particularly for education and criminal justice agencies.

By the next fiscal year, budget cuts will become a highly improbable solution for such a large sum. The eight percent cuts calculated for this year's menu of options nets just shy of $700 million.

"If revenues tank, and we don't see some improvement in state revenue, then they will have a budget hole to address when they get back," says Brantley. "A lot of this is driven by revenues, we just don't know what revenues are going to look like."

There's some hope that the newly formed Tax Reform Council will find solutions to the state's revenue problems by taking a closer look at the tax code and identifying wasteful or unnecessary tax breaks.

The eleven member panel, consisting of economists, business leaders and Governor Perdue met for the first time last week to begin discussing ideas. They will present a set of recommendations to a special joint committee in the General Assembly in January, who will draft a bill to reform the state's tax code.

"There is some sense that the Tax Reform Council could recommend some revenue solutions to this," Essig says. "But right now there's no discussion of it because of the politics in an election year."