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Joint Budget

November 10, 2022

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Sen Rice: …Budget meeting to order. We have special guests first, and we are going to move our business until after the Governor speaks. But I would like to recognize Representative General Berry for a personal privilege. General Berry, you’re recognized.

 

Recognition of Sen. Wallace

Rep Berry: Thank you, Mr. Chairman, for your consideration. And on this – excuse me – Veterans Day Eve, I would like to– a special recognition to one of our colleagues, a great friend of mine, great friend of all of us, and Senator Dave Wallace. And you’re talking about a great American hero. We’re very fortunate to have Senator Dave Wallace serving in our legislature. So I wanted to make mention that, in addition to Senator Wallace’s Legion of Merit Bronze Star, he has an Air Medal for valor, he has three Distinguished Flying Crosses for heroism, Hh has three Vietnam crosses for gallantry. He served in active duty for 21 years in tours in Vietnam. If you don’t know what the Distinguished Flying Cross is and the accomplishments of Senator Dave Wallace, I beg you to go look at that because he is a true American hero. And it gives me great pleasure to recognize Dave Wallace.

 

Sen Rice: Thank you, Representative Berry. And we appreciate our colleague and friend, Senator Wallace. And we want to recognize all our veterans and thank them for their personal sacrifice to our freedom. And members, we are again moving other business after the governor here. Governor, welcome, Governor Asa Hutchinson. Let’s give him a welcome.

 

Sen Rice: Thank you for being with us today. And in your packet, members, we have copies of balanced budget, and the forecast. And Governor, you are recognized. Thank you.

 

Gov. Hutchinson budget presentation

Gov Hutchinson: Thank you, Mr. Chairman. And to members of the committee, thank you for that welcome today. And thank you for honoring Senator Wallace. General Berry, those were great words that you shared today. And first, let me extend congratulations to each of those that won re-election in this last session. And I also want to congratulate my successor, Governor-elect Sarah Sanders. I met with my successor yesterday, and we have coordinated what I expect to be an excellent transition from one administration to the next. It is an honor to appear before this General Assembly for my last time. We have done a lot together over the last eight years. We have lowered taxes, created more efficient state government with a 14% reduction in the number of state employees. We have invested in education, funded highways, and set aside over $2.5 billion in reserve accounts.

 

Gov Hutchinson: Today, I can say with confidence that the state has never been in better financial condition. I also want to recognize my cabinet. I noticed that they came and are behind me, either to back up Secretary Walther when he answers questions or to back me up today. But I’m grateful for each of my cabinet for helping have the state successful over the last eight years and to work closely with the members of this assembly. And I salute them. I also will be joined by Secretary Larry Walther and Budget Director Robert Brech, who will answer questions following my overview of the budget. Let me present the highlights of the executive recommendations on the budget.

 

Budget surplus

Gov Hutchinson: First of all, as I mentioned, there is $2.78 billion in reserve funding. I believe we have a slide to that effect. And you can see from the slide that you have $1.2 billion in the catastrophic reserve fund. You have a general revenue allotment reserve fund of $1.3 billion, a restricted reserve fund, and a small amount left in a rainy day fund that likely will be spent. But you can see the extraordinary reserves that we have built up together here in the state totaling $2.78 billion. 

 

School funding increases

Gov Hutchinson: The second highlight I will mention in the budget that the executive branch has submitted is that it includes a $550 million increase in Public School Funding over the next two years. This is from general revenue, $200 million in FY 2024 and $350 million in FY 2025. This allows the next administration and the general assembly maximum flexibility in terms of raising teacher salaries and raising the outcomes for education in the state. The increase would be the largest increase in education spending in well over a decade. And I believe that it is necessary for us to be competitive. It is necessary in light of our financial condition, and it is important in light of what is needed in terms of student growth and progress. 

 

Foster Children

Gov Hutchinson: The budget also includes $13.3 million increase for the Division of Children and Family Services to improve our care for foster children and foster families. This money will allow an increase in the stipend for foster parents for the first time since 2009. It will also cover stipends for the first time for provisional foster parents, such as grandparents, siblings, and other kin who provide a safe place for the foster children. This is important to do for the welfare of our children in the state. The budget also increases the State Police budget by $1.5 million for each of the next two years. This obviously is needed for increased operational expenses. And there will also be $3 million allocated for State Police vehicles that will become a part of the budget rather than relying upon one-time funding.

 

Corrections funding

Gov Hutchinson: There is an increase in the proposed budget for the Department of Corrections of $5.4 million. That covers increase in medical costs, and it’ll also support their work in trying to increase bed capacity. And that will be increased to $7.3 million for the second year of the biennium. There will be an increase for community corrections of $3.5 million dollars for each of the next two years that cover additional drug courts, many of which you have advocated for, and it will also cover the intensive supervision initiative that puts additional parole officers to support those high-risk parolees that come out that are trying to get a second chance in life but are struggling with different issues. 

 

Military funding

Gov Hutchinson: It will provide for an increase of $4.2 million to the Department of the Military. This will cover increased maintenance of armory facilities, which is important for recruitment and retention purposes and for strengthening the support of at-risk youth that the National Guard serves.

 

Youth Services

Gov Hutchinson: There’ll be additional changes in the Division of Youth Services budget, which will provide for an increase of the Division of Youth Services to better manage and provide treatment for youth with more complex needs, including those with a history of more violent behavior. The additional funding will support the opening of a 20-bed residential facility for high-risk offenders, high-risk youth offenders. And the budget also includes an expected price increase in the contract for management of these facilities. This is an important part of the budget because we have some challenges with youth offenders. This allocates more resources for them. And that’s a tremendous responsibility for the state, both in terms of public safety but also in terms of doing the right thing with youth that come from a troubled background that are struggling in life.

 

Gov Hutchinson: Even with these investments in public safety, health, and education, I’m submitting a budget that includes a surplus of $255 million in FY 2024 and a surplus of $309 billion in FY 2025. These are budgeted surpluses. And I would add, again, that we are currently in a fiscal year, and we are anticipating a $600 million surplus through the course of this year. The budget growth rate in year-over-year terms is 5.2% in FY 2024 and down to 2.8% in FY 2025. Considering inflation is at over 8% across the nation and in Arkansas, limiting the growth to 5% reflects conservative budgeting during these challenging times. In terms of the Medicaid budget, we are not increasing the funding until the second year. But I remind everyone that we have over $600 million in our Medicaid trust fund, which is the largest amount in my memory for that trust fund.

 

Gov Hutchinson: The trust fund has a larger balance now than eight years ago. It is in good position, and so we’re not allocating an increase to the Medicaid budget or drawdown from that now. There is expected to be a drawdown from that over the course of the next couple of years. But we have $600 million that’s set aside in that trust fund. The budget includes funding for a new pay plan, which could be $41 million. This is included in the performance funding line on the budget, and it doesn’t mean it has to be spent. Some of that can be absorbed. But it allows $41 million for a new pay plan. This will allow room for a new pay plan to be considered and adopted by the next administration and the General Assembly that will help us to recruit and retain quality state employees who serve the people of this state so well. Lastly, on higher education, the budget reflects increases to cover the productivity funding model and an increase for UAPB to cover the cost of the federal match required for land grant institutions.

 

Gov Hutchinson: That concludes my summary of some of the highlights of the budget. I know that you’ll look at it very closely. And Secretary Walther and Director Robert Brech will be here to answer questions on it. The budget is now in your hands and in the hands of the next administration. I know that you’ll work to adopt a final budget that improves education, public safety, and the services of state government. 

 

Governor’s farewell

Gov Hutchinson: It has been the highest honor of my public life to serve as Governor of this state. Scripture says that iron sharpeneth iron. I think about that in terms of the General Assembly. And when iron strikes iron, what do you get? You get a few sparks, but you also get a sharper outcome. And I believe that our relationship has reflected that scriptural principle, that you have made me a better Governor, you have made our outcomes better. And it has been a high honor and privilege to serve with you over the last years. And I’ll be praying for you and God bless you.

 

Sen Rice: Thank you, Governor. And before the governor leaves the room, I forgot to mention the reason some of our senators are not here, we were having orientation, organization up at Heber Springs, and a bunch of us came back, but some of them are going to be coming back for our organization this afternoon. So they send their best too. Thank you. Members, I think DFA is just chomping at the bit, would like to come up if anybody has any questions. Or if we don’t have any questions, we’ll save their time. I think I’ve got a question for you. Go ahead. Thank you for being here. We’ll let you identify yourself. And then Senator Irvin has a question.

 

Walther (DFA): I’m Larry Walther, Secretary of the Department of Finance and Administration.

 

Brech (DFA): Robert Brech, budget director.

 

Shellnut (DFA): John Shelnutt, DFA.

 

Sen Rice: Thank you, gentlemen, for being here. Senator Irvin, you’re recognized.

 

Federal matching funds (FMAP)

Sen Irvin: Thank you, Mr. Chair. Thank you, gentlemen, for being here. And it could be more of an agency-directed question. But I was wondering if we could get an update on the Medicaid FMAP which has been enhanced, and the timeline of us moving away from that enhanced match rate under the FMAP and what that might do to our budget and our Medicaid spending or Medicaid spend.

 

Sen Rice: Please recognize yourself. You can answer the question.

 

White (DHS): Thank you. Mark White, Department of Human Services. So as you indicated, Senator, right now, we do have an enhanced FMAP. It is 6.2 percentage points higher than what it normally would be because of the public health emergency declared by the federal government related to COVID. And let me give you a sense of timing on that. That extends for as long as we are in that public health emergency. The current emergency extends through January 13– actually, I’m sorry– it’s January 10 that we expect to hear– well, the federal government has promised they will give states at least 60 days’ notice before they let that public health emergency expire. If they intend to let this be the final extension and for it to expire in January, they will be notifying us this week. We have not received notice yet, but we are waiting to see if we receive a notice.

 

White (DHS): Presumably, if they do not make that announcement today or tomorrow, that would suggest they intend to extend that public health emergency further into the spring of next year, at least. So at the moment, we’re waiting to hear from the feds about what happens. Once that expires, that enhanced FMAP would end at the end of that quarter in which that expiration happens. So if they would let that expire in January, that would mean that the public health emergency would expire– the FMAP would expire by the end of March at the end of that quarter. And then we’d go back to our regular FMAP. The FMAP after that right now looks a little better than we thought it did three to six months ago. The projections have actually gone up a little bit for us in terms of what our FMAP will be.

 

White (DHS): But I would caution you that there’s a lot of volatility in the national economy right now. Our FMAP is calculated based on how our economy does in comparison to the rest of the nation. Historically, when there’s a downturn, our state runs a few months behind the rest of the nation in terms of that downturn. So we’ll just have to wait and see how the economy does and how that impacts our FMAP. And so I’m hesitant to make any specific projections going out too far because of that volatility. But hopefully, that kind of lays out where things are at right now.

 

Sen Irvin: So just as a– if you can just give me ballparks as to what that means, real dollars, what are we looking at?

 

White (DHS): Sure. For every one point difference in the FMAP, that is a $65 million difference in terms of state general revenue.

 

Sen Irvin: And we are at 6.2?

 

White (DHS): The enhanced is 6.2 right now. Our current is, it’s around 70%. It’s projected to be for next year, I believe, 70.33%, if my memory is correct.

 

Sen Irvin: Okay. So it could potentially be a big, big issue for us to deal with?

 

White (DHS): Yes. If there’s a change in that FMAP, it does make a significant difference on the management of the Medicaid program.

 

Sen Irvin: Okay. I just wanted to make sure I had timeline clear and that information as part of this conversation because I think it’s a big thing that we have to watch as we move into the next session for our budget and our spend.

 

White (DHS): It is. And as the Governor said, we do have a very healthy balance in the Medicaid trust fund right now. So far, with that enhancement FMAP, even though it has brought other obligations that have cost us money, net, we’ve been on the positive side for that. And right now, the next biennium looks good for us with the combination of SGR and what’s in the trust fund. The biennium following that, there will be a need for more SGR.

 

Sen Irvin: Okay. Thank you. Thank you, Mr. Chair.

 

Sen Rice: Thank you. Representative Cavenaugh, you’re recognized.

 

Rep Cavenaugh: Thank you, Mr. Chair. Mine’s going to be for DFA. Thank you. So I just wanted to talk about the forecast for a little bit, just ask some questions, if you don’t mind. On the forecast, I notice that we’re showing that the revenue goes down in 2023 and 2024, and we’re projecting it to go back up in 2025. Is that because of the tax cuts we actually are going to be implementing? Is it that and also the fact that we’re going to– your thought about a recession and what might happen to the revenue because of that?

 

Projections: Inflation

Shellnut (DFA): So the forecast includes all of those. It includes the phase-down of stimulus funds and programs. It assumes that inflation slows down, and it includes essentially a borderline US recession next year with some impact on the growth rate. And then FY 2025 is essentially normal growth coming back into the forecast after four years of abnormal growth up and down. And so FY 2025 is assumed to be normal growth year over year.

 

Rep Cavenaugh: Okay. And on the inflation, you’re projecting it to cool down in 2024? Is that what we’re projecting?

 

Shellnut (DFA): Right. Across the entire biennium, we’re looking at some cooldown of inflation, still somewhat above the long-run average even in 2025. But it’s a quite significant slowdown of inflation across the biennium.

 

Rep Cavenaugh: Okay. Thank you.

 

Sen Rice: Thank you. Senator Dismang, you’re recognized.

 

Sen Dismang : And actually, we were visiting this a little bit, because it’s more of a question I think will be answered when you all present the balanced budget. I’m assuming we’re still going to go through with that. I think we got the highlights and the neat parts, but like to get a little bit in the weeds on what the balanced budget proposal looks like and a little bit more on forecast. I think you all have presentations ready. In particular, when you do, I’d like to just address a little bit about how much we plan on, with this balanced budget, utilizing any of our trust funds. So that’s going to be Medicaid or education and that sort of thing. So it’s going to be important to understand. But anyway, if you don’t mind, I’d ask you to just kind of move forward with the presentation of the balanced budget.

 

Sen Rice: Okay. Gentlemen, if you’ll go ahead and have that. We’re ready for your presentation.

 

Brech (DFA): I believe what the governor presented it is everything, all the increases in the balanced budget. I can tell you as far as using fund balances, obviously, with Medicaid, they may have to use their fund balances depending on how that works after they lose the 6.2% enhanced FMAP at the end of March. So they may dip into their fund balances. Also, the education fund balances would have to be dipped into to do what the Department of Education is planning along with the recommendations from the Senate and the House depending on how all of those finalize. But it would be necessary to use some of the adequacy funding, their fund balances as well, in the Public School Fund. Those are the only fund balances that I’m aware of.

 

Sen Dismang : Okay. And we’re not going to– so there’s no more deep dive into the balanced budget that we’re going to, the proposal that the governor made this morning. And so then, I guess, what I would ask is, so just more specific– and this is probably an agency. I mean, there was a proposal they made to the governor. DHS has some estimation of what it’s going to take because of the proposal he made today of exactly what that number looks like for what needs to be the drawdown on the trust funds. I’m just curious and trying to make sure I understand how much one-time money we’re using that is outside of everything that’s been presented today or do we anticipate using outside of what’s been utilized today. And the same thing would be true for education since those are the big two. Maybe we just should hear directly from the agencies about their plans. And I know there’s volatility, and maybe that’s a way to kind of work around without having to say an absolute number. But there should be a contingency, I would think, both ways on the FMAP change and then also for whenever the feds reduce or do away with the enhanced rate.

 

White (DHS): Senator, Mark White, DHS. I apologize. I do not have those numbers with me. We can get those numbers to you. And certainly, we’re going to bring those on our budget hearing which is coming up a week from Monday. But I will tell you, yes. Our expectation is, assuming that the PHE ends at the end of March, then we do expect to draw down the Medicaid Trust Fund through the biennium.

 

Sen Dismang : I was thinking we’d get a little farther along than that. So specifics, I mean, just in general terms, we have a balance based on estimations, future collections. I mean, are we anticipating spending all of it over the next three years under this proposal, over the next two years? I mean, just in general terms, what do you think is going to happen to that outstanding balance based on the presentation we’ve got for this balanced budget?

 

Trust fund balance depletion (part 1)

White (DHS): In general terms, I would say that over the rest of the biennium, to the extent we’ve got excess in the trust fund, we’ll be exhausting that through that time.

 

Sen Dismang : Which is, I think, critically important for us to understand as members and is not lined out in this. As the Governor was very good to explain, this is GR spend is what’s here. And so if we’re spending down our trust fund balances to compensate for lack of GR spend, we just all need to be mindful of that whenever the balances do run dry. And you’re saying some time potentially in the next two years.

 

White (DHS): I would call it the excess of the trust fund, to the extent that it is larger than what we’ve seen in the past, yes. So that would certainly go down through the biennium.

 

Sen Dismang : All right. Thank you.

 

Sen Rice: Thank you, Senator Dismang. Senator Hammer, you’re recognized.

 

Sen Hammer: Thank you. Good morning. Along that line, let me ask you. Do you track historically how much gets swept into the Medicaid trust fund at the end of the fiscal year because of money that’s not been used in respective categories? Do you have that number readily available in a historical sweep?

 

White (DHS): We can get that number for you, Senator, because at the end of each year, there are a number of our areas where we can sweep those remaining funds into Medicaid trust fund. And historically, working with the governor’s office and DFA, we’ve tried to do that in order to strengthen that balance. But we can get you those specific numbers.

 

Sen Hammer: I’d like to get those, if you would, please. Thank you. Thank Mr. Chair.

 

Sen Rice: Senator Elliott, you’re recognized.

 

Sen Elliott: Thank you, Mr. Chair. This is not for you, Mark. This is for the other guys. When we look at the totality of the surplus, can you tell me what percentage of that surplus is federal funds or connect to federal funds?

 

Shellnut (DFA): I can’t answer that specifically. Certainly, the federal programs have boosted spending in the state, both at the household level and business and government spending. It’s significant, but it’s blended with inflation effects and quick rebound in Arkansas from the COVID-19 recession. That was probably a faster rebound than the national average. So we can’t really segment those effects.

 

Sen Elliott: I’m sorry. You can’t tell me how many dollars of the whole fund, how many dollars are federal dollars? I know it has some impact. It will have some ancillary impact. But there’s no way to just say, “Of this big pot of money, this many dollars came from the federal government”?

 

Shellnut (DFA): Well, some of those programs are still in process, still in the approval stage and payout stage. I don’t know if you want to address the phases of that.

 

Walther (DFA): We still have ARP money to distribute, a significant amount. We have spent a lot already. What the issue is, is that money is translated into grants and loans and other types of assistance to businesses around the state and to individuals, if you will recall during the heat of the pandemic. It gets provided to them, and then they in turn– they spend their money. They buy things. Businesses hired people, and they translate into income tax as well as sales tax. But how much of that is in the surplus or in the amount of money that we received in total? We can’t tell.

 

Sen Elliott: So you all did a good job of telling me how it works. But when I say to anybody out there, as we said today, “Here’s this big surplus that we have.” And we say, “Some of it is connected to the stimulus,” there’s no way of saying to the public, “This is what’s in this surplus that came from the federal government that we know probably can’t depend on– not probably, that we can’t depend on years down the road because it’s tied to something else.” That, to me, is how it works. But the simple question of what it is can’t be answered. I just want to be clear about that. Here we have a surplus of whatever, but we can’t say, extrapolate it out to show in an itemized way how much of it is general revenue, how much of it is federal government funds. We really can’t do that, huh?

 

Shellnut (DFA): Well, if you use the example of the cash payments to households, I think economists nationally are realizing that for upper-income households, a lot of that was saved rather than spent. And so that’s affecting how fast the economy responds to higher interest rates, for example. I mean, we can tally for you the official numbers that were sent to Arkansas, but how they actually played out in the economy, again, it’s a blended story.

 

Sen Elliott: Okay, thank you.

 

Sen Rice: Representative Wooten, did you have a question? Hit your button again. I think it got turned off. You’re recognized.

 

Teacher raises

Rep Wooten: Yes. Okay, thank you, Mr. Chairman. Yeah. I have several questions. First of all, on the Department of Education, are the $200 million in this next fiscal year and in the $350 [million], what does that cover for teachers? Does that give a $4,000 raise of the base salary?

 

Brech (DFA): Yes. What the governor wanted to do was to make sure that it gave enough flexibility to at least meet the $40,000 that was recommended by the House and the Senate Education committees with their adequacy recommendations, but thinks that there is enough leeway to even go higher than that. But wanted to leave that up to the next administration and to the legislature. But that would make sufficient funding available to go up to at least the $40,000.

 

Rep Wooten: To move it to $40,000?

 

Brech (DFA): Yeah.

 

Rep Wooten: What about tenured teachers? What are they going to receive?

 

Brech (DFA): I believe the way I understand the adequacy recommendations is all teachers would get a $4,000 raise and the minimum would go up from $36,000 to $40,000. But all teachers would get a $4,000 raise.

 

Rep Wooten: Okay. So we can cover that with $200 million the first year and $350 [million] the second?

 

Brech (DFA): The Department of Education, that’s what they asked for.

 

New prisons

Rep Wooten: Okay. Secondly, on the public safety area, the Board of Corrections has recommended or has asked the staff down there to start looking for new prison sites for 1,000 beds. And then they’re looking at some sanction beds. Is that in the budget?

 

Brech (DFA): Not necessarily. The increases are for inflation and their operating expenses. But the Department of Corrections does have some funding that could be made available for that. They may disagree, but they did turn back funds last year, and we are increasing it now. So our hope is that some of this would help with increased bed capacity as well.

 

Rep Wooten: So there’s nothing in the budget to build the new prisons with?

 

Brech (DFA): No, sir.

 

New Crime Lab

Rep Wooten: What about a new crime lab? Is there any provision made for $200 million for a new crime lab?

 

Brech (DFA): No, and we wouldn’t want to put that in the RSA, necessarily. Those would be one-time capital projects that could be funded. That’s up to the legislature to handle. But that wouldn’t be part of the RSA.

 

Rep Wooten: The Governor’s Office didn’t give any consideration to that?

 

Brech (DFA): No, it wouldn’t be part of the balanced budget, no.

 

County jail support

Rep Wooten: All right. What about the funding for county jails on paying for prisoners? Is there anything in the budget to cover that?

 

Brech (DFA): No, but it was increased last year a significant amount.

 

Rep Wooten: I was asking about the future.

 

Brech (DFA): Nothing additional.

 

Rep Wooten: No additional money–

 

Brech (DFA): No sir.

 

Rep Wooten: –for the county jails? Does the state not recognize that that’s their responsibility? Once they go through the court system, that is the result of an action by the state placing those people in the county jails?

 

Brech (DFA): And I think that’s why there was a significant increase last year. And I understand the question, but there’s nothing in this budget to handle any future increases.

 

Projections: Inflation (Wooten)

Rep Wooten: All right. My next question is for Mr. Shellnut. I’m not as optimistic as you are or as the department that inflation is going to abate. Now it’s down to 7.7% this morning. That’s a 2/10 of a percent drop. But our people are hurting, and I don’t know, what are you basing– what assumptions are you making that’s going to turn this around? We have problems with energy. We have problems with the supply chain. We have a war in Europe. What are you basing your assumptions on that the inflation rate and the hurt is going to diminish for the people of Arkansas?

 

Shellnut (DFA): So the forecast service that we subscribe to from the national level includes a lot of ex-Federal Reserve staff members in that forecast team. So the forecast and the model look at the economy much the way the fed models do, which assumes that rising interest rates will tap the brakes essentially in the economy. For the most glaring part of the components of GDP, that will show up in construction spending, both residential and non-residential. But over time, there would be this slowdown in consumption, which is expected next year from these rising interest rates, affecting financing of purchases for big-ticket items, for example. So the fed policy is geared towards slowing consumption and that leads to lower inflation by pulling down demand. In next year, it includes a borderline recession that, for the first time, includes the large component of final consumption in it. That was not the case in the first half of this year when it was a mix of other technical components, but not consumers. But next year, it does include the large component of final demand. So there is an assumption that there is a normal response to these aggressive interest rate changes, which is essentially the only tool that the Federal Reserve has to combat inflation. They do not attempt to modify energy prices or food prices. They focus on core inflation, which is excluding those components. So you could still see volatile swings in energy and food prices that hit the economy. But fed policy on interest rates is focused on the core inflation rate. The same applies to our forecast service group. We receive forecast updates monthly, and a shock coming from energy prices is essentially absorbed in the update of the forecast. It’s very difficult to predict global commodity inflation with so many players involved on the supply side and demand. We are looking at a borderline global recession next year, with Europe leading the way on that and a lot of other countries hurting because of the rise in financing costs coming from the US market. So we are looking at a slowdown globally for demand.

 

Rep Wooten: Well–

 

Sen Rice: Representative Wooten, if you’ll go ahead and wrap up and get back in the queue. I’ve got others waiting.

 

Rep Wooten: All right. Well, let me just say that the very point you made is the reason that I’m not optimistic that we’re going to see a downturn in the next 10 months, 12 months, the next 18 months, with the global situation being what it is. And I’ll get back in the queue. Thank you. Thank you, Chair. Thank you, Mr. Shellnut.

 

Sen Rice: Senator Hickey, you’re recognized.

 

Trust fund balance depletion

Sen Hickey: Thank you, Mr. Chair. Mr. White, this question is for you, if you don’t mind, and I’d like to back up to the Medicaid Trust Fund. If I heard you right, the way the budget was balanced, you said that we would be using the excess of what’s in the Medicaid Trust Fund. And staff just pulled this for me at my request that we’ve got $642 million in there right now. What do you consider the excess? Because I’ve got the historical numbers here, so I think we need to know that.

 

White (DHS): Right. And I apologize. I did not bring the numbers with me today, and I’m very hesitant to try and go on memory. But just I would say the majority of that trust fund balance I would expect to be used through the course of the biennium.

 

Sen Hickey: Okay. I think that’s a little more clear. I mean, we’re talking about over a half a billion dollars. If you’re talking about a half a billion dollars of money that you’re going to use out of your checking account, and when it’s gone, we’re somehow going to have to replace that and get that back within our budget. So I guess for DFA, I know you may not want that question, but how does all of that work?

 

Brech (DFA): And we’ve had a lot of discussions with Human Services about their Medicaid Trust Fund. It depends on how you’re looking at it. We don’t feel like they’re going to use that much over the biennium. The thought was we’ll know a lot more at the end of this fiscal year. The FMAP, whether it’s over or not, we’ll know where their Medicaid balance will be. It should grow more over the next few months. As long as they’re getting the enhanced FMAP, they’re actually saving some of that money now or saving the GR. So we’ll know a lot more at the end of the fiscal year and going into 2025. We may very well have to add money in 2025. The governor wanted to go ahead and put $25 million in now just as a down payment on that. But we’ll know a lot more a year from now than we do today. The thought is they won’t be in any trouble in FY 2024.

 

White (DHS): And sir, if I can add to that. That’s part of the reason why I did emphasize the volatility right now. Just to give you an example of that, these last six months that we’ve been working on the budget request, looking at the numbers, during that time, there was a 1-point swing in the projections for our FMAP for the following years. As I said, just that one-point swing, that’s $65 million in SGR. And so we make guesses about where we will go over the next course of this biennium. But as I said, there’s a lot of volatility there and a lot of uncertainty.

 

Sen Hickey: I understand, but respectfully here, all agencies have to. And you all have been doing this for years, and I understand the volatility of that and I understand what a percentage on the amount of dollars that you all use, what that means. That’s big numbers. But you’re sitting here telling me that basically over the next two years that your agency is anticipating using this $642 million. And Mr. Brech, I mean, I’m hearing you all say you don’t think it’s that much. I guess my question to you is how much do you think it’s going to be?

 

Brech (DFA): Well, there are a couple of factors that come into play. One is how long the enhanced FMAP lasts. And then it’s projected there are 20% more individuals enrolled in Medicaid than are actually eligible at the moment. Because of the enhanced FMAP, they’ve not been able to take anyone off the rolls, or very few, but they’ve not been able to do any eligibility requirements and they haven’t taken anybody off the rolls since that started. So you’re going to have a 20% decrease in the enrollees at the same time that you’re going to be losing the FMAP. How long it takes them to get those people disenrolled, that’s going to be interesting. And it’s going to tell us a lot more of what they’re going to need in the future. When we looked at it, because they’re getting the enhanced FMAP today or last year, they got around $350 million because of the enhancement, but they saved the majority of that. So when you look at the ability to shed 20% of the enrollees at the same time losing that, we don’t think that they’re going to lose as much as they think. But we’ll know a lot more a year from now. I do believe that. It’s probably somewhere in the middle.

 

Sen Hickey: I just know that we’re going to have this session coming up and it’s always a lot of people want to do different tax cuts. I know that there’s at least a soft drink tax that everybody always wants to come off of that that rolls into this fund. And I think we’re going to have to try to get a better guess, for a lack of a better word. May I ask one more question, Mr. Chair, and then I’ll stop? On the education funding again, same thing here. How much of that Adequacy Fund or whatever are we actually anticipating? And I don’t have in front of me what it was. Off of memory, I think it was $200– no, it was $600 [million] in there also.

 

Brech (DFA): What Education asked for was actually $200 million in 2024 and $250 million in 2025. That was their original ask. They are going to be depleting their fund balances. To be able to do everything that the Adequacy reports are recommending, they are going to have to use their fund balances by giving them the extra $100 million in 2025 that will protect them somewhat. But I do think that their fund balances will be depleted in 2026 or 2027.

 

Sen Hickey: The $600 million is what you’re talking about on that?

 

Brech (DFA): That’s correct.

 

Sen Hickey: It’s over a billion dollars. We’re talking about out of our fund balances that we’re going to have to cash flow within our regular budgets. Okay. Thank you, Mr. Brech.

 

Sen Rice: Senator Dismang and then Senator Chesterfield.

 

Sen Dismang : So I get we’re not going to have an in-depth discussion about the proposal and that’s fine, but I mean, you’ve spent a lot of time on the forecast. And if you don’t mind, can we just get a quick presentation on the forecast? Maybe you only want to focus on individual income tax collections and sales tax collections, the big two, and refunds or whatever it may be. Because I’m trying to piece together the pages here, just trying to make sense of part of this is going to be due to implementation of the tax cuts. But that’s only going to be year one since we advanced those. And then on the out years, what are we looking at? Because it’s some pretty volatile swings in individual income tax collections, for instance, or even sales tax collections. I think it’s dramatic they’re going to go up 9.4%. How much is that due to inflation? We talked about the federal spend and the impact on collections and revenues that’s generating. But sales tax in particular, how much of that is being driven by inflation only? Because it seems to me the numbers are lining up pretty similar. Do you mind just going into a little bit more depth? I know you’ve spent a lot of time on it and I think it’d be a shame not to have a more robust presentation on the forecast.

 

Tax cuts

Shellnut (DFA): Well, first of all, turning to current year FY 2023, you’ll notice that we’re attempting to place the accelerated income tax cuts in the tables here. And we’ve added quite a lot of that tax cut down in individual refunds, which come later in this fiscal year, and not so much in withholding, partly because of the chaos that it does to withholding formulas and tables for employers. So we have more of it down in refunds. So that’s the tax cut impact, and that was a retroactive tax cut. So you would expect larger refunds later to adjust for that. That includes the $150 tax credit for low incomes, which would show up more in refunds, I think. Looking at corporate income tax, this our more volatile, significant revenue category. Whenever we have two or even three years of double-digit percentage growth in that category, we get concerned about the forecast, and we have handled that with two years of decline back to somewhat normal levels adjusted for inflation. So that explains the double-digit decline in current year and in FY 2024. So two years of adjustment back down to normal. It may not happen this year. So far, the corporate collections look pretty strong. I suppose they could reverse course later in the fiscal year, but we could add to the surplus if that doesn’t play out, if it doesn’t contract this fiscal year. But certainly FY 2024, we have to allow for a double-digit percentage contraction there. In sales tax, again, it may be conservative, but we are factoring in a borderline recession nationally with some impact there, and at the same time, deceleration of inflation, slowing that in the context of year-over-year change. Again, in sales tax, we’re coming off of near double-digit growth in that category over two years because of stimulus and quick rebound, and now we’re bringing it back to normal. A lot of states are dealing with the same issue in their forecasts of coming down off of stimulus and hearing talk of inflation or recession at the same time. And that’s what produces this unusual, nearly flat growth rate in FY 2024. And then 2025, because of all of the economic assumptions, it looks like it’s back to normal for underlying growth rates and inflation. So the transition here is FY 2024.

 

Projections: Labor

Sen Dismang : Thank you. Just one quick question on that, because one thing we didn’t really talk about, and I guess at least anecdotally what I feel is just the shortage in the labor market. I think that’s what most employers– it’s part of what we hear about teachers or nurses or whatever, just a general lack of folks to fill positions. And how are they factoring that in? And it’s always been my question, and maybe you’ve read a little bit about it, but how are they meshing fixing that with the rise in the interest rates? Because there’s still the demand. It’s not like we’re losing people, we just don’t have enough people to fill the roles, to fill the demand of the jobs that are out there now. At least that’s what I feel personally and then in talking to other employers. So how does that factor into this? So we’re utilizing interest rates to soften the economy. I’m having a hard time understanding how that’s going to mesh with the labor issue, which is, I think, really one of the drivers.

 

Shellnut (DFA): Right. Well, we have very low unemployment rates in Arkansas and relatively low at the national level. So the forecast assumes that it adjusts lower demand because of rising interest rates, obviously in areas such as construction, but a lot of other categories as well. So demand is lowered. You’re not seeing that yet in the actual numbers. We don’t see it in collections. We’re not seeing it in labor market indicators. So it’s all a projection over the horizon of response to fairly aggressive changes in interest rate policy.

 

Sen Dismang : And my concern would be, just as we’re working through, that it’s not just an issue– I mean, we’re not going to be able to contract the building construction industry and it fix what’s happening because I believe that the shortage is across pretty much all industries, including service industry. And so, again, I’m not quite sure I understand how it’s going to work out, but I didn’t know if there was any additional information you’d seen on that. So we’re counting on a contraction in the construction industry that’s going to ripple through other areas, which again, I think are almost unrelated. But thank you.

 

Shellnut (DFA): Right. We’re not seeing it in the actual numbers at this point.

 

Sen Rice: Thank you. Senator Chesterfield, you’re recognized.

 

Projections: Interest rates

Sen Chesterfield: Yes. Thank you, Mr. Chair. Good morning, gentlemen. How are you? I’m going to see a lady down there one of these days. This morning, the forecast said we were at 7.2% inflation and as a result of that, that the Fed may not have to increase interest rates as aggressively as they have been doing in the past. If that is the case, what impact will that have on our budgeting?

 

Shellnut (DFA): So I saw the number released this morning, both top-line and core inflation. The stock market is responding favorably, but they’re looking ahead also at what it means. It suggests we have a turning point in inflation numbers coming down. But as Chairman Powell commented, we’re very early in the fight on inflation, so it’s not clear that they’re going to step back from three-quarter percent increases back to say, half a percent. I think that may involve some wishful thinking.

 

Sen Chesterfield: That’s wish. Will the tax cuts going forward cost more than originally anticipated? I think you said something like $164 million in the second year of it. Is that what I’m remembering? Where’d the $164 million come? Was that the second– the immediate impact was like $500 million and then the next year would not cost quite as much. Remind me of what that was. Remind me of the impact on the budget of the tax cuts.

 

Shellnut (DFA): So by fiscal year, the current year impact is $500 million. The second year, FY 2024, is $167 million.

 

Sen Chesterfield: $167 instead of $164. Could you tell me if that’s going to be increased if inflation continues?

 

Shellnut (DFA): Since that is mainly income tax impacts, I’d have to think about that a little bit to give you an answer on that one.

 

Sen Chesterfield: All right. And finally, Senator Elliott alluded to how much we get from the feds. And you were saying that we can’t just define it because so many ways the federal government monies impact the state. How much money is going to the Department of Health? How much is going to DHS? How many federal dollars are going to the Department of Education? I’d like to know that, and I think you can get that information for me. Is that correct?

 

Walther (DFA): Yes, we can get that information.

 

Sen Chesterfield: All right. I would just like to know, according to each one of the agencies headed by a secretary, how much in federal dollars are flowing directly to that agency.

 

Walther (DFA): Some go direct, some come through ARP. That would come through the steering committee and the legislature. They all come through here for appropriations.

 

Sen Chesterfield: Yeah, I know that.

 

Walther (DFA): We can gather all of that.

 

Sen Chesterfield: All right, I’d appreciate if you would share that with me. Thank you so very much.

 

Sen Rice: Thank you. Representative Ladyman, you’re recognized.

 

Rep Ladyman: Thank you, Mr. Chair. My question concerns the income to the state, okay, the income streams that we have coming in from taxes. If we’re saying that inflation is going to slow– you mentioned housing and construction– so if those things slow down, in my mind, that would reduce our income stream from sales tax, income tax. So is that figured into this budget? How did you project that reduction in income due to a slowdown in the economy?

 

Shellnut (DFA): So our tax revenues in Arkansas are based on current dollar activities in the economy. And that current dollar is composed of real growth such as construction activity and also inflation layered in there with it. And so what we’re seeing in this forecast for FY 2024 is both of them slowing down the real activity and inflation over that year. So it is a blend.

 

Rep Ladyman: But even with those slowdowns in growth, the budget projects a growth in income, is that correct?

 

Shellnut (DFA): Well, for FY 2024 in gross revenues, we are looking at a contraction of 2.6% for individual, and we’re assuming a 22% contraction in corporate income.

 

Rep Ladyman: All right, thank you.

 

Sen Rice: Representative Wooten, you’re recognized.

 

Rep Wooten: Thank you, Mr. Chairman. Can you tell me, Mr. Shellnut, the percent of the surplus that is created by inflation in the next two years? What percent of that is the result of inflation?

 

Shellnut (DFA): I don’t think I can answer that question, but clearly, it is helping revenue collection. It really depends on our tax base, what is taxed and what is not. Our sales tax does not pick up energy inflation to any great extent other than utilities. And for general revenue, we’re not picking up food inflation. That would be manifested in city and county sales tax base, but not state general revenue.

 

Rep Wooten: All right, then what we’re seeing happen here, a surplus is great for state government, but the inflation is terrible for the citizens of Arkansas. It’s costing them a bunch of money. On one hand, you indicate that construction has got to abate and residential construction, commercial has got to abate. And following along with Senator Dismang and Senator Hickey and Senator Chesterfield, if that abatement occurs and continues to occur and the Fed continues to raise the interest rate, it’s going to hurt the people of Arkansas even more. And my next question is what portion–or does the use of the trust funds create the surpluses, add to that, by using the surpluses in the Department of Human Services, and you mentioned, Mr. Brech, in Education, their fund balances. They’re using those trust funds like that, does that create a situation where it increases the likelihood of surpluses while our people are suffering under 8% inflation?

 

Brech (DFA): And the answer is yes. If you didn’t use any of the surplus dollars from either the Public School Fund or the Medicaid trust fund, it would require a larger percentage increase on the RSA and more than $200 million in 2024 and $350 million in 2025. It certainly would. I don’t know exactly how much that would be, but I think you could probably add 2% to that at least.

 

Rep Wooten: So are we backing ourself in a corner to where we’re going to hurt our citizens, and state government’s going to flourish?

 

Brech (DFA): Well, I don’t know how to answer that. I think what we’re trying to do is keep the RSA down, maintain a surplus in 2023, 2024, and 2025. Because keep in mind, even if we do deplete or reduce the trust funds, the surplus is still there. And we’re looking at a $600 million surplus this year, $245 million in 2024, and another $309 million in 2025. So even though we’re using those trust balances, we’re increasing our balances even more because our fund balances now, I think the Governor went over that, are 2.7. They will grow.

 

Rep Wooten: Well, I understand that, but my concern is we’re almost at a $3 billion reserve funding. And I know why we’ve done that, and I think that’s good budgeting, and I think that’s a wise use. But do you agree that we need to be very, very careful in using these trust funds like that? Because we could back ourself in the corner like we ended up with the workers’ benefits not too long ago and then also with our benefit program for the state employees. Do you not agree we need to be careful?

 

Brech (DFA): Absolutely, we need to be careful. Yes.

 

Rep Wooten: All right.  Thank you, Mr. Chairman.

 

Sen Rice: Thank you. Not seeing any more questions, thank you, gentlemen, for being here today. Wish you the best for the day. Members, we have– going back to B1, Senator Wallace will be back in just a minute. We are going to pull number two, and it will be presented later. In just a minute, we’ll have Senator Wallace’s report. Have you got it? Okay, we’re going to have the report for the Personnel Subcommittee. Representative Wooten, if you’ll hit your button, you’re recognized.

 

Rep Wooten: Thank you. The Personnel Committee met on Wednesday, November 9, here in Big Mac A, and the committee recommends agency request for the constitutional offices and the judicial agencies, as well as executive recommendations for the listed executive branch agencies. The attached documents that each of you have been provided reflects a revised executive recommendation for two DHS divisions. And, Mr. Chairman, I move for the adoption of the report at the proper time.

 

Sen Rice: Okay, I’ve got a motion for the report. Do I have a second? Second. All in favor? Aye. Okay, members, as you can see on your schedule, next week is ALC week. ALC’s subcommittee is going to be meeting Tuesday through Thursday, and then Friday will be full ALC. You do have a Monday afternoon Children and Youth Joint Committee. Thank you for your participation. Thank you for being here today. Have a safe weekend. We are adjourned.