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Arkansas governor's proposal on reserve cash wins plaudits, but some in state raising questions

by Michael R. Wickline | January 21, 2018 at 4:30 a.m.
Gov. Asa Hutchinson delivers remarks Tuesday Jan. 16 2018 at the North American Free Trade Agreement summit in Rogers.

Gov. Asa Hutchinson's proposal to set aside nearly $48 million of what he calls surplus money into a new reserve fund is winning praise from some Republican lawmakers who want to slow the growth of state spending with an eye toward paying for future income-tax cuts.

But the Republican governor's proposed restricted reserve fund is drawing skepticism from some Democratic lawmakers. They said Hutchinson's proposed general-revenue budget for the coming fiscal year falls short of funding needs such as hiring more probation and parole officers and assisting the University of Arkansas for Medical Sciences, which has laid off more than 200 employees because of a larger-than-expected deficit.

For fiscal 2019, Hutchinson proposed a $5.62 billion budget that would be a $172.8 million increase over funding in this fiscal year. Of that increase, $142.7 million would go to the Department of Human Services. The proposal continues to provide $15.8 million a year for the rainy-day fund

Hutchinson said his budget also would provide a surplus of nearly $64 million, with $47.9 million earmarked for the reserve fund that could be tapped with the blessing of the Legislature. The other $15.9 million would be used to help match federal highway funds.

"The goal is to create a surplus that will be a cushion for future economic changes and they will come some day, but it will also be the foundation and sets the stage for future tax cuts, increasing the competitiveness of Arkansas tax rates," he told the Joint Budget Committee nearly two weeks ago.


The state previously set money aside. For nearly a decade, the state has had a so-called rainy-day fund. It also has a long-term reserve fund created in 2016 by the Legislature, which the next year authorized the shifting of about $100 million of tobacco-settlement proceeds into that fund.

The rainy-day fund holds $20.6 million and the long-term reserve holds $123.4 million, said state Department of Finance and Administration spokesman Scott Hardin.

Under state law, the long-term reserve may be tapped only if the chief fiscal officer determines that a revenue shortfall exists: specifically, when the official forecast of total general revenue is projected to increase by less than 3 percent above collections in the previous fiscal year from changes in economic conditions.

Tapping the long-term reserve requires a two-thirds vote of the Legislative Council or Joint Budget Committee members to meet unanticipated shortfalls in general revenue.

Nearly all states have what are commonly called rainy-day funds, to set aside money in good economic times so that it's available in the bad economic times, the Pew Charitable Trusts said in a report last year.

Despite the widespread use of these funds, the policies that guide deposits, withdrawals and the size of the fund vary greatly, the report said.

States have struggled to determine adequate savings targets for their rainy-day funds, and many states found their balances were insufficient to cover the revenue shortfalls that emerged during the last recession, according to the Pew report.

"Since then, several states have increased their rainy-day caps or savings targets," the report said.


"I like the fact that we are putting more money in savings," Rep. Lane Jean, R-Magnolia, said in an interview about Hutchinson's proposal.

"Looking down the road, if we are going to do tax reform, it can't all be [funded by] shifting revenue from one person to another, one place to another," said Jean, who is a co-chairman of the Joint Budget Committee and a co-chairman of the Legislative Tax Reform and Relief Task Force.

"There will have to be savings in government if we are going to lower the tax, especially the income-tax rate in Arkansas," Jean said. "I think the governor is trying to get prepared for that for next session [in 2019] and I applaud what he is doing."

To push his proposals in the 2019 regular legislative session, Hutchinson will first need to be re-elected this year.

The Republican-controlled Legislature approved Hutchinson's proposed cuts to the individual income-tax rate totaling about $150 million in the 2015 and 2017 sessions. Hutchinson has said that he wants to cut income taxes further. The tax-overhaul task force is required by law to present its recommendations to the governor and lawmakers by Sept. 1 in advance of the 2019 session.

"I don't think this is responsible, to suggest that we have a surplus, if we are not meeting the needs of our people." Sen. Joyce Elliott, D-Little Rock, said in an interview.

"The first priority for me ought to be making sure that we are funding the needs of the state as opposed to saying we are accumulating a surplus because you don't have a surplus that is real. We have outstanding needs such as UAMS, such as being comfortable that the Department of Correction has the money it needs to respond to the issues they have ... and not funding the number of parole officers that we need ... based on the study that we spent one year compiling," said Elliott, who serves on the tax-overhaul panel.

Hutchinson's budget administrator, Duncan Baird, assured lawmakers nearly two weeks ago that the governor has proposed sufficient increased funding for the Department of Community Correction and Department of Correction. The former handles pardons, paroles and community-based help for offenders; the latter oversees the prisons.

"Everyone can argue for a different priority in spending, from pre-K education to UAMS to public safety," Hutchinson said Friday in a written statement.

"In my view, the budget strikes the right balance from meeting the needs of the state and setting aside savings for the future. Savings have been a priority of mine from the creation of the long term reserve fund to other tools that give our state a more secure financial future," he said.


The tax cuts approved in 2015 for Arkansans with taxable income between $21,000 and $75,000 a year became effective for an entire fiscal year for the first time in fiscal 2017. The state projected the cuts would reduce general revenue by about $100 million a year.

In May, the governor reduced the budget for fiscal 2017 by $70 million, largely because of lagging collections of sales and use taxes and corporate taxes. However, $60 million of that reduction was restored by the last day of the fiscal year, on June 30, after collections rebounded. In May, Hutchinson also trimmed the fiscal 2018 budget by $43 million.

The cuts approved in 2017 for Arkansans with taxable income of less than $21,000 take effect Jan. 1, 2019. The state projects these cuts will reduce revenue by $25 million in fiscal 2019 and then $50 million each fiscal year.

Hutchinson has said he would like to reduce the top individual income-tax rate to 5 percent, but it could take a while to do so. The top rate is 6.9 percent. The finance department projects that cutting the top rate to 5 percent would reduce revenue by more than $300 million.

Asked whether the proposed reserve fund is a way to begin factoring in reduced revenue to help fund a future tax cut, Elliott said, "I think he obviously must be because one of the things the governor said, it would set the stage for another income-tax cut."

The governor was asked by a reporter whether he foresees the proposed reserve fund as a permanent part of the budget or a one-time proposal to set aside money that could be used for an income-tax cut approved in 2019.

"As I stated to the Joint Budget Committee, the restricted reserve fund is a very important tool to build capacity for future tax cuts," he said in a written statement. "As to using the fund as a long term tool, that will be determined in future discussions with the General Assembly."

House Speaker Jeremy Gillam, R-Judsonia, said the Legislature potentially could use the fund to help pay for future tax cuts.

"The way I look at it is [the governor] is presenting this as something that gives us options and flexibility instead of it going straight to expenditures or straight to tax cuts," Gillam said Thursday. "He is saying, 'Look, let's just be prudent, and take a pause button on this money and make sure that we're in good financial position and then you are able to go forward.' I think it is good because he is just giving options."


Asked about the difference between the rainy-day fund and the restricted reserve, Hutchinson said, "The rainy day fund is designed to be spent as needed, but the restricted reserve fund is designed to be saved.

"The rainy day fund is for unanticipated needs of the state, like responding to a child welfare crisis or replacing a boiler at the Law Enforcement Training Academy," the governor said Friday in his written statement.

"Funding in the rainy day fund can be accessed through previously approved but unfunded appropriations or by specific authorization from the Legislative Council," Hutchinson said.

"The restricted reserve fund is totally different in that it is not designed to be spent for capital improvement projects or to fund specific appropriations.," Hutchinson said.

The 2009 Legislature created a rainy-day set-aside inside the General Improvement Fund for the 2009-11 biennium. Unspent money was kept in that set-aside until the 2017-19 biennium, "when an actual Rainy Day Fund (not a sub fund of GIF) was created ... since there was no funding provided for General Improvement Fund in the 2017-2019 biennium," Kevin Anderson, assistant director of fiscal services for the Bureau of Legislative Research, said in an email to the Arkansas Democrat-Gazette.

The General Improvement Fund has largely been funded with surplus dollars over the years and it was used to pay for a wide range of projects and programs.


In the 2009-11 biennium, the rainy-day set-aside received $40 million in surplus funds; $29.5 million of that was spent, with most going to the Department of Correction with the approval of then-Gov. Mike Beebe and the Legislature, according to bureau records.

In the 2011-13 biennium, the rainy-day set-aside received $20.5 million; $14.9 million was spent, with the Correction Department again getting most of the money, the records show.

In the 2013-15 biennium, the records show the rainy-day set-aside received $59.5 million and $54.9 million was spent, including $18.8 million for the Medicaid program, $7 million for UAMS and $6.6 million for the Children and Family Services Division. Beebe was the governor for the first year and a half of this two-year period and Hutchinson was governor for the last six months.

During the 2015-17 biennium, the rainy-day set-side received $161.9 million, largely from surplus funds and the Department of Health's sale of an in-home health care program. The state spent $124.8 million, the bureau's records show. Expenditures included $40 million to help match federal highway funds; $10 million to shore up foster care; $9.9 million to the state police for upgrades for an emergency and public safety communications system; $7.5 million to the Higher Education Department for workforce implementation grants; $14.7 million to the Department of Correction for Ester unit renovations, personnel and operating expenses; and $4.5 million for UAMS, according to the records.

So far in the 2017-19 biennium, the rainy-day fund received $27.9 million; $7.2 million has been spent largely for projects at the Arkansas Economic Development Commission and to help fund an additional crisis-stabilization center through the Human Services Department, the records show.

Senate President Pro Tempore Jonathan Dismang, R-Searcy, said Thursday, "There has been an issue with understanding what rainy-day is as far as being set aside to shore up things.

"When we are using it for capital projects, it didn't really adhere to the intent of what you would commonly think as a rainy-day fund," he said.

Photo by Staton Breidenthal
Rep. Lane Jean, R-Magnolia
Photo by Staton Breidenthal
Sen. Joyce Elliott, D-Little Rock

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