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Governor sets goal of $420M in reserve

He lays out plan to fill fund by ’23 by Michael R. Wickline | December 6, 2020 at 3:24 a.m.
FILE — The state Capitol is shown in this file photo.

Gov. Asa Hutchinson wants to continue bolstering a state savings account, with a proposal to double the amount of money it has to at least $420 million by mid-2023.

The Long-Term Reserve Fund was designated in 2016 to be a savings account that could be used to shore up state programs in economic downturns. The fund was originally named the Arkansas Rainy-Day Fund, which existed for several years but was never given money.

Hutchinson declared his intention to boost the reserve fund in a letter to state lawmakers on Nov. 10 when he presented his proposed general-revenue budgets for fiscal 2022 and 2023. Fiscal 2022 starts July 1, 2021.

"When I took office [in 2015], the balance in the Long-Term Reserve was zero," Hutchinson wrote. "Today, the balance is $185 million. With my budget today, I will be presenting a plan that will see that balance rise to at least $420 million by the end of the biennium."

Hutchinson asked that the 93rd General Assembly, when it meets in its regular session starting Jan. 11, transfer $100 million of the state's $240.9 million surplus to the reserve fund.

"This is important for our future and you can see this will be added to each year, so it will continue to grow and be a cushion against the uncertainty of the future," Hutchinson said.

FUND'S HISTORY

In May 2016, the Legislature and Hutchinson renamed the Arkansas Rainy-Day Fund as the Long-Term Reserve Fund to avoid confusion over which "rainy day" fund is being tapped, a state official said then.

At that time, Jake Bleed, who is now the budget director, said the reserve fund would be "a fallback funding source in the event of an economic downturn," and its funding would come from the Securities Reserve Fund, which contains earnings on investments made by the state treasurer.

In May 2017, the Legislature and Hutchinson authorized the transfer of more than $100 million from the Arkansas Healthy Century Trust Fund, which held tobacco settlement monies, to the Long-Term Reserve Fund.

At that time, Hutchinson had urged legislative approval of the tobacco-funds transfer to improve the state's Standard & Poor's global bond rating of AA/Stable.

Robert "Ro" Arrington, director of homeownership and public finance at the Arkansas Development Finance Authority, said last week that eventually building the Long-Term Reserve Fund to somewhere between 7% and 10% of the state budget, along with other factors, would help improve the bond rating.

Hutchinson said Friday that favorable bond ratings will ultimately reduce interest rates for higher-education institutions and other state agencies, such as the prison system, that use bonds to finance capital improvement projects.

The reserve fund has its current balance of $184.9 million because of transfers totaling $103.4 million from the Arkansas Healthy Century Trust Fund -- including a $102.9 million transfer on June 29, 2017 -- and $81.5 million in transfers from the Securities Reserve Fund since June 30, 2017, according to Scott Hardin, a spokesman for the state Department of Finance and Administration.

OTHER FUNDING SOURCES

In addition to the proposed transfer of $100 million in surplus funds to the reserve fund, Bleed said in a recent interview that the governor's proposal also would shift $25 million a year over a three-year period to the fund from the state's property tax relief trust fund.

Finance and Administration Secretary Larry Walther has authority under a 2019 state law to make those transfers.

Voters approved Amendment 79 of the Arkansas Constitution in 2000 to create the homestead property tax credit. The Legislature originally set the credit at $300 per parcel and increased it to $350 in 2007. In the 2019 session, the General Assembly and Hutchinson enacted a law to increase the homestead property tax credit to $375 per parcel.

The Legislature also enacted a 0.5% sales tax, effective Jan. 1, 2001, and the revenue goes to the property tax trust fund. The trust fund was created to reimburse local governments, school districts and other entities for the loss of their revenue from real property taxes because of the credit.

"We have to be careful on how we do that [transfer to the reserve fund] because the counties and therefore the school districts build their budgets off of transfers out of the property relief transfer fund," Bleed said. "If we take out too much, there is going to be a cash flow ripple effect all down the chain, so what we have got is a plan to transfer $25 million a year every calendar year, '20, '21 and '22, out of there without affecting anybody downstream, so that is another $75 million that we planned to have."

Another source would be the Revenue Stabilization Act, which prioritizes the flow of state general revenue to state-supported programs.

In fiscal 2023, "we schedule about a $55 million transfer from [the Revenue Stabilization Act] directly in the long-term reserve," Bleed said.

That's "the first time we would ever actually take money out of RSA, get a line in the RSA and begin transferring money to long-term reserve, that gets us to about $415 million," he said.

The governor proposed a general-revenue budget of $5.84 billion in fiscal 2022, an increase of $161 million over the current funded budget of $5.68 billion, and a general-revenue budget of $6.01 billion in fiscal 2023.

The governor's proposals factor in about $36 million in reduced revenue from new tax cuts in fiscal 2022 and about $37 million more from these tax cuts in fiscal 2023.

These include income-tax cuts eventually totaling $50 million a year for low- and moderate-income Arkansans; reducing the top individual rate from 5.9% to 4.9% for new residents for five years; and reducing the sales tax from 6.5% to 3.5% for used vehicles priced between $4,000 and $10,000. Used vehicles priced below $4,000 are now exempt from the sales tax.

As to another funding source for the Long-Term Reserve Fund, "the last piece of the puzzle and the hardest to predict is the amount that the treasurer's office transfers from their investment proceeds," Bleed said.

"By the end of fiscal 2023, we anticipate that will be at least a few million dollars more. That gets us to about $420 million by the end of the biennium," he said.

Bleed said the governor's plan "is all subject to whatever the Legislature does and it is entirely conceivable that they may come in and say, 'We don't do the long-term reserve transfer, we want to cut income taxes.'

"But that right there is the balanced budget that the governor presented and that's how we get to $420 [million] at least," he said.

INCOME-TAX CUTS

Hutchinson said Friday that he proposed the Legislature, in the upcoming regular session, approve another $50 million in tax cuts for low- or moderate-income Arkansans rather than proposing further cuts in the top individual rate.

The top rate falls from 6.6% to 5.9% on Jan. 1.

The governor said the $50 million in cuts for low- to moderate-income taxpayers will help set the stage for later lowering the top rate below 5.9%.

"We followed this pattern in 2015 when we provided $100 million in tax relief for the middle-income earners," he said in a written statement.

"Then, we came back [in the 2017 session] and helped the lower-income Arkansans, and then lowered the top rate to 5.9% [in the 2019 session]. This pattern has proven to be successful, even though we would all like to get to the finish line sooner. For me, the goal is to get everyone in our state to a 4.9% income tax rate," Hutchinson said.

The Department of Finance and Administration projects that reducing the top tax rate to 4.9% eventually would cut tax revenue by about $275 million a year.

LEGISLATIVE REACTION

Hutchinson said Friday that legislators have reacted very favorably to his plan to boost the Long-Term Reserve Fund.

"Let's see [when] we get into session and see how the economy is doing," said Rep. Lane Jean, R-Magnolia, a co-chairman of the Joint Budget Committee. "I am for always growing the reserve. I think that's the fiscal prudent thing to do. What the number will be at the end of the session, I don't know.

"I support the concept of growing the reserve as much as we can do responsibly," Jean said.

During the covid-19 pandemic, there is uncertainty, he said.

"I am not sure we were out of the woods economically, so I think that's the right thing to do," Jean said.

Sen. Bob Ballinger, R-Berryville, said he favors putting more money into the reserve fund.

"From my standpoint, if we put that money back there it will be easier to cut taxes, so I am all for it," he said. "That is one way to cut spending and the size of government, is to put money back and don't spend it."

Senate Democratic leader Keith Ingram of West Memphis said the governor's goal is admirable.

"We need to look at it during times like this," he said. "That should be something we look to to try to accomplish."

Rep. Lanny Fite, R-Benton, said he's looking at the feasibility of introducing legislation in the 2021 session that would stop the transfer of funds from the property tax relief trust fund to the Long-Term Reserve Fund and either increase the homestead property tax credit to $400 per parcel or create a mechanism to later raise the tax credit.

"If the numbers work, I'll file that bill probably," he said

Fite said he didn't know that Hutchinson plans to transfer $25 million a year out of the property tax relief fund over three years to the reserve fund, "but I knew he wanted to use the money."

Fite said Amendment 79 "was sold as [a 0.5% sales tax] going to property tax relief and we feel like the people were misled" on some of the uses of the trust fund that the Legislature has authorized.

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