Beacon Journal editorial writer
Ohio soon will face a two-year budget shortfall estimated at between $4 billion and $8 billion, the worst fiscal crisis since the early 1980s.
While estimates vary, there is no dispute that painful choices lie ahead. Unlike the federal government, Ohio must balance its budget. The process allows no wiggle room to borrow to meet operating expenses.
John Kasich, the former Republican congressman who won the governor's race, must present the administration's two-year budget plan by March 15. The legislature must act by July 1. Under the Ohio Constitution, no deficits are allowed. If shortfalls develop during the biennium, the legislature may act to plug the holes. If the legislature fails to do so, then the governor must cut spending.
Ohio has two two-year budgets: One for transportation and one for all other operations. Overall, Ohio will spend about $118 billion in the two-year period ending June 30. Of that total, about $54 billion is in the General Revenue Fund, 72 percent of which comes from income, sales and business taxes. Non-GRF money is in more restricted funds and comes from fees, bond issues, licenses and federal grants.
Estimates of the budget shortfall apply to the general fund, which makes a worst-case scenario of a $10 billion shortage look insurmountable. But even if the problem is closer to $4 billion, and state leaders reach outside the GRF to tap other funds, the scope of the problem remains ominous.
How did Ohio get into this fiscal mess? A national recession cut deeply into general fund tax revenues at the same time the state was implementing business and individual income tax reductions enacted in 2005. The state's income tax rates, for example, are now 30 percent lower than they were just 25 years ago.
To balance the General Revenue Fund budget in this biennium, there was virtually no increase in spending last year, a reduction of about $1.7 billion this year and the postponement of the final phase of a scheduled income-tax reduction. The state also drew more heavily on ''one-time money,'' or nonrecurring revenue, much of it federal stimulus funds.
Democrats estimate this structural deficit facing the state at around $4 billion, Republicans at more than $8 billion, perhaps as high as $10 billion.
Few specifics on how to handle the looming crisis emerged during the campaign, from Kasich or Ted Strickland, the outgoing Democratic governor. But once the results of the Nov. 2 elections were in, broad outlines began to emerge.
Pledge against taxes
Republicans will be firmly in charge, with Kasich in the governor's office and Republicans back in control of the Ohio House. The Ohio Senate remained in Republican hands, as it has been since 1985.
During the campaign, Kasich pledged not to raise taxes and to restore the 4.2 percent income tax cut postponed to balance the current budget after the Senate failed in 2009 to identify a final round of $850 million in cuts.
Kasich would like to phase out the state income tax, source of $7.2 billion last year — or nearly a third of the general fund. That would mean even more spending reductions, moving that part of the Kasich agenda to the back burner.
Additional revenue could be tapped without a tax increase, although that would involve risks for Republicans, who called the postponement of the income-tax reduction a tax increase. Republicans are willing to examine tax expenditures, otherwise known as credits, deductions and exemptions that are available to businesses or can be found by Ohioans on their annual tax returns. The tax expenditures amount to some $7.5 billion a year. Out of 120 tax expenditures, some decades old, the thought is that many have outlived their effectiveness.
Other options lie embedded in the parts of the state budget not included in the general fund. In effect, the legislature could play shell games by shifting money to the general fund. To a limited degree, it has done so in the past. An increase in fees supporting a particular state agency, for example, would free up money for the general fund.
Everything will be on the table as Kasich and Republican leaders drive to balance the budget while lowering taxes. Among the ideas: privatization of state services, allowing oil and gas drilling on state lands and the sale of state assets. While almost all revenue from new gambling casinos will go to local governments and school districts, Kasich is looking at expanding the Ohio Lottery by allowing horse racetracks to install video lottery terminals. But initial estimates of $933 million in new state revenue in the next biennium are doubtful because of casino competition.
Still, the focus of the budget debate will be on cutting general fund expenditures. Looking for waste, fraud and abuse will only go so far.
In his four years, Strickland cut almost $4 billion in spending and eliminated some 5,000 state government jobs. In a drive for even greater efficiency, Kasich has embraced a GOP plan that dates back to 2006, when fellow-Republican Jim Petro proposed consolidating state government from 23 departments to nine. That could eliminate another 11,000 jobs.
But even if all 58,000 state government workers were fired in the next two-year budget, the total savings would be around $5 billion, less than the budget hole projected by Republicans.
Many groups have studied how to respond, among them a legislative Budget Management Planning Commission, the governor's Office of Budget and Management, the Ohio Chamber of Commerce and its eight members in major metropolitan areas, the Center for Community Solutions and the Brookings Institution.
Governor-elect Kasich has talked about picking ''low-hanging fruit,'' pointing, for example, to savings from changes to the state's collective bargaining law for public employees. In particular, Kasich questioned the right of public employees to strike and the use of binding arbitration to settle labor disagreements for unionized safety forces, whose members are not allowed to strike.
Many, in both parties, share concern over rising costs in the public sector, which offers generous health-care and retirement benefits. That doesn't mean changes will come without a fight.
School officials object
The Brookings Institution and the Greater Ohio Policy Center noted the state's share of spending on school district administration is 49 percent higher than the national average. In response to a recommendation to reduce Ohio's 614 districts by at least one-third, school officials immediately voiced strong objections, indicating another hard-fought budget battle.
Yet finding the resources to protect education from deep cuts affecting the classroom is needed to prevent the state from falling further behind in the percentage of its adult population with a postsecondary degree, a drag on economic development. As it is, Ohio's public schools would have received a 5 percent cut in recent years had it not been for federal stimulus funding. Higher education, too, has been spared the deep cuts of past budgets, after universities promised greater efficiency through a reorganizing pushed by Eric Fingerhut, chancellor of the Ohio Board of Regents.
The budget studies offer evidence that cuts have gone too far in some areas, producing long-term effects that will cost the state dearly. The state's mental-health system, once a model, has been cut in recent years, drug and alcohol addiction services by 30 percent and local mental health appropriations by 35 percent. That neglect can invite costly prison stays and lost productivity in the work force.
There is rough consensus on reforming the state's prison system, lowering costs through sentencing reforms that steer offenders to lower-cost, community-based treatment; containing Medicaid spending through managed care and in-home care for seniors; and encouraging consolidation among the multiple layers of local government, gaining efficiency.
The question is: Can such structural reforms yield big savings within the next two-year budget? Community-based facilities would have to be beefed up if offenders are diverted from prisons; so would in-home services for seniors, keeping them out of nursing homes. Local governments say they are making strides toward efficiency. Despite the claim, Ohio still has some 3,700 political subdivisions.
Ohio is not in a unique position. Overall, states face a total of $140 billion in budget shortfalls, according to the Center for Budget and Policy Priorities, a Washington think tank.
Some other states face much more difficult budget situations, having failed to cut spending as deeply as Ohio or make payments to state pension funds.
The closer John Kasich and his Republican allies in the legislature get to July 1, the less consolation that will be.
Steve Hoffman can be reached at 330-996-3740 or firstname.lastname@example.org.
Most of Ohio's spending is for health care, education, prisons, highways and direct aid to local governments.
However, there are many other functions of state government — some of which are difficult to adjust.
For example, $167 million is budgeted out of the General Revenue Fund this year to pay the interest on bonds sold to repair and replace school buildings that, a decade ago, were identified as among the worst in the nation.
Failure to make those payments would put the state in default.
Some of the smaller GRF accounts are:
• Attorney general — $47,159,119.
• Department of Veterans Services — $31,860,717.
• State treasurer — $30,000,557.
• State auditor (administration) — $29,979,031.
• State School for the Deaf — $8,727,651.
• State School for the Blind — $7,278,572.
• Ohio Civil Rights Commission — $4,897,185.
• Secretary of State — $2,540,705.
• Ohio Ethics Commission — $1,513,908.
The legislature and governor determine which accounts should be in the GRF and which should be in special funds. Special funds can be supported by such sources of income as fees, taxes, licenses, bond sales, federal grants and gambling revenues.
For example, the state auditor, who is supported by GRF money, is also supported by fees charged to local governments when the state audits annual financial accounts of schools, communities and other agencies, and the Secretary of State charges fees when businesses are incorporated.
Barbers, doctors and funeral directors pay for their licenses, and those payments support the boards that oversee their practices.
These are a few of the non-GRF, or special funds, in the state budget:
• State auditor — $45,734,250.
• Department of Insurance — $32,858,979.
• Department of Taxation — $28,935,000.
• Ohio Department of Agriculture — $19,022,678.
• Secretary of State — $14,425,400.
• Ohio Expositions Commission (state fair) — $12,273,315.
• State Medical Board — $8,100,000.
• State Board of Cosmetology — $3,533,679.
• Ohio Dental Board — $1,409,944.
• Marriage and Family Therapists Board — $1,117,171.
• Liquor Control Commission — $772,524.
• Board of Barber Examiners — $600,851.
• State Board of Embalmers and Funeral Directors — $572,159.
• Respiratory Care Board — $488,142.
• Manufactured Homes Commission — $400,000.
• State Veterinary Medical Board — $319,407.
• Athletic Commission — $247,624.
Copies of the state budgets are available on Ohio.com.