Missouri’s bank balance looked pretty healthy at the end of September. But in reality, it’s like the family account before the mortgage check clears — and there are signs that future revenue will struggle to meet expectations.
Three months into the fiscal year — and three months before lawmakers return for a session that will write the next budget — fluctuations in daily revenue figures can cause repeating cycles of elation and concern, said newly-appointed Senate Appropriations Committee Chairman Rusty Black.
As of Sept. 30, revenues for the year to date were down 0.6%, while a few days later, on Saturday, reports showed they were up 0.4%. The official forecast is for revenues to increase 1.6% in the year that ends June 30.
“If you look at one day or one month, you get really excited, and the next day might completely change it, especially this early in the process,” Black said in an interview with The Independent. “At the end of August, there were people coming up with ways to spend extra money.”
There was $7.1 billion in the general revenue fund and accounts that can be spent like general revenue in the state treasury on Sept. 30. The uncleared checks total $5.6 billion — $1 billion for capital projects from past years; $2.1 billion earmarked for major projects like expanding Interstate 70; and $2.2 billion to cover the difference between projected revenue and spending for state operations.
The coming year will bring additional pressure on current revenue as the state exhausts extra federal aid for health care banked during the COVID-19 pandemic. To make up the difference, the Department of Social Services is asking for $784 million in two areas of the Medicaid program.
Two other items push the need for new spending to continue current operations above $1 billion. The Department of Elementary and Secondary Education says it needs $190 million to continue foundation formula school aid at current levels and $32 million to meet the demand for student transportation.
Revenues flat
When lawmakers wrote the current budget, they were working from a consensus estimate that the general revenue fund would bring in $13.6 billion this fiscal year. The trend through Saturday would result in revenue about $75 million below the estimate.
And state Budget Director Dan Haug said in June that there won’t be another $2 billion available in the coming year to cover the gap between spending and revenue. The unencumbered balance on June 30, he said, will be around $700 million.
“The times are going to be getting tougher as we go forward, and so I think we would like to try to limit general revenue spending so that we are able to craft responsible budgets,” Haug told lawmakers at the time.
The estimate made in December didn’t account for tax cuts made by lawmakers in the spring — an exemption for capital gains income and an increase in a property tax credit program for lower income people over 65 or living with disabilities.
The official estimate for the capital gains exemption is a revenue reduction of approximately $157 million in the current fiscal year and about $111 million annually on an ongoing basis. Other estimates, however, put the potential cut in revenue at $625 million or more.
Most of the benefits from the capital gains exemption would go to a small slice of taxpayers. The 23,800 federal returns filed for 2022 with incomes greater than $500,000 a year represent 0.8% of all returns but included 65% of the capital gains income.
“It’s really important that folks recognize that this is for the ultra-rich at the front of the line,” said state Sen. Maggie Nurrenbern of Kansas City, the top Democrat on the Senate Appropriations Committee. “But all the people I talk to every day who are going to the grocery store and recognizing that their food costs more, that their prescription drugs cost more, that their utilities are costing more, aren’t getting any relief whatsoever from the General Assembly, and that’s what I find most frustrating.”
Another factor putting downward pressure on revenues is interest income. As interest rates rose, and Missouri’s fund balances soared, so did interest revenue. But balances are falling and rates are down slightly. So far this year, the income from overnight deposits is down about $22 million.
Democrats who lead their party in budget committees of both chambers said they are worried that Republicans in the majority will continue to push for tax cuts despite growing demands for spending.
“I am very concerned,” Nurrenbern said. “We are really headed towards this fiscal cliff much sooner than many anticipated.”
The last time there was a major decline in state revenue, following the 2008 financial crisis, higher education and school transportation were among the services hardest hit by cuts.
“We can look back in history on tough fiscal years and see the services that get cut first,” Nurrenbern said.
Missouri Gov. Mike Kehoe has targeted the income tax for elimination but that doesn’t answer where the state will obtain its revenue, said state Rep. Betsy Fogle of Springfield, ranking Democrat on the House Budget Committee.
“I would encourage the majority party to stop having conversations about reducing our state budget and our state revenue by such significant amounts without a solid plan to backfill,” Fogle said.
Spending demands
There are two types of spending items in the Missouri budget — mandatory outlays and discretionary disbursements.
Mandatory items include public school support, which must be at least 25% of revenue, and Medicaid, which has its own list of mandatory services in order to qualify for federal matching aid. Another mandatory item is pension and other benefits for state workers, which is estimated at 65% of payroll for the coming year.
Discretionary disbursements are anything not required by law, and can range from small-dollar earmarks to major construction projects such as the $2.8 billion program to add lanes to Interstate 70.
Kehoe vetoed $300 million in discretionary spending in June, and restricted the release of $211 million more. In his veto message, Kehoe warned of a $1 billion spending shortfall in the coming year.
Of the four new budget requests that total $1 billion, two are mandatory and one — fully funding school transportation — is discretionary. The fourth — $190 million in new money to maintain current support for schools in the foundation formula — is viewed as mandatory by Democrats but may not be by Kehoe.
The largest mandatory item is $421 million to continue the managed care program that covers most families on Medicaid. The money is needed to replace a federal pandemic fund that will be exhausted by the end of the year.
The other major Medicaid mandatory item is $363 million for the adults age 19 to 64 covered under the constitutional amendment passed by voters in 2020. The program is budgeted to cost $4.2 billion in the current year, with federal funds paying 90%.
Since the program was placed into a separate line item for fiscal 2023, there has been no general revenue cost for the expansion population of 350,000 Missourians. The state’s 10% share has been paid from pandemic health care funds supplied from Washington.
By the end of the fiscal year, that means federal funds have paid for $17 billion in health assistance to Missouri with no direct cost to the state taxpayers.
“We have not had to cover any of that 10% because it’s being covered by this Stabilization Fund, which was originally about a billion dollars, and it’s going to be exhausted in about a year,” said Tim McBride, a professor in the Washington University School of Public Health who studies Medicaid financing and previously served on the oversight board of Missouri’s Medicaid program.
There have also been shifts in applications away from traditional Medicaid programs toward the expansion group, especially among people with disabilities, McBride said. The savings to state general revenue from that shift is equal to about half of the state’s share of the Medicaid expansion program.
“If you can do it, you don’t have to go through a bunch of paperwork, and get a doctor to approve it,” he said. “So you might as well do that.”
While many aspects of Medicaid are mandatory, such as hospital care, physician visits and medical transportation, others are not. Optional services include physical therapy after an injury or surgery, dental services, eyeglasses and home-based care.
In 2005, when the state was facing a shortfall in Medicaid, many optional services were cut. Many have been restored but they could be eliminated again, Democrats said.
“I was in a primary care association meeting a week or two ago where the conversation, the dialogue, surrounded or started to become, ‘what services are we going to cut?’” Fogle said.
Changes to federal budgeting included in the bill signed in July by President Donald Trump will likely add billions to the state’s costs for participating in shared programs.
The biggest portion of that shortfall will be in the Medicaid program, which became a prime target for cuts in the federal budget bill. According to KFF, Missouri could lose approximately 14% of its federal Medicaid funding over the next decade, or approximately $17 billion.
That will mean a close look at whether the state can afford optional services under Medicaid, said House Budget Committee Chairman Dirk Deaton, a Republican from Noel.
“In some cases, we’re more generous than the federal law requires, so you could look at things like that,” Deaton said.
Another way to control costs in Medicaid is to cut the payments to medical providers, Deaton noted.
“Those would probably be the things that I would be looking at,” he said.
Along with $421 million from general revenue to replace other resources in the managed care program, the social services agency is asking for $90 million of general revenue, and $343 million overall, to increase monthly payments by 6.5% for managed care in Medicaid.
McBride said he doesn’t see why the increase is necessary when medical inflation is running at about 3%. There should be ways to make it less expensive without cutting services, he said.
Missouri spent an average of $9,382 for every person enrolled in Medicaid in fiscal 2023, KFF said in a report issued Monday.
That is $1,804 more than the average of the eight states surrounding Missouri. Only Kansas and Nebraska have higher average costs.
“Missouri, for some reason, is more expensive for most population groups than most other states,” McBride said. “Why that is is not clear to me, but I don’t think we do a very good job of controlling costs in Missouri.”
New budget leadership
For the first time since 2019, state Sen. Lincoln Hough, a Republican from Springfield, will not be the chairman or vice chairman of the Senate Appropriations Committee.
Hough was fired by Senate President Pro Tem Cindy O’Laughlin in September after opposing leadership tactics to slam through a new congressional district map and changes to how majorities are calculated for constitutional amendments proposed by initiative.
Black, who was vice chair under Hough, said he expected to become chairman at some point.
“Did I know it was going to happen that day, that way? No, I did not,” Black said. “But did I realize there’s a chance I’m going to be making appropriations decisions for the state? Yes, I was hopeful that would have happened.”
Black said other lawmakers should not expect any disruption in the process of designing the budget. He was on the House Budget Committee when he was a representative and has been on the Senate Appropriations Committee since his election to the upper chamber.
The job will be tougher with tighter finances, Black said.
“People will be in a position to have to make decisions that none of them will be good, none of them will be popular, but our state’s not going to borrow money to keep going,” he said.
Black was the Senate sponsor of the redistricting plan and his willingness to take it to a vote without allowing any amendments is troubling, Nurrenbern said.
“That is an example of him taking orders from Republican leadership and relinquishing his responsibilities of being a senator,” she said. “And so for that reason, I share those concerns of how he’s going to approach being the chairman of the Senate Appropriations Committee.”
Any cuts, Black said, will be as painless as possible.
“Some of those decisions won’t be easy to make if it happens,” Black said. “But I will try to do my best to make them do no harm to Missourians, unless we get to a point where I have to.”