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WV rainy day fund finally in play to help with state budget

CHARLESTON, W.Va. -- Budget officials plan to tap the state's $920 million Rainy Day Fund to close a hole in next year's budget.

Gov. Earl Ray Tomblin delivered his budget proposal to lawmakers as part of his State of the State address Wednesday night.

Though he didn't offer many details of the proposal during the speech, he admitted there were challenges.

"This is a year of tough financial choices for our state," Tomblin said. "Our budget is strained."

During a briefing with reporters earlier in the afternoon, Revenue Secretary Bob Kiss described next year's spending plan as "an austere budget."

While Tomblin said the budget contained tough choices, he did not let that fact stand in the way of offering raises to state employees.

The balanced budget includes a 2-percent raise for teachers and school service personnel as well as a $504 annual raise for state employees. But it also features a 7.5 percent spending cut and several one-time accounting moves designed to close a $265 million revenue gap without raising taxes.

While some of those moves will involve sweeping unused money from agency accounts, as well as temporarily diverting some special tax and fee revenue to the state's general fund, a significant portion of the gap will be closed by drawing $83.8 million out of the state's reserve fund.

Kiss, during a briefing with reporters Wednesday afternoon, emphasized the moves were a response to short-term budget shortfalls and did not represent any long-term structural problems with the state's tax and spending policies.

"Yes, we're going to use some one-time resources to get through the next couple years, but we're not going to build budgets over the long term using those one-time resources," Kiss said.

He said if current tax and spending policies remain in place, the state will budget will naturally return to surpluses by 2018.

The state, in recent years, has significantly cut several taxes. The food tax for consumers was eliminated, the business franchise tax is set to be phased out next year and the corporate net income tax has been cut from 9 to 6.5 percent.

Revenue officials said the tax cuts have reduced annual revenue by about $425 million.

However, officials said one of the major revenue problems of late has had less to do with those cuts and more to do with stagnant wage growth in the state. The bulk of revenue for the state's General Revenue Fund comes from the personal income tax.

Deputy Revenue Secretary Mark Muchow said the state was banking on wage growth this year that did not materialize. He said softness in coal prices and a 28 percent decline in exports of metallurgical coal last year put pressure on wages.

"The recent decline in the coal industry has really had an impact on wage growth," Muchow said. "Between calendar year '12 and '13, mining wages went down about 10 percent. That brought overall wage growth in state down to close to zero percent."

Excluding programs funded by the State Road Fund or federal tax dollars, Tomblin is proposing a $4.7 billion budget for the next fiscal year. It's roughly $86 million more than the budget he proposed last year.

The biggest driver of costs next year is $87 million in additional Medicaid spending.

Kiss emphasized this growth is completely unrelated to the governor's recent decision to expand the Medicaid program under the federal Affordable Care Act. The federal government will pick up the entire cost of additional Medicaid spending that resulted from the expansion through the 2009 fiscal year.

Officials said the increased spending next year had to do more with general increases in costs as well as the fact that the federal government is picking up a smaller portion of the overall tab of Medicaid spending.

Muchow said that was a function of the overall health of the state's economy. Under the federal-state Medicaid partnership, as a state's economy improves, the federal government picks up less of the tab (aside from the increased spending caused by the expansion).

Kiss said when he was in the Legislature in the late 1990s, the federal government typically picked up about in excess of 80 percent of the state's Medicaid costs. As of the last fiscal year, that figure was down to 72 percent.

The second largest increase in the budget comes from the pay raises Tomblin proposed, which will increase spending by nearly $42 million over the next year.

To offset the increases, the governor is cutting most agency spending by about 7.5 percent overall. Higher education, however, will see a smaller cut of about 3.75 percent.

Kiss said officials did not cut higher education any more, as they did not want the cuts to result in tuition hikes for state students.

In total, state officials will make about $148.7 million in additional one-time actions, including the $83.8 million draw down from the Rainy Day Fund to balance next year's budget.

Administration officials emphasized that the one-time actions will not result in higher tax rates or increased fees on state residents or businesses.

"Taxpayers aren't going to be paying additional taxes," Kiss said.

Instead, some fees or taxes that are typically earmarked for special revenue funds will be diverted to the General Revenue Fund.

Officials said more details about those changes would be discussed when administration officials present the budget to lawmakers on Thursday.

State Budget Office Director Mike McKown also said he and other revenue department officials went to New York City last week to meet with officials from the various credit ratings agencies about the state's upcoming budget.

He said they discussed the state's decision to tap the Rainy Day Fund and said the agencies seemed okay with the state's decision.

"We felt good about those meetings," McKown said.

He said the state's Rainy Day Fund is already the third-best in the nation and the one-time draw down should not significantly affect that ranking.

He said ratings agency officials also felt it was important that the move was being made solely for short-term revenue stabilization and not to fund some special project.

"They understand that's what it's there for," McKown said.

Kiss acknowledged tapping the fund could be a "slippery slope" used by future administrations to justify taking more money from the fund. He said the administration has already worked with legislative leaders to impress upon them the importance of ensuring this is a one-time move, and not something that becomes a habit further down the road.

Ted Boettner, executive director of the West Virginia Center on Budget and Policy, a liberal-leaning think tank, criticized Tomblin's commitment to maintain the $425 million in tax cuts in light of the current fiscal shortfall.

"Instead of continuing to cut taxes that mostly benefit large out-of-state companies that have put a large hole in our budget, we need to invest in ways to really create jobs, like education, infrastructure, innovation, workforce development and our state's colleges and universities," Boettner said in a statement.

House Minority Leader Tim Armstead, D-Kanawha, said he did not feel like tapping the Rainy Day Fund right now is the best path forward.

Armstead said he thinks efforts would be better spent on auditing state agency spending and finding more ways to trim waste.

"I really think what we need to do, rather than going into those Rainy Day funds just to do our basic operating budget, is start looking at where we can be more efficient and make cuts," Armstead said. "That's going to be tough to do, but it's something we need to do."

State Sen. Brooks McCabe, D-Kanawha, also said he would have liked to see some type of effort to study ways to reduce the size of the state's government as part of the governor's budget proposal.

"I have no criticism for what he proposed," McCabe said. "My frustration is that there's more to the equation than what he talked about. "He didn't throw down the gauntlet and say, 'We need to redesign government -- we're all in this together, how will we do it?,'" McCabe said. "I didn't see that. That's a multi-year process, but to not start it this year I think was probably a missed opportunity."

Contact writer Jared Hunt at business@dailymailwv.com or 304-348-4836.


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