Filling Tennessee's Deep Budgetary Hole

UT, TennCare and other state institutions face tight times ahead

This past year's economic recovery has begun to lift state revenues out of the deep hole into which they plunged during the Great Recession of the two preceding years. But even sustained continuation of the 4 percent growth rate experienced so far this fiscal year won't be sufficient to get new Gov. Bill Haslam out of the budget bind he faces for several years to come.

Just how deep the hole is depends on how you measure it. The simplest way is to focus on the 10 percent decline in state tax collections from $11.1 billion in fiscal year 2008 to about $10 billion in fiscal year 2010 that ended last June 30. But the director of the state Legislature's Fiscal Review Committee, Jim White, insists this doesn't capture the full depth of the hole because it fails to take into account mandatory increases of some $400 million in state outlays over the span of time. These went primarily to cover formula-driven increases in state funding for K-12 education, obligatory contributions to the state's pension plan, and higher costs of health insurance for state employees including higher education personnel and public school teachers.

By White's way of researching, the total size of this hole adds up to $1.5 billion. Because he classifies about half of the state's expenditures as fixed and half discretionary, he further calculates that it would take a 30 percent increase in revenues to restore discretionary funding for the sundry departments and programs that are dependent on it to pre-recession levels. So it could take the better part of a decade to get that money back.

For the past two years, former Gov. Phil Bredesen steered the state toward absorption of the $1.5 billion in cuts. Of these, $600 million was imposed for the current fiscal year. However, the other $900 million was deferred through the use of federal stimulus dollars, drawdowns of state reserves, and other non-recurring sources of money—all of which are due to terminate at the end of this fiscal year. And Bredesen put all of their recipients on notice that in the fiscal year that begins July 1, they should plan to do without them.

The biggest single recipient of the federal stimulus outlays has been higher education, which got $270 million in the current year as the third annual installment of support intended to maintain appropriations at their pre-recession level. Of this, $106 million went to the University of Tennessee. And without it, UT's state funding is due to drop from $509 million in 2008 to $403 million next year.

But UT's overseers haven't just been bracing for a fall off this "diff," as they refer to it. In the meantime, they've imposed tuition increases totaling $85 million over the past three years, and another one for the year ahead equal to this year's 9 percent would raise another $35 million that would cumulatively more than offset the cut in funding from the state. Since salaries, which are the university's biggest expense, have been frozen for three years, as have faculty ranks, the additional tuition revenue would seemingly provide a cushion against cutbacks in the year ahead.

But UT budget officials insist that such is not the case. According to UT-Knoxville's vice chancellor for finance and administration, Chris Cimino, only $11 million of a $41 million increase in tuition revenues on the Knoxville campus over the past three years are available to help offset Knoxville's impending loss of $56 million in stimulus funding. The rest of the tuition hikes, Cimino claims, has gone to cover increased fixed costs for everything from utilities and maintenance contracts to faculty promotions, undergraduate student aid, and graduate student health insurance.

Still, since more than half of the $56 million has been committed to one-time expenditures, primarily aimed at increasing energy efficiency on the campus, and given the prospect of further tuition increases, it's very hard to believe that UT is in the world of hurt that has been widely forecast.

The same holds true for the other biggest loser of non-recurring funding on White's list: namely, TennCare. Its revenue losses include $300 million derived from a one-time assessment on the state's hospitals and $123 million in enhanced federal funding that also goes away. Under Medicaid's complex formula for matching state with federal dollars, these losses could blow a hole of $1 billion or more in TennCare's $8 billion total budget.

Under similar circumstances a year ago, Bredesen proposed whacking hospital and physician reimbursement rates. However, the Tennessee Hospital Association came to the rescue with a self-devised 3.5 percent state fee on its members' revenues that because of federal matching forestalled much deeper cuts. And there's every reason to believe the THA will back extension of that fee for the year ahead.

Last week, Haslam held budget hearings at which several of his newly-appointed state department heads appealed for restoration of cuts including $13 million for mental health, $7 million for a diabetes prevention program, and $6.5 million to cover extended child care for single working mothers who've gotten low income jobs under the Families Trust program. Haslam said, "We obviously can't restore all these cuts, but I'm doing my best to understand their impact."

One issue left unaddressed is compensation of state workers, including higher education employees and public school teachers—none of whom have gotten a raise since 2007. A year ago, Bredesen proposed a 3 percent bonus contingent on revenue growth sufficient to cover its $150 million cost, but the growth didn't materialize and the bonus didn't either.

As mayor of Knoxville, Haslam showed a lot of sensitivity to public-sector compensation. Indeed, one of his final acts as mayor was to come up with $1 million to complete the funding of a plan intended to bring the pay of all city workers in line with their peers in other cities. Despite hard times, competitive compensation is also an issue facing the state, nowhere more so than in the field of education; and it will be very interesting to see how Haslam addresses it.