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Georgia Growth Directly Linked to Washington’s Fiscal House

Mike Klein

Mike Klein

Georgia’s ability to continue slow but steady economic growth might depend on factors beyond its control, including a “heroic assumption” that the federal government will somehow get its fiscal house in order.  “If we can just solve things in Washington I think we will be ready to go,” state fiscal economist Kenneth Heaghney said Tuesday morning at the State Capitol.

Heaghney was largely upbeat and cautiously optimistic when he addressed House and Senate joint appropriations committee legislators.  Slow growth is possible through 2017.  Year-to-date year total tax revenue for six months ending in December was 4.9 percent, less than forecast.  “Our revenue stream tends to be very volatile,” Heaghney said.

“Individual income tax is trending in the right way (year-to-date, up 5.4 percent) and underlying detail suggests an economy that is slowly improving,” Heaghney said.  “Housing appears to have turned the corner both nationally and in Georgia.  That takes away the severe negative that we saw in the early part of the recession and even in 2010.”

Evidence Georgia is rebounding includes: Individual and corporate income tax receipts continue to improve; existing home sales are trending up; several sectors report hiring growth, including manufacturing and trade; initial unemployment claims are down; and, the state’s 1.8 percent annual gross domestic product growth is better than the 1.4 percent national growth.

Heaghney predicted the Georgia private sector will create about 20,000 new jobs over the next six months and about 63,000 for the fiscal year that ends in June.  With an eye on the “heroic assumption” that Washington can fix its fiscal house, Heaghney predicted job growth could pick up later this year, and, “In 2014 we could see much more rapid growth.”

Kenneth HeaghneyState Fiscal Economist

Kenneth Heaghney
State Fiscal Economist

Consumers have not fully bought into recovery.  Heaghney said 2.7 percent current year state sales tax growth is “relatively slow” because consumer discretionary spending stalled due to a decline in disposable personal income.  Heaghney predicted discretionary spending growth will continue to be soft after payroll taxes increased for everyone this month and higher income earners also saw their federal income tax rates go up because of the “fiscal cliff” agreement.

Washington is wrestling with several contentious fiscal issues: Mandatory across-the-board budget cuts that could be imposed under sequestration, the unresolved national debt level argument and a continuing resolution that must be passed so bills can be paid.   The House will vote Wednesday on a Republican proposal to extend the debt limit discussion by several months in an attempt to work out budget disagreements and Senate Democrats say they will write a budget that further increases taxes.

Agreement reached on the so-called “fiscal cliff” less than four weeks ago now seems almost inconsequential.  “We ended 2012 with a very small solution to the overall federal budget problem,” Heaghney said.  “The part that was resolved results in higher taxes, payroll taxes and income taxes on high income people.  We expect that to be a weight on consumer spending growth and investment growth, particularly in the first half of 2013 while people adjust to the new tax regime.”

Georgia’s pre-recession economy depended heavily on construction.  Recession devastated builders and banks.  Construction employment was down 18 percent two years ago so by that measurement, last year’s one percent decline is progress.  New home construction permits have been trending up since mid-2011.  The Atlanta region reported six consecutive months of price increases through November but prices have not rebounded to 2000-year levels.

“The caveat is that we still see very high foreclosure rates even though they are falling,” said Heaghney, “and mortgage delinquency rates are still high, although they are falling.”  Heaghney said existing home sales are trending up because of investor group demand for rental property.

“That is the story behind the improvement in housing value that we’ve seen within the metro Atlanta area,” Heaghney said.  “It seems they’ve got a lot of money to invest.”  Individual buyers are still finding tough sledding.  “It is very difficult for non-prime credit people to get a mortgage.”  He predicted “a long slide” before the individual homeowner mortgage market loosens up.

Governor Nathan Deal began three days of hearings with brief remarks that recapped priorities in his $40.8 billion Fiscal 2014 proposed budget.  The proposal includes $19.8 billion in state dollars and $21 billion in federal funds.  Deal reminded legislators that state spending is down 17 percent in a decade and there are 9,000 fewer state employees than five years ago.  Deal outlined his priorities last week at “Eggs and Issues” and in his State of the State address.

Appropriations committee hearings Wednesday morning will focus on the adult corrections and juvenile justice systems.  All sessions are broadcast live on the House TV website.

January 22, 2013 Posted by | Uncategorized | , , , , , , , | Leave a comment

Governor Deal Defends $19.2 Million Budget During Capitol Hearing

Mike Klein

Governor Nathan Deal opened three days of House-Senate appropriations hearings by taking exception to media reports that suggest his budget is a significant spending increase.

Deal proposed a $19.2 million Fiscal 2013 budget, up from $18.3 million this year.  Increases would fully fund anticipated K-12 enrollment growth, required pension and the state employee health care benefit obligations, improve Medicaid funding and enable the state to purchase new prison beds “for those who truly need to be locked up,” the Governor said.

“Other than funding these areas of growth, my budget calls for funding increases of three-tenths of 1 percent,” Deal told assembled legislators at the State Capitol, “not the figure that you have seen in some of the media reports.”  Deal added $4.2 million to support residency slots for physicians, $10 million for One Georgia rural economic development, $10 million for accountability courts and $3.7 million for school nurses.

The Governor said 14,000 state positions were taken off the books since last year and the total state workforce is down 7.7 percent since 2001 to about 96,800 employees.  “When adjusted for inflation per capita spending in my budget recommendation for fiscal year 2013 is 20 and one-half percent less than Fiscal Year 2002,” Deal said.  “In that same time period state population grew by approximately 1.5 million.  Therefore, we are providing more services with fewer resources.”

Governor Nathan Deal

The State Personnel Administration would be phased out under Deal’s 2013 budget with its staff and resources transferred to other state agencies.  There would be sweeping changes at the Department of Labor.  DOL state funds would be reduced by $23.3 million and many services would be transferred to other agencies.  Deal has also proposed selling state fixed wing aircraft and transferring Georgia Aviation Authority budget, staff and resources to other agencies.

“There are no new taxes being proposed and this is small government that is focused on doing the things that government is expected to do and to do them well,” Deal told legislators.

Using phrases like “relatively good news for a change” Georgia state fiscal economist Kenneth Heaghney testified that recovery to pre-recession levels is still three years away, the state housing industry is still weak and Europe could be a big drain on the U.S. and Georgia economies for years to come.

Heaghney presented a mixed but overall an upbeat report.  “All in all, the news has been good,” the Georgia State University economist told the Senate-House Joint Appropriations Committee.  “The outlook is positive.  We do expect the economy to strengthen.”  He said state monthly tax revenues have been consistently stronger and that trend is expected to continue.

State Economist Kenneth Heaghney

Heaghney said several factors will determine the pace of recovery.  “Consumers are still trying to adjust to declines in their housing wealth and their equity wealth. We see Europe probably falling into recession,” he said. “China’s growth is slowing so there is a slowdown in the overall global economy.  There are still headwinds and we expect the recovery to be improving but still not the kind of robust growth we’ve seen coming out of other recessions.”

Heaghney said the national economy ended last year with upticks in GDP growth and lower jobless claims along with improvement in manufacturing, professional and business services, education and health care sectors.  He said the U.S. broader national economy was resilient despite oil price instability, European and U.S. debt crises and the Japanese earthquake.

Heaghney predicted state government revenue will not return to pre-recession levels until Fiscal 2015.  Here is what he said about the state housing downturn:  “It’s really tough to find any good news in Georgia.”  Heaghney said real estate values declined 3 percent nationally last year but 12 percent in Atlanta.  “That suggests that probably distressed sales are making up a bigger portion of the market.”  Heaghney predicted bank foreclosures will increase going forward.

Despite those realities, Georgia continues to demonstrate slow but steady economic growth. State government month-to-month revenue increased for 18 straight months until last month when it posted a decline because of unusually high December 2010 corporate audit payments.  Fiscal year revenue is up 5.2 percent with an expectation that it will continue to improve.

(Mike Klein is Editor at the Georgia Public Policy Foundation)

January 17, 2012 Posted by | Uncategorized | , , , , , | Leave a comment

Budget Hearings: “Kind of Like Going to the Dentist Without an Anesthetic”

Mike Klein

Governor Nathan Deal pledged to restore revenue shortfall reserves when he addressed the Senate – House joint appropriations committee budget hearing Tuesday at the State Capitol.

Deal was followed to the podium by state fiscal economist Kenneth Heaghney who warned the weak housing sector and volatile energy prices could affect economic recovery. Heaghney predicted Georgia will not return to fiscal year 2007 revenue levels until fiscal year 2015.

State capitol budget hearings are the annual high profile grilling of agency chief executives. During light-hearted opening banter House Appropriations vice chair Terry England described the process as “kind of like going to the dentist without an anesthetic.”

Last week Deal used his Inaugural and State of the State addresses to emphasize government must spend wisely. “I campaigned as a fiscal conservative,” Deal said Tuesday morning, noting that Georgia is one eight states with a Triple A bond rating. “I intend to keep it that way.”

Revenue shortfall reserves peaked at $1.544 billion in fiscal year 2007, but the recession happened and reserves were drained to pay state bills. Just $116 million remained at the end of Fiscal 2010. State revenue improved during the past six months; it is up $590 million year-to-date.

“I do not believe we should spend additional revenue if actual collections, in fact, were good enough to exceed our estimate,” Deal said. “We must replenish the revenue shortfall reserve and hopefully that is what you will be committed with me to doing.”

Governor Nathan Deal

Last week Deal proposed an $18.162 billion budget that would be 3.75% more than this year. “I think all of you know that the greatest challenge in 2012 is going to be replacing almost a billion dollars of the federal stimulus funding that we will not have available to us,” Deal said.

The governor acknowledged last week’s unique Georgia weather — “You can’t say we didn’t get off to a memorable start in this administration” – before he recited economic indicators that Deal said show, “Businesses in Georgia are beginning to rebound from this global recession.”

First time unemployment claims are running below year-ago levels, private sector hours worked are up, individual wages and salary income have grown during the past two quarters, consumer spending is up 5% during the past six months and manufacturing expansion is occurring.

Deal said, “Our economy is not where we want it to be and it will not be there, in my opinion, until we make real sustained progress in reducing unemployment and underemployment.” State unemployment is 10.1% (higher than the national average) and Georgia lost 300,000 jobs during the recession.

The governor has used all three addresses since last week to emphasize HOPE scholarship funding must be fixed. On Tuesday, Deal said the program “is now on an unsustainable course dipping into reserves at an alarming rate. Without action HOPE will be unable to fund its obligations in fiscal 2013.”  Deal said HOPE will not be allowed to spend more than it receives from Georgia Lottery funds.

Deal’s proposed bond package includes $10 million to design a new Medicaid eligibility system that would integrate PeachCare and the current state Medicaid program. Deal said federal matching funds could be available to develop and implement the new program.

Economist Kenneth Heaghney

Heaghney, the state’s fiscal economist, followed Deal to the podium with a sober assessment: “Although we are in recovery mode, it is a long way back from where we were.” He predicted the state’s economy will continue to grow, labor markets will strengthen, consumer spending will rebound and inflation will remain relatively low.

Housing remains weak.  “We expect housing to be really at the bottom so it’s neutral in terms of growth, no longer a drag but no boost to the economy in the near term,” Heaghney said.

The Georgia State University economist said Atlanta metro home prices are falling again, construction employment remains down, foreclosures are rising and there has been no increase in new construction permits. One brighter note: Mortgage payment delinquencies are somewhat down.

One legislator asked if Georgians should expect gasoline to cost $4 per gallon. “We’re not projecting $4 (per gallon) gasoline in the next year,” Heaghney said. “The assumption is that energy prices, gasoline in particular, will rise about 3% per year on average. If we do have a rapid run-up, essentially a 30% or more increase, that would have negative effects.”

During Tuesday afternoon presentations University System Chancellor Errol Davis predicted higher education budget cuts could result in tuition tax hikes for students this fall.  This was the final presentation to the committee for Davis who who will retire this year.  Governor Deal’s proposed budget would trim $118 million from higher education, leaving it with $1.723 billion.

Newly elected state Schools Superintendent John Barge made his first presentation.  Barge warned the state’s more rigorous mathematics curriculum could result in lower high school graduation rates. This spring the Department of Education said the state achieved an 80% graduation rate.

Budget hearings continue Wednesday and Thursday.

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 18, 2011 Posted by | Uncategorized | , , , , | Leave a comment