When Georgia legislators last met in June, they were hoping the worst of the pandemic would be behind them when they returned to the Capitol for the 2021 session.
Conversely, they expected the state’s financial situation to be worse than it is, which is why they cut about $2.2 billion from the budget last summer.
COVID-19 numbers have spiked as the air chilled and people got together inside. But state tax collections — which fund the $26 billion budget that pays teacher salaries, builds roads and provides health care — are way up rather than down, a sign of economic growth.
Still, when lawmakers come back into session Jan. 11, they’ll be looking over their shoulder, worrying about what lies ahead as they craft a spending plan for the next 18 months. Tens of thousands of Georgians remain unemployed, health care spending continues to rise, and income tax collections could plummet early this year.
“I still think it’s going to be a difficult year,” said. Sen. Elena Parent, D-Atlanta, chairwoman of the Georgia Senate’s minority caucus. “There is a lot of uncertainty. We have a new administration, we still have the pandemic, we still don’t know what the long-term situation is for the hospitality, retail, entertainment industries. How many business can and will survive is still a question.”
House Appropriations Chairman Terry England, R-Auburn, who has helped write state budgets since the Great Recession, said, “I am still apprehensive. Our numbers look good right now but at the same time, I know what the headwinds are.”
What the state collects ― mostly from income and sales taxes — is important because it pays for services millions of Georgians depend on, sometimes on a daily basis.
The taxes help the state educate 2 million children, provide health care to more than 2 million Georgians, manage and improve parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state issues driver’s licenses and helps pay for nursing home care for the elderly.
The state is a major provider of treatment for mental health and drug addiction, and it helps fund public health programs that are fighting the pandemic.
Besides paying salaries, it helps make sure that hundreds of thousands of former teachers, university staffers and state employees receive pensions and health care.
COVID brings “mixed bag”
The COVID-19 outbreak caused the General Assembly to suspend its session last year and the state’s economy was partially shut down. More than 1 in 5 Georgia workers applied for unemployment benefits in the first month.
Lawmakers reconvened in June and passed a state budget for fiscal 2021 —which began July 1 — that cut spending 10% for most agencies, including $950 million in basic K-12 school funding.
Legislative leaders figured schools could handle the cut because many of the districts had huge reserves.
Despite the spending reductions, the state avoided large-scale employee layoffs or furloughs. Still, the spending plan projected a slow economy and declining tax collections for the fiscal year ending this June 30.
Nationwide, research groups were predicting states would collectively see a $500 billion revenue shortfall from the pandemic recession. But that worst-case scenario hasn’t happened, at least not in most places.
“It’s been a mixed bag in terms of revenue,” said William Glasgall, senior vice president and director of state and local initiatives at the Volcker Alliance, a New York think tank.
Glasgall cited strong revenue numbers in North Carolina, but he might as well have been talking about Georgia. Collections were up $551 million over the first five months of the fiscal year, or 5.7%.
As Gov. Brian Kemp prepares to release his budget proposal for the rest of fiscal 2021 and fiscal 2022, his budget director, Kelly Farr, said things look pretty good.
But he added, “I think there is still a lot of choppy water ahead.”
The federal Cares Act, which Congress passed last March, included $150 billion in aid for states and large localities and $2 trillion worth of help for the economy. However, the $900 billion stimulus package passed in December, which will also help goose the economy, didn’t include direct aid to states and localities.
Budget writers cautiously look ahead
Ironically, federal aid — specifically extra payments to the unemployed that were approved in March — is one of the causes for concern for state budget writers.
State revenue collections were propped up, in part, by income taxes withheld from the federal unemployment supplements, which were $600 a week for the early months of the pandemic.
That added hundreds of millions of dollars to state coffers, but much of that money will go back to taxpayers when they file their state income tax returns. That’s good news for those Georgians, but bad news for state finances.
Then there’s the general uncertainty in the economy. It will take months, if not the better part of the year for most Georgians to get COVID-19 vaccine shots, delaying a fuller economic recovery from the pandemic. It’s also unclear how the latest coronavirus wave will effect the economy.
And costs — particularly for health care — continue to rise. The Department of Community Health, which runs Medicaid — the health care program for the poor and disabled — has asked for a nearly $400 million increase in spending. That’s partly because if COVID-19 eases, the agency expects more recipients to go to the doctor or get treatment they delayed during the pandemic.
Other state agencies asked for spending increases too, mostly for schools, colleges and road building. The total spending hike would top $700 million.
That doesn’t include money for a teacher pay raise. When he was running for office in 2018, Kemp promised a $5,000 pay raise for teachers. Lawmakers approved a $3,000 raise in 2019 but another $2,000 increase he proposed in 2020 was lost to the COVID pandemic.
Kemp will want to get those $2,000 raises before he faces voters again in 2022. England, the House budget chairman, doesn’t see them winning approval from the General Assembly this year.
“I think we are going to be trying to maintain what we’ve got and not create a bigger obligation,” he said. “He (Kemp) realizes as much as any of us that you can’t spend more than you bring in. I don’t think you’ll see a whole lot of new stuff.”
Kemp, who was criticized for quickly re-opening businesses after the COVID-19 shutdown, has remained bullish on the state’s economy and told agencies in August that they won’t face any more spending cuts in fiscal 2022.
Kyle Wingfield, president and CEO of the Georgia Public Policy Foundation, a free-market think tank, said, “It seems to me like there are a lot of reasons for optimism. In a lot of ways, Georgia has really seen the V shape recovery we hoped to have.”
Georgia’s economy was going strong before the pandemic hit, although there was talk of slowing growth in 2020 even before COVID-19. The pandemic shutdown sank the economy temporarily, but Wingfield said many of the jobs lost have come back.
But he also said state budget writers won’t feel comfortable until they see what income tax collections, and returns, look like during the first four months of the year leading up to the traditional April 15 deadline to file.
England acknowledged he’s nervous about the first half of the 2021.
“The income tax returns, and when the courts open back up and they get started with foreclosures, evictions and repossessions … we will see what that all does,” he said. “I am kinda to the point where if we get to June 30 and we’re at an even balance, I will do a happy dance.”
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