Legislative Preview: 2012 Fiscal Session Could Get Feisty

Arkansas lawmakers will convene in February for a legislative session that will focus only on budget matters.

On Monday, pre-filing officially began for the fiscal session that begins Feb. 13. Two bills were filed by the Joint Budget Committee to deal with technical corrections to the state’s Revenue Stabilization Act.

Sounds boring, right?  Think again.

There are a number of major crossroads and political dynamics that will make the upcoming session anything but boring.

FLATLINE GROWTH
At its annual required revenue forecast on Dec. 1, Richard Weiss, director of the Arkansas Department of Finance and Administration, laid out a scenario that suggested relatively “flatline growth” for the next year.

“Back in November of 2010, it was looking like when you got up to ‘12 and ‘13 that we would be rebounding nicely from the recession. That doesn’t appear to be happening,” Weiss told lawmakers at the hearing.

Personal and corporate income taxes have been fairly strong in the current fiscal year, while gross receipts, which include sales taxes, have been lackluster. The December revenue report was stronger than expected, but state finance officials remain cautious.

Gov. Mike Beebe (D) has already warned that “operations budgets for most state agencies will remain flat,” and he’s not expecting any bold initiatives, such as an additional cut to the grocery tax.

$50 MILLION SURPLUS
It’s not much to write home about when you’re talking billions of dollars, but it’s better than the alternative.

Arkansas finished its last fiscal year in July 2011 with a nearly $94 million surplus. That figure slipped closer to $50 million after several obligatory expenditures were addressed. In an overall $4.6 billion budget, that only accounts for about 1%.

Lawmakers will likely bring a variety of pet projects to the table. Based on their political strength, some will get funded. Emergency spending for prisons, forestry, health care, courts and federal budget cuts will also line up for handouts.

JUDICIAL REVIEW
The third branch of government — the judicial branch — always takes a more low-profile position in legislative sessions. The executive branch and legislative branch tend to dominate press coverage of the daily action at the capitol.

This year, however, the judicial branch will be much more front-and-center. Why? It needs money.

The state’s trial court system has been experiencing a near-catastrophic cash flow crisis, which has caused Gov. Beebe to step in with emergency funding.

Also, the state’s drug courts, which have a high success rate of rehabilitating non-violent drug offenders, found themselves facing a $2 million shortfall last year. A band-aid funding solution was found to limp to the fiscal session, but a longer-term fix will be on the agenda.

HEALTH CARE ON THE HORIZON
Federal and state health care reforms promise to be among the most contentious subjects driving policy debates in the next regular legislative session in 2013, but budget planning in 2012 will open the proverbial “can of worms” early.

With a state-run health insurance exchange scrapped in late 2011, all eyes will turn to a U.S. Supreme Court review of the federal health care law’s constitutionality next spring. There shouldn’t be much new ammunition for either side during the fiscal session, which will lead to budgeting for the unknown.

More importantly at this juncture, Gov. Beebe’s effort to overhaul the state’s Medicaid system could be a budget driver. While he has said a state Medicaid crisis is likely postponed for another year, he’s still planning on a shift from the current “fee-for-services” payment model.

He’s faced resistance by Republican lawmakers primarily, as well as many different medical stakeholders in the health care system. This is an area to watch for potential budget battles or at least “lines in the sand” to be drawn.

FEDERAL BUDGET CUTS LOOM
Another tricky and complex budget debate will involve the billions of dollars that flow into the Arkansas budget from Washington, D.C.

When the Congressional “super committee” failed last fall to find a solution to the nation’s budget crisis, it allowed a trigger mechanism to occur that, in theory, will extract $1.2 trillion from the federal budget.

The trickle-down to Arkansas is unknown, but it could mean cutbacks in federal funding for the National Guard, the already battered Forestry Commission, and highly-prized highway dollars, just to name a few. Medicaid funding is not expected to be affected.

Again, state lawmakers will budget with a blindfold as they try to plan for this yet-to-be-settled issue.

TAX EXEMPTIONS REVIEW
In a typical budget session, most of the action is centered on the powerful Joint Budget Committee in the mornings and the floors of the House and Senate in the afternoons.

This fiscal session will be different.

Rep. Davy Carter, R-Cabot, wants to review every sales and use tax exemption on the books in Arkansas and look at potential income tax reform. That means that 121 exemptions worth more than $1.2 billion to those that have them will be put under a magnifying glass.

Carter’s call for a review will run through the House Revenue and Tax committee, which he chairs. The committee won’t take any legislative action on existing tax breaks in the fiscal session, but it will be laying the groundwork for the 2013 regular session.

That said, the House Revenue and Tax committee will be a busy room in February 2012 as lobbyists and trade association representatives file through to help their interests justify the existing tax code.

UPDATE: On Thursday, Jan. 12, Carter said he would hold off reviewing exemptions during the budget session at the request of Speaker of the House Robert Moore (D-Arkansas City). Moore wants members to focus strictly on budget issues.  Carter said he’s fine with the request and plans to use the session to organize for an interim study of exemptions.

THE POLITICAL DYNAMIC
The final factor in play in the upcoming session centers on the party line balance in the Arkansas House and Senate. Democrats hold a 54-46 advantage in the House and a 20-15 advantage in the Senate.

Those thin margins will lead to some budget skirmishes as we first witnessed in the 2011 session.

A handful of budget bills are destined to become political footballs in the fiscal session — just which bills are unknown.  Expect both parties to participate in the exercise: control of the Arkansas General Assembly is at stake.