Gov. Hutchinson outlines $5.75 billion biennial budget, teacher raise and tax cuts chief priorities

Gov. Asa Hutchinson on Wednesday (Nov. 14) laid out his budget priorities for the upcoming 2019 legislative session that includes an average $4,000 annual raise for Arkansas teachers and a sizable $111 million tax cut reducing the top income bracket from 6.5% to 5.9% by 2023.

In his much-anticipated appearance before the Joint Budget Committee, Gov. Hutchinson told lawmakers gathered at the State Capitol that his biennial budget request reflected the state’s shared priorities going into 2019 and beyond. Overall, Hutchinson’s $5.75 billion budget request for the upcoming fiscal year 2020 would increase by 2.3%, or $125 million above the fiscal 2019 budget of $5.6 billion, which ends June 30, 2019. The 2021 fiscal budget request would rise another 2.3% to nearly $5.88 billion.

“This budget reflects priorities that I hope we all share together – and I know that we do,” Hutchinson told lawmakers. “This budget reflects a commitment to teachers and education needs and a commitment to tax cuts … Public safety is a priority and tools to spur economic growth continues as part of our budget.”

Before shifting gears and offering details of his budget plan, Hutchinson emphasized to legislators, lobbyists and policymakers gathered in the spacious “Big Mac” meeting room that past dependence on one-time surplus and rainy-day funding for Medicaid and other key budget requests would come to an end.

“If you recall four years ago, we came in here using $50 million and $60 million-dollar figures for one-time funding for Medicaid (and) for other needs in our states. You will see in this (plan) that we have made it a true budget without reliance on one-time funding,” said Hutchinson, who was re-elected by an overwhelming majority in the Nov. 6 election.

In outlining his balanced budget recommendations for the 2019-2021 biennium, Hutchinson first proposed a $60 million program to increase the minimum teacher salary levels in Arkansas from $31,800 to $36,000 over the next four years. Hutchinson said those budget transfers would raise average teacher pay in Arkansas by $4,000 annually.

If adopted, Hutchinson’s executive recommendation would instruct the Arkansas State Treasurer to transfer appropriations of $60 million in each of the next two fiscal years to the state’s Public School Fund. Hutchinson provided reporters with a letter he sent to Joint Budget Hearings co-chairs Sen. Bill Sample, R-Hot Springs, and Rep. Jim Dotson, R-Bentonville, outlining the plan.

“This program will be utilized over the next four fiscal years to provide additional funding to school districts currently below the minimum teacher salary schedule,” Hutchinson offered in his letter to Sample and Dotson. “I appreciate your consideration of this matter.”

“2-4-5-9” TAX PLAN
The largest request in the biennial budget is a $111 million tax relief package that would be enacted in two phases. The proposal, known as the 2-4-5-9 plan, would implement major recommendations developed by the Arkansas Tax Reform and Relief Task Force that would simplify the state’s tax code and cut the top marginal tax rate eventually to 5.9%.

Under the plan adopted by the tax reform panel this summer, the Arkansas standard deduction would rise to $6,800 and $13,600 for individual and joint taxpayers, respectively. Afterward, the new rate schedule in “Phase 1” would be 2% for the first $8,000, 4% through $18,000, 5.9% through $65,000, and 6.5% for anything in excess of $65,000.

In “Phase 2,” the 6.5% bracket would be eliminated leaving the state with a top 5.9% marginal rate. The net effect would simplify and flatten Arkansas’ income tax bracket schedules, DFA officials have said, with the initially higher rates for lower income levels helping to reduce the revenue impact.

Hutchinson credited the legislative task force for partnering with him to propose the $111 million tax cut plan, which is the third plank of his administration’s overarching plan to reform the state’s tax code. As his first act in the 2015 session, Hutchinson pushed the legislature to enact a $102 million tax cut that lowered the state’s middle-income tax bracket from 6% to 5%. That was followed in the 2017 session by a smaller $50.5 million tax cut for the working poor.

“I want to complement the extraordinary work of that task force that has raised awareness on our tax issues, on our exemptions, and educated legislators and all the people in this room, including the governor,” Hutchinson said of the bicameral tax panel led by Senate Pro Tempore-elect Sen. Jim Hendren, R-Sulphur Springs, and Rep. Lane Jean, R-Magnolia.

OTHER RECOMMENDATIONS
In other key recommendations made during Hutchinson’s brief 15-minute presentation, Hutchinson alerted lawmakers that the state would face a $38.5 million “budget hole” in the upcoming fiscal year due to voters approving Issue 4 on Nov. 6. That constitutional amendment would legalize casino gambling at Oaklawn Racing & Gaming in Hot Springs, Southland Park Gaming & Racing in West Memphis, and in Pope and Jefferson counties.

“This will result not in a reduction of services, but simply in the amount that we are able to put into savings for reserves,” the governor warned.

Other top priorities in the governor’s fiscal budget include his plan to streamline state government by reducing the number of cabinet-level state agencies from 42 to 15. That plan, he said, would incorporate a total savings of $7.5 million to general revenue collections by fiscal 2021. Hutchinson said state officials have already implemented a merit and performance-based pay plan for all state employees that will also lead to additional savings.

On the economic development front, Hutchinson also proposed a plan to reduce the amount of funding to the Governor’s Quick Action Close from $50 million to $30 million. That discretionary fund, which was established in 2007, allows the state’s chief executive to dip into state revenue to close deals with key economic prospects. Since the fund was created, former Gov. Mike Beebe and Hutchinson have used state funds to close key deals with Hewlett Packard, Welspun Pipes, Big River Steel, Risever Machinery and Aerojet Rocketdyne.

“Due to conservative and careful management of the fund, we’re reducing the level of funding request for that (fund), but it remains a very important tool for competing for expansion projects and new industry opportunities,” the governor said.

Another executive recommendation focused on public safety, including a proposed $2.3 million budget increase for the Arkansas State Police Department that will fund the hiring of 24 new state troopers and a new “Trooper School” for improved cadet training. Another $900,000 would be set aside for a new Northwest Arkansas crime lab in Lowell.

Hutchinson’s budget would also increase higher education funding for “non-formula” institutions, allocating an extra $1.1 million and $1.5 million, respectively, in base funding to the University of Arkansas for Medical Sciences and the university’s Division of Agriculture. Another $24 million will also be set aside to meet the state’s obligation to match funding for the Teacher Retirement System.

The state Department of Community Corrections would also get a substantial budget increase to hire 30 new probation and parole officers, and fund drug courts in Osceola and Franklin County. An additional $1.3 million would be budgeted for the state’s newly created $103 million long-term reserve fund that was created during a special session in May 2017.

RAINY DAY FUND
Hutchinson also elaborated that a $29 million-line item for rainy-day funds would still be allocated in the upcoming fiscal budget for potential unanticipated emergencies.

“Rainy day funds are just a necessary part of government these days to have funds for emergency circumstances,” Hutchinson said, citing $24 million in one-time funding approved in the 2017 session for child welfare emergencies, and shortfalls in highway funding and construction costs for the Little Rock Veterans’ home.

After his brief presentation, Hutchinson told reporters he believes he has strong support from the legislature for his budget plan entering the General Assembly that begins in January. The popular Republican governor also said the two-year budget plan protects against a possible slowdown in the economy in late 2019 that has been predicted by some economists.

“This is a conservative revenue forecast that has been presented,” said Hutchinson. “I have quizzed our forecasters and they have looked ahead and while they believe there will be continued growth this year, on the long-term is a little more unpredictable but we have set aside the savings to account for that in the event we do have an economy downturn.”

Gov. Hutchinson’s budget presentation to the state lawmakers did not address Medicaid spending and highway funding. Earlier Tuesday at the annual meeting of the Arkansas Good Roads Foundation, Hutchinson said extending a half-cent sales tax due to expire in 2023 could be included in a highway plan presented to Arkansas voters.