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Spending spree.

Spending Spree

As State Legislators Prepare To Disburse $3 Billion In Revenues, State Agencies Can Expect Four-Percent Hike In Their Budgets

In January, the Arkansas General Assembly convenes to begin a spending spree that will run through more than $3 billion -- the projected amount of general revenues for the state over the next two years.

While spending that kind of money may sound like fun, developing a new budget for the state is, by and large, a rather ominous task for legislators.

During the past months, state agencies that will be funded out of the revenues have submitted their budgets to legislative committees. The agencies identify the cost of continuing their existing programs along with the cost of proposed new programs.

For example, new early childhood education programs benefit both the participants and the taxpayers. Advocates of this program try to convince committee members that the state will benefit if funds are provided. Other advocates appear before the committee to recommend an increase in funding for university salaries, noting that existing salary levels are the lowest in the region.

Program advocates don't say how the expenditures are to be funded. This unpleasant job remains the task of the committee.

Obviously, members of the General Assembly can't fund all of the new and existing programs included on the shopping list submitted by state agencies. State legislatures also know -- perhaps better than politicians in Washington -- that tax collections limit the amount spent.

Constitutional restrictions in Arkansas also prevent deficit financing by the state. In contrast to the state's spending limits, Washington spends its annual tax collections, plus new borrowing that adds to the federal deficit each year.

That's why it's important to review the state's past general revenue income prior to next year's legislative session. It is hoped members of the General Assembly will gain valuable information that may be used to determine their votes on spending.

Inflation Studied

The accompanying line graph traces quarterly total general revenue collections since 1980. The solid line displays actual general revenue collections. The dotted line traces the real general revenue collects after adjusting for inflation.

Inflation strongly affects the state general revenue. Inflated prices of merchandise subject to the sales and use tax enhance tax collections. Inflation also affects individual and business incomes by increasing state income tax collections. Excluding the effect of inflation allows one to focus on the real growth in the state's general revenue collections.

In the graph, both lines coincide in the 1982 base period. As we move farther away from the 1982 base, the two lines diverge and reveal some interesting points. First, the level of general revenue collections jumps up in 1984 following an increase in the sales tax. Second, collections declined in 1986, and this played havoc with the budgets of state agencies.

Past trends in total general revenues, along with expected increases in income and national business activity, provide the base for forecasting total general revenue collections. The accompanying bar chart shows the expected collections through 1993.

This chart shows the four quarter percent change beginning in the first quarter of 1985 and continuing through the fourth quarter of 1993. The first quarter 1985 entry shows the percent change from the first quarter 1984. The highest column in the third quarter of 1989 shows the percent change from the third quarter of 1988.

This chart also shows "before and after" adjustment for inflation. The black area shows the percent change after adjusting for inflation. The white area shows the percent change before inflation.

The bar chart offers the Legislature an insight into its ability to fund new state programs. Actual total general revenues collections will increase about 3.8 percent each quarter for the next two years. Adding up the increases for the next two years ending in June of 1991, total general revenues are expected to equal $3.981 billion. Forecasts show that for the two years beginning July of 1991 through June of 1993, general revenues will increase to $4.287 billion. The two-year increase equals 7.7 percent.

After adjusting for inflation, total general revenue collections will increase about 2 percent each quarter through 1993. Total general revenues are expected to equal $3.039 billion for the two years ending next June. During the following two years, real total general revenues will increase to $3.152 billion. This represents a 3.7 percent increase. The 4 percent difference between the two growth rates represents the average rate of inflation expected during the next two years.

Budget Increase

Revenue forecasts show that the Legislature can increase agency budgets by 4 percent to maintain expenditures at current levels to offset future inflation. Real economic growth will provide the Legislature with a 3.7 percent increase in funds. The amount of new money available to the Legislature will be about $147.3 million.

The national economic outlook is a source of uncertainty in the state's revenue forecasts. By looking at the line graph, the 1984 interruption in the growth of state revenues coincided with a pause in both the national and the state's economy.

Since the present national economy is in the early stages of a decline, forecasts of the state's total general revenues depend on our skill to foretell the outlook for the national economy.

Next February, when the general revenue collections for the last quarter of 1990 are available, updated forecasts for the biennium beginning in July of 1991 can be prepared. Until then, about $150 million in new money will be available for appropriation by the Legislature during the next biennium. [Graphs Omitted]

Dr. John C. Pickett is a professor of economics at the University of Arkansas at Little Rock. His interests include the analysis of emerging public and private issues.
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Title Annotation:Arkansas General Assembly to disburse $3 billion
Author:Pickett, John C.
Publication:Arkansas Business
Date:Dec 3, 1990
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