To the Members of the Mississippi Legislature:
In accordance with § 27-103-139, Mississippi Code of 1972 annotated, I transmit to you my balanced executive budget recommendation for Fiscal Year 2007.
Fiscal Impact of Katrina
This task is easier because in the last two years we have gotten state spending under control. Before Katrina struck, the state was on the verge of having completely dug out of the budget hole created in the first years of this decade. The FY 06 state budget adopted this spring was based on a very conservative revenue estimate, almost eliminated the reliance on one-time revenue for recurring expenses, reduced state spending by 1.75%, and put in place long-term reforms for programs such as Medicaid. The FY 06 budget put the state in a much better fiscal position, which helps in our response to Katrina.
Uncertain Revenue Forecast
At this point, 8½ months before the beginning of Fiscal Year 2007 and 2½ months after Katrina, it is impossible to prepare a precise state budget. The Joint Legislative Budget Committee has adopted a revised revenue estimate for FY 06 and a revenue estimate for FY 07, but there is widespread agreement that more data is needed before we can accept these projections as reliable.
The FY 06 revised General Fund growth estimate appears greater than it really is due to legislation enacted in 2005 which transferred several revenue sources into the General Fund. In the past, a portion of the oil and gas severance tax and the gaming tax was diverted away from the General Fund. These and other legislative actions account for $101.1 million of the increased revenue in FY 06. With these legislative changes removed the year-over-year revised revenue growth estimate for FY 06 would be 1%. If real growth exceeds this rate in FY 06, the baseline will increase for FY 07, and more revenue will be available for both years.
In FY 04, general fund revenue grew 4.05% over FY 03, and in FY 05 general fund revenue grew 7.79% over FY 04. The FY 06 budget was based on a very conservative revenue estimate, which we are currently exceeding, despite Katrina. Nevertheless, this may be temporary, and it is likely Katrina will negatively impact revenue growth above the FY 06 sine die estimate.
I strongly recommend the Legislature not attempt to consider an FY 07 budget until revenue data through February is available.
Awaiting Fiscal Decisions by the Federal Government
The questions surrounding state agency spending requirements are exacerbated by the uncertainty of future actions by the federal government. The United States Congress is currently considering a number of proposals to help our state rebuild, many of which would have a direct impact on our state’s budget. For example, due to the anticipated increase in Medicaid enrollment resulting from Katrina and the recognition of the impact of Katrina on state finances, both houses of Congress are considering legislation to require the federal government to pay 100% of the cost of our state’s Medicaid program for several months. If this becomes law, it will have a significant impact on our budget.
Additionally, I have asked the federal government for financial assistance for school districts impacted by Katrina. It is a source of great state pride that every one of our school districts has reopened and that more than 98% of our kids are back in the school district they were in before Katrina. However, these school districts have new costs associated with restoration while they are experiencing a short-term reduction in local revenue. Additionally, many school districts north of the coast are temporarily educating evacuated students either from Mississippi or somewhere else, and are bearing unbudgeted costs. Congress is considering legislation to mitigate such costs through federal grants for these school districts.
Social service agencies such as the Department of Human Services, the Department of Mental Health, the Department of Rehabilitative Services, and others have already received some federal financial assistance to pay for the increased need for their services. Additionally, the President has proposed a significant increase in funding for the Social Services Block Grant to our state, and the Congress is currently considering this proposal.
Although the Congress and President will be considering Katrina-related legislation for many years, I expect us to have a clearer picture of the immediate federal assistance available before the beginning of the Regular Session of the Legislature. However, until the federal government acts, attempting to design a state budget would be a fruitless endeavor. More importantly, if the federal government does not provide appropriate assistance, the burden on state government and our taxpayers would be so high that the possibilities for rebuilding and renewal would be greatly reduced.
Summary of the Fiscal Year 07 Executive Budget Recommendation
Direct appropriated support for state government operations now comes from four primary sources: the general fund, the budget contingency fund, the health care trust fund , and the education enhancement fund . These four funds combine to finance the entities of state government which in the past relied almost solely on the general fund. Thus, these state agencies are referred to as “general fund agencies.” Other agencies of state government, so-called “special fund agencies,” receive support solely from federal funds and/or state taxes or fees earmarked for a specific purpose or that agency.
The Fiscal Year 2007 Executive Budget Recommendation:
- Does not raise taxes. Raising taxes as our people are trying to rebuild their homes, businesses, and lives would be an impediment to their well being and to an economic revival.
- Essentially level funds state General Fund agencies, with a total state source (General Fund, Budget Contingency Fund, Health Care Expendable Fund, and Education Enhancement Fund) FY 07 funding recommendation of $4,734,139,108.
- Provides the necessary management tools to state agency executive directors by establishing lump sum budgets as the standard for all agencies, allowing agency heads the maximum flexibility to move funds between budget and major objects of expenditure as circumstances dictate. The FY 07 EBR also recommends eliminating the restrictive language included in FY 06 appropriation bills which prevents agency directors from promoting state employees or awarding salary increases through reallocation, reclassification, realignment, education benchmark, or career ladder. This language severely hampers agency directors’ ability to manage their agency and is counter-productive to effective government.
- Ends the use of one-time money for recurring expenses made possible in the past by the cash balances of special fund agencies. In 2003, the Governor and Legislature used $277 million of special fund revenue to balance the budget. In FY 06, this was reduced to $23 million. The FY 07 Executive Budget Recommendation uses no revenue from special fund agencies for general fund purposes.
- Addresses the known deficits in the FY 06 budget for debt service and the Department of Corrections and sets aside $10 million for other potential deficits in FY 06. The potential for the debt service and corrections deficits was known when the FY 06 budget was enacted last spring. The EBR provides an additional $83.9 million for debt service, as recommended by the State Treasurer on October 27, 2005, and $10.7 million for the Department of Corrections due to increased inmate population. In addition, I recommend that an additional $426,967 be appropriated to Corrections during Fiscal Year 2006 for the specific purpose of establishing a First Responder Unit at the Rankin County Correctional Facility that will provide adequate fire protection for all state property in its vicinity. The cost of operating the unit in future years is estimated at $150,000 annually.
- Follows the legislatively established schedule of expenditures from the Health Care Expendable Fund (HCEF). The only non-recurring revenue in the FY 07 Executive Budget Recommendation is the $40 million difference between the FY 07 HCEF expenditures and the FY 08 HCEF statutory funds transfer.
Governor’s Priorities for Using Additional Revenue
I share the optimism of the State Economist that the available revenue for FY 06 and FY 07 will be greater than is currently projected. Pre-Katrina, our state’s economy was generating more tax revenue without raising taxes, and growth of the state’s economy (GSP) was at its highest level since 1995. Last year in Mississippi, personal income grew by the highest rate since 1998, and employment grew more than any year since 1999.
As the State Economist noted recently, “The damage notwithstanding, we are optimistic about the future. The historical pattern for areas suffering from a natural disaster is for the economy to suffer an initial decline followed by a period of rebound fueled by rebuilding. This was the experience following Hurricane Hugo in South Carolina, and Andrew in Florida as well as the four hurricanes that hit Florida last year.”
With any additional available revenue, I recommend the following priorities:
1) Meeting necessary state match requirements for federal public and individual assistance as required under the Stafford Act or other applicable federal laws;
The President has granted the state’s request that the federal government pay 100% of the costs of debris removal, emergency protective services, and direct federal assistance through at least the end of November. However, state and local governments will be required to match costs for some individual assistance and public assistance programs. For example, the Federal Emergency Management Agency and the Mississippi Emergency Management Agency currently estimate that the state will spend more than $100 million in Fiscal Year 2006 to meet state matching requirements for individual assistance programs.
The President has also granted the state’s request that the match for public assistance programs be reduced from 25% to 10%. This will save the state and local governments significant funds, but there will still be a significant financial burden. However, it is likely the overwhelming majority of the public assistance matching funds will not have to be appropriated in the near future.
Matching funds for individual and public assistance will need to be made available to the state Disaster Trust Fund in order to meet these requirements as they become due.
2) Increased state support for education, especially higher education.
Education is the number one economic development issue in Mississippi and the number one quality of life issue. Therefore, it is and must be the top priority of state government. A focus of my Administration is to promote the public’s embrace of lifelong learning in Mississippi. Education begins in early childhood, continues from kindergarten through 12th grade, through higher education at a community college and/or a university and beyond to workforce training and adult education.
State funding for K-12 public education is primarily from the Mississippi Adequate Education Program (MAEP) (and its predecessor, the Minimum Foundation Program), and it has increased 55% since FY 00, or $692 million, while the number of students has stayed about the same. A portion of this increase has been to fund pay raises for public school teachers. In the last two years, K-12 public school teachers have received an average raise of 8% each year, completing the promise that was made five years ago. The average annual teacher salary in Mississippi is now more than $41,000.
By comparison, since FY 00, funding for the Institutions of Higher Learning has been cut $44 million, or 7%, while their number of students increased 12%. Community Colleges are receiving $42 million less in state support than they received in FY 00 (a 20% reduction) while their number of students increased 26%. The last two years, the IHL and community colleges have received essentially level funding. However, state funding for workforce training at the community colleges has increased $14 million since last year.
I support increased education funding at all levels, but higher education particularly needs and deserves extra help in this budget year.
The Executive Budget Recommendation does not redirect Education Enhancement Fund revenue, as has been done in recent years, but the Legislature may consider this as the overall budget picture develops.
3) A pay raise for state employees.
As of October 31, 2005, the State of Mississippi has 31,103 non-education related employees, the lowest number of employees since March, 1999, earning an average of $29,920/year. These employees will not have had a pay raise since January 1, 2003, when all classifications received a minimum realignment of $600. Before that, it had been another three years since a state employee pay raise. Therefore, most state employees have received only a $600 pay raise in six years.
As of the beginning of FY 06, more than 3,200 state employees are eligible to retire immediately, more than 10% of the state workforce. Another 8,000, more than 25% of the workforce, are eligible to retire within five years. Recruitment and retention of a quality state government workforce is a pressing issue.
Within available revenue, I propose that all state employees receive a pay raise in FY 07. This pay raise should include an across-the-board increase for all employees; a portion of the realignment increases recommended by the State Personnel Board; and some funding of a merit pay model.
Realignment is the adjustment of the starting salary of a job classification based on the State Personnel Board’s annual salary survey of the surrounding states and the Mississippi private sector. Once the job classification has been adjusted, new employees begin at the new starting salary; current employees receive an increase equal to the difference in the old and new starting salaries.
The productivity pay plan provides flexibility to agency directors to reward the hard work and merit of an individual employee. No two employees have the same value to an agency so we should not expect them to receive the same pay. Pay for performance encourages innovation and extra effort by state employees.
The Fiscal Year 2007 recommendation provides a starting point for budget deliberations in the Regular Session of the 2006 Legislature. Recognizing the many uncertainties caused by Hurricane Katrina, it establishes my priorities for responding to the fiscal challenges created by the storm; increasing funding for education, especially higher education; and providing a pay raise for state employees. Other areas of the budget, such as Medicaid and other social service agencies, will certainly need to be addressed as decisions are made by the federal government.
I look forward to working with the Legislature on these and other issues as we work together to lead a renaissance for all of Mississippi.
Governor Haley Barbour
P.O. Box 139 Jackson, MS 39205
Phone: 601.359.3150 Fax: 601.359.3741