Arkansas state lawmakers will begin budget hearings for state agencies on Tuesday to prepare for the regular session beginning on Jan. 9, and key lawmakers expect the budgets for education and human services programs and prisons to dominate the discussion.
The Legislative Council and Joint Budget Committee will hold budget hearings together that could run through Nov. 21, according to the General Assembly's website.
Gov. Asa Hutchinson's proposed general revenue budgets for fiscal 2024, which begins July 1, 2023, and fiscal 2025, which begins July 1, 2024, and the state Department of Finance and Administration's revised general revenue forecasts for fiscal 2023, which ends June 30, and for fiscal years 2024 and 2025 are scheduled to be released on Nov. 10.
The Republican governor's successor will be elected Nov. 8 and is expected to be sworn into office on Jan. 10. Republican gubernatorial nominee Sarah Huckabee Sanders, Democratic nominee Chris Jones and Libertarian candidate Ricky Dale Harrington Jr. are vying for a four-year term as governor.
In the fiscal session earlier this year, the General Assembly and Hutchinson authorized a general revenue budget of $6.02 billion for fiscal 2023 -- up by $175.1 million from fiscal 2022's general revenue budget, with most of the increases going to public schools and human services programs.
"We have to understand inflation is real and keep the budget as responsible as possible without harming the services we want to provide," said state Sen. Bart Hester, R-Cave Springs, who is in line to be the Senate president pro tempore from 2023-2025.
The budgets for education, human services and correctional programs will be key issues during the budget hearings, he said.
"We have got to build bigger prisons to keep the bad guys locked up," and the state's plan to expand a prison is a good first step, Hester said.
State Rep. Lane Jean, R-Magnolia, who is co-chairman of the Joint Budget Committee, said teacher pay raises also will be a major discussion course during budget hearings.
Sen. Jonathan Dismang, R-Searcy, who is the other co-chairman of the Joint Budget Committee, said the state's aim is to keep the state's budget growth below the inflation rate, "but where we need to fund and how to maintain state services, I don't know the numbers at this point."
Hutchinson said in a letter dated June 9 to his department secretaries and directors that by "continuing my vision of transforming the way we operate and improving our tax competitiveness, we will further my goal of growing the private sector faster than the public sector."
"It is important to propose a balanced budget to the next governor that limits public spending, while providing necessary and critical services to the citizens of Arkansas," the governor wrote in his letter.
"The new administration takes office in January and may establish its own funding priorities," Hutchinson said. Thus, he said, "with limited exceptions, I plan to submit a flat base level budget or less to the Legislature that will only include a continuation of the previously authorized two percent [2%] salary adjustment and performance pay increases, [Employee Benefits Division] increases, along with career service payments for state employees for the next biennium."
Asked if there is a particular numerical goal in terms of limiting the proposed state general revenue budget for fiscal 2024 and fiscal 2025 despite the high inflation rate and labor market pressures, Hutchinson said Friday in a written statement that "I expect the agencies' existing budget to absorb inflationary costs but there will have to be some exceptions that relate to health care needs, education and public safety."
Asked if he is factoring any tax cuts into his proposed fiscal year 2024 and 2025 general revenue budgets, the governor replied, "Not at this time."
Hutchinson said his proposed general revenue budgets for fiscal 2024 and fiscal 2025 won't be completed until Nov. 10, "which is the time required by law for the budget to be submitted."
PAY PLAN REVISIONS
Office of Personnel Management officials have drafted an overhaul of the state's pay plan that is projected to cost about $41 million a year in general revenue and cover about 22,400 executive branch employees.
"The draft pay plan will allow state government to pay employees more comparable to the private sector and will keep pace with inflation rates," Hutchinson said. "The plan will be financed through existing agency budgets and supplemented by the allocated amount in the pay plan."
State government last overhauled its pay plan in 2017. That pay plan was projected to cover 25,000 full-time state workers and cost about $57 million to implement in fiscal 2018, including about $24 million from general revenue, with the remainder coming from other state government revenue sources.
The pay plan adjustment is needed because it will have been six years since the last pay plan and there is high employer demand in an extremely competitive labor market and inflation, according to an Office of Personnel Management summary of the draft pay plan obtained under the Arkansas Freedom of Information Act.
The Office of Personnel Management said it reviewed labor market data for 140 benchmark classifications representing a broad spectrum of employees, jobs and departments and current pay grade ranges are about 20% below the current labor market rate. The draft pay plan would "move to near labor market rate" and "provide for limited seniority adjustments," the records show.
REVENUE VS. SURPLUS
The Finance Department's latest general revenue forecast on May 18 projected a $914 million general revenue surplus at the end of fiscal 2023 on June 30.
That was before the Legislature and Hutchinson in the Aug. 9-11 special session enacted a four-pronged tax cut package that the finance department projected would reduce state general revenue by $500.1 million in fiscal 2023, by $166.6 million more in fiscal 2024, by $69.5 million more in fiscal 2025, by $18.4 million more in fiscal 2026 and by $8.4 million more in fiscal 2027.
Dismang said the Legislature in the August special session advanced the implementation of individual and corporate income tax cuts that originally were to be phased in over the next few years, so "we need to let things settle before we move forward on new tax cuts" and "determine what we need to maintain existing services in the state."
During the special session, House Revenue and Taxation Committee Chairman Joe Jett, R-Success, told the House committee that enactment of the tax cut measure would leave a projected general revenue surplus of roughly $400 million in fiscal year 2023.
But the state's general revenue surplus in fiscal 2023 could be larger than $400 million because the state's net general revenue collections during the first three months of the fiscal year have exceeded the state's forecast by $174.8 million.
The state currently has more than $2 billion in reserve funds.
The state's catastrophic reserve fund totals $1.21 billion and the state's general revenue allotment reserve fund totals $1.34 billion, according to finance department spokesman Scott Hardin. The Legislature will consider how to use the general revenue allotment reserve balance in the 2023 regular session.
The state's overall restricted reserve fund balance totals $227 million and the state's rainy-day fund balance is $1.3 million, Hardin said.
The four-pronged tax cut package, enacted in the Aug. 9-11 special session, accelerated the reduction of the state's top individual income tax rate from 5.5% to 4.9% retroactive to Jan. 1, 2022, and the state's corporate income tax rate from 5.9% to 5.3%, effective Jan. 1, 2023.
The tax cut package also granted a temporary, nonrefundable income tax credit in tax year 2022 of $150 for individual taxpayers with net income up to $87,000 and of $300 for married taxpayers filing jointly with net income of up to $174,000, and adopted the 2022 federal Section 179 depreciation schedule as it existed on Jan. 1, 2022, which provides an income tax reduction for the expensing of certain property.
Hutchinson declined to put teacher raises on the call for the Aug. 9-11 special session, citing the lack of support in the Republican-dominated Legislature. Prior to that, he had floated proposals to boost teacher salaries in the special session, while House and Senate Democrats and some Republicans said they also wanted to consider raising teacher salaries in the special session.
But Republican legislative leaders said at that time they wanted lawmakers to consider increasing teacher pay during the 2023 regular session, starting Jan. 9, after the House and Senate education committees complete their biennial educational adequacy review this fall.
The House Education Committee on Tuesday recommended $4,000 raises for teachers by the end of fiscal 2023 and raising the state's minimum teacher pay from $36,000 to $40,000 a year in fiscal 2024 and a $2 per hour increase in classified staff pay as part of its educational adequacy recommendation, while the Senate Education Committee rejected that recommendation.
The House Education Committee's educational adequacy recommendation is projected to cost $386.8 million more in fiscal 2023, $147.3 million more in fiscal 2024 and $85.7 million more in fiscal 2025.
Dismang said he hopes for more discussion among House and Senate leaders about educational adequacy.
"I don't anticipate a fight," he said. "I think all members want to head in the same direction, just wanting to know what that path needs to look like."
The state Department of Human Services' general revenue budget in fiscal 2023 is $1.814 billion and the department is requesting a $1.891 billion general revenue budget in fiscal 2024 and a $1.954 billion general revenue budget in fiscal 2025, according to department spokesman Gavin Lesnick.
"These budgets reflect current and forecasted growth rates in enrollment and [utilization] related to the continuation of the public health emergency," he said.
At the start of September, there were 1,121,689 clients enrolled in Medicaid, including 339,297 enrolled in the state's Medicaid expansion program known as ARHOME, Lesnick said. ARHOME is the Arkansas Health and Opportunity for Me program.
"As of Oct. 4, 2022, 347,593 clients have had their coverage extended due to the Public Health Emergency and are at-risk of losing their coverage," Lesnick said, and 117,674 of those are covered through ARHOME.
"We do not know how many of those who have been extended will actually be ineligible for Medicaid, which is why we continue to encourage everyone to update their information," Lesnick said.
At the start of the public health emergency for covid-19 on Feb. 28, 2020, Medicaid's enrollment totaled 923,148, he said.
The end of the federal public health emergency would mean the state would no longer receive enhanced federal matching rates in certain Medicaid programs and would have to cover an increased share of the cost for the programs, department officials have said.
They have said the public health emergency's end also would mean the state would no longer have to abide by federal limitations that allow states to end Medicaid eligibility only for beneficiaries who die, go to jail or go to prison or who ask to be removed from the programs.
The U.S. Department of Health and Human Services' current public health emergency is set to expire Oct. 13, he said.
"At this point, we still have not received confirmation from the federal government when they will end the public health emergency," Lesnick said Tuesday. "However, they have committed to providing states at least 60 days' notice prior to the end."