“The Idaho economic outlook turned unseasonably cool this summer, which is a slight change from spring’s warming trend,” began the new forecast, prepared by the Division of Financial Management (DFM) and state economist Derek Santos.  The forecast said state businesses are showing “signs of growth this year followed by modest gains thereafter.”

“The forecast is generally weaker than the one from last quarter,” said Wayne Hammon, who leads DFM. “However, it’s still positive.”  Hammon told state lawmakers in an e-mail that they shouldn’t start planning where to spend the new revenue, since there will be a new forecast before lawmakers convene in 2012, and it’s unclear if the expected tax revenues will hold.

The latest revenue projection is almost $80 million higher than the last projection from this year. The projected $2.6 billion is much higher than the target lawmakers set the current state budget to, $2.43 billion.

Lawmakers set low tax revenue targets the past two years after Gov. Butch Otter had to issue holdbacks to cut spending in 2009. In 2010, that lower target wasn’t cleared, but a contingency plan, including state reserve funds, made up the difference. This year, the target was cleared by $85 million, which triggered sending additional funds to schools. Otter also used the surplus to thaw the planned freeze of the grocery tax credit, which results in a $10 credit for most income tax filers.  After those policy decisions, the state still had a $17 million surplus to start the current budget year.

Otter’s spokesman, Jon Hanian, said the governor is sticking with his approach to the budget in light of the new forecast.  “Given what we’re seeing in the financial markets, not just in this country but worldwide, I think caution is the watchword,” he said.

Hanian also laid out where the governor would want to put any additional revenue.  “If we have additional money at the end of the day, we’re going to ensure that education gets that,” he said.  “It’s also important that we replenish our rainy day funds.”  Hanian said the stockpile of reserve funds cushioned the blow to the state economy during the recession.

Democratic lawmakers have criticized Republicans in power for the low revenue targets.  Boise Democratic Reps. Grant Burgoyne and Bill Killen wrote in a recent opinion piece that it led to an artificial surplus.

“The Republican budget forecast was intentionally low,” they wrote.  “And it resulted in a budget that significantly underfunded public schools, colleges, and the help needed for the disabled and mentally ill … None of this needed to happen.”

courtesy: Idaho Economic Forecast

DFM also released the tax revenue report for July, the first month of the current budget year.  The state took in half a million dollars less than the brand new forecast expected.

The new forecast expects Idaho to create slightly fewer jobs during the next four years and for personal incomes to be less than expected, though both economic measures will increase from their current levels.

Almost $60 million of the money will go to public schools, which is required since the state took hundreds of millions in federal stimulus money in 2009 and more than $50 million for educators’ jobs last year.  Those federal strings also require the state to give $7.5 million to Idaho’s three community colleges.

An additional $15 million will pay for the next increase in the grocery tax credit, which would give most Idahoans an additional $10 on top of the current $50 they currently receive.  Seniors and poor Idahoans get $70 in the grocery tax credit, which would also rise by $10.

State officials are pleased by the good news, as revenues were $19.1 million above expectations last month.  Some did question Gov. Butch Otter’s decision on the grocery tax credit.  “I’m grateful for the revenue growth,” Otter said. “But I still think that we’re a long way from out of the woods.”

“I thank the Legislature and Gov. Otter for their fiscally responsible approach to budgeting and continued commitment that Idaho public schools will receive the first dollars available,” said Superintendent of Public Instruction Tom Luna.  “Now, we are able to distribute $60 million in additional funds to our schools, which will more than cover the $47 million shortfall school districts were going to face in the upcoming year.”

Money will go to local schools based roughly on how many students they teach.  Districts in Idaho’s 10 largest cities and several other sizable districts will all get more than $1 million apiece, topping out with Meridian’s $7.5 million.  For a full list of district’s surplus payments, click here.

Sen. Dean Cameron, R-Rupert, one of the leading budget writers, said districts need to be prudent with the funds.  “They should consider the money one time in nature, so I would discourage them from trying to use it on ongoing expenses,” he said.  He cautioned that districts could see a drop in state funding for teachers’ salaries due to the school reform plan lawmakers approved this year.

The community college money will be divvied up by enrollment growth, so the state’s newest college, the College of Western Idaho, will get $5 million of the $7.5 million pie.

“There hasn’t been a decision as to how the money will be spent,” said CWI spokeswoman Jennifer Couch.  She said the school’s board will discuss how to spend the money at a meeting next week.  “We are taking a look at a number of different options, since we’ve had increased expenses due to our enrollment growth.”

Before lawmakers knew about the surplus, they passed a resolution asking the governor to freeze the grocery tax credit.  Now that there’s extra money, Otter said he won’t follow that request.  “That’s one of the promises we made long ago, and we’ve desperately tried to keep it,” the governor said about increasing the tax credit.

“That’s pretty much the governor’s decision,” said Senate President Pro Tem Brent Hill, R-Rexburg, though he added that he generally agreed with the decision.  “Sixty seven million dollars for public education and $15 million back to the taxpayers seems like a pretty good compromise to me.”

Cameron said that if it was his call, that money would go elsewhere.  “If it were left to my choice, I would probably restore some of the reductions in health districts and the Department of Health and Welfare (DHW),” he said.

Democratic House Minority Leader John Rusche of Lewiston also questioned putting the surplus to the grocery tax credit.  He said the money could go to other state programs, including DHW programs for the poor and disabled, probations and parole programs as well as building and maintenance programs that have been put off during the economic downturn.

“Is giving this tax credit the best way to use this money?”  Rusche asked.  “Those questions will persist.”

The $85 million surplus amounts to 3 percent of the state’s $2.44 billion in general fund tax revenues for the past year.  The surplus arose when lawmakers set their revenue to a dollar amount recommended by the governor, but that was lower than his staff economist predictions and requests from legislative Democrats.

“it’s pretty clear that we did set that bar too low,” said Sen. Diane Bilyeu, D-Pocatello.

Otter, Cameron and Hill all said that the lower revenue target was needed given the economic uncertainty and the difficulty of putting in spending holdbacks if the $85 million surplus ended up as a $85 million deficit.

“Lawmakers were very conservative in the projection that they did, realizing the very adverse consequences of estimating it too high,” Hill said.

“We had to make a decision based on the information at the time,” Cameron said.  “Based on that, I think we set the revenue projection just right.”

Rusche said that low target may have led to more cuts than were necessary.  “What’s done is done, but I think that it may have caused unnecessary harm in the budgeting process,” he said.

Republicans who worked on the state budget say the revenue numbers are good news. “That’s last year’s taxes, and last year was not a good year, so I’m pleased with that,” said Rep. Maxine Bell, R-Jerome, one of the leaders of the Joint Finance-Appropriations Committee (JFAC), which sets the budget.

The extra money for schools comes as part of legislation approved by lawmakers this year and required by the 2009 federal stimulus package. Idaho took more than $100 million in stimulus dollars, promising to hold off on large reductions to schools.

For every $5 million in tax revenues beyond the current budget target, $3.1 million will go to public schools, according to the legislation. That money would be distributed as discretionary funds sent to local districts. If the current surplus holds, districts would get approximately $46 million. That could offset the $47 million reduction to schools approved by lawmakers earlier this year.

“I think we can all agree this is a positive sign for our economy and good news for our schools today and in the future,” Superintendent of Public Instruction Tom Luna said on his blog.

Districts likely won’t receive that extra funding until July, once the state figures out how much it received in tax revenues for the budget year.

The rest of the revenue surplus would stay in the state general fund. Bell said, depending on what happens the next several months, it could be spent on some state agencies, including state prisons and public health districts.

“Corrections is right on the edge,” Bell said, adding that an increase in the state’s prison population would require more funds. She said health districts have a tight budget. “It’s not a big budget but a little bit makes a lot of difference.”April is Idaho’s biggest month for tax revenues, as most individuals and businesses file their income taxes. The state collected $377 million in income, sales and other taxes last month. Only one other month has collected two-thirds that amount.

Individual income taxes were more than $7 million below predictions, but corporate income taxes were $11.6 million more than expected. A report from the Division of Financial Management (DFM) said income tax witholdings on individuals’ paychecks was better than anticipated. “This strength suggests employment growth is more robust than was previously thought,” according to the monthly report, written by state economist Derek Santos.

Sen. Dean Cameron, R-Rupert, who leads JFAC with Bell, said on Twitter that he wished the sales tax and individual income tax revenues had been better, calling them a better reflection of the state economy.

“Both March and April still show weakness in sales tax collection, which is a reflection of weakness in the current economy,” Cameron said. “We still have to be cautious.” He said topping projections is good, but there are other economic mixed messages, including Idaho’s persistent high unemployment rate.

DFM administrator Wayne Hammon called the new revenue numbers good news, but said the state budget year isn’t over. “It confirms the wisdom of Governor Otter’s conservative approach to budgeting in collaboration with legislative Republicans,” Hammon said in an e-mail to reporters “If these strong returns continue through the end of the fiscal year, we should have some extra money for education.”

One of the Democrats on JFAC, Sen. Nicole LeFavour, D-Boise, said lawmakers set a budget revenue target for the current and next year that was irresponsibly low and influenced by politics.

“All these jobs that we eliminate do depress the economy,” she said. “We have a responsibility as policymakers. There are a lot of lives in our hands. When we cut services and eliminate jobs, people face very dire impacts.” She said cuts to Medicaid and mental health programs could have a powerful impact on Idaho families.

Bell said lawmakers were right to set a more fiscally conservative budget, since tax collections have fallen short of budget numbers for several years. “Lawmakers have had about three or four years of the most difficult budget setting that we’ve ever had,” she said. “Had we not been conservative, we’d have ended up in August with the governor making another holdback.”

While April is the biggest tax month, June is in the top three, so revenue totals could change. Tax revenues have only dipped below expectations once during the current budget year, in December.

According to Sen. Dean Cameron, R-Rupert, the strong month could be good financial news for Idaho schools. Lawmakers approved a plan that would shift more money to public schools if revenues exceed the current budget target at the end of the fiscal year. Idaho is by the federal government to shift those funds, since it received federal stimulus funds for education starting in 2009.

Cameron said that for every $1 million above expectations, $600,000 would go schools. So, if current revenues hold steady, the March numbers would mean more than $2 million for schools. Any other surplus in the budget could be put into reserves or spent by lawmakers next year.

March is a relatively small month for collections, bringing in $118 million. April is more than three times larger, which projections of more than $360 million, due mostly to income taxes being due April 18.

“April will tell us whether we’re on track, we’re ahead or we’re behind,” said Cameron, who co-chairs the committee that writes the state budget.

According to a report from the Division of Financial Management (DFM), personal income tax filings were almost $10 million below expectations. That may be due to changes in how the state is processing income tax refunds, since February collections were initially reported as $40 million more than expected.

Higher-than-expected corporate income tax revenues contributed to the good month. They were $13 million above projections. Sales tax receipts were $3 million above expectations. The report for DFM said that taxes on insurance premiums led to a drop in miscellaneous taxes of 2.9 million.

Courtesy of the Division of Financial Management

Inspections for out-of-state vehicles is supposed to be paid by fees on boat registrations, but those generated less than expected. The 20 inspection stations this past year found eight boats infested with quagga or zebra mussels, which can damage pipes and other infrastructure and eat plankton in waters that deprive other animals’ food supply, according to the ISDA.

ISDA Director Celia Gould said cleanup of an infestation could cost $90 million. “It’s not just an ag problem, it’s not just a recreation problem, it’s everybody’s problem,” Gould told members of the Joint Finance-Appropriations Committee (JFAC) Tuesday.

The extra money for the program would come from the state general fund in the form of a deficiency warrant. Gould explained that the deficiency warrant is like a credit card that allows the department to spend state money to prevent the spread of invasive pests. She said the agency uses its authority to spend that money very cautiously.

Other agencies with the authority for deficiency warrants include the military division, to pay for the cleanup of hazardous materials, and Department of Lands, to pay for fighting some fires.

Gould said the inspection stations checked boats from 49 states. The total budget for the inspection program was approximately $1 million during the past year. Idaho boaters pay $10 from their registration fee to the program. Out-of-state boaters pay $20 and non-motorized vessels, including canoes, pay $7 for boat stickers.

“Watercraft are the most prevalent form of movement for invasive species from water body to water body,” Lloyd Knight, the plant industries division administrator with ISDA, told JFAC.

Knight said ISDA will try to balance its budget by reducing how much it costs to run the program, not by proposing fee increases on boats. The department is planning to close three of its inspection stations and open one new station. The stations tend to be located along Idaho’s borders with other states and near popular lakes.

“We’re really not trying to make it more onerous for our local boaters,” Gould said about the inspection stations.

In Gov. Butch Otter’s proposed budget, spending by ISDA would increase in the next fiscal year by 2.3 percent to $35.4 million. State funding makes up $7.3 million of that budget.

Gould said the agency could save $900,000 in state funding if it shifts a program to thwart Eurasian Water Milfoil, another aquatic pest, to one of its dedicated fund sources. “This is a high-priority program for us,” Gould said, “but we realize that balancing the state budget is critical for you.”

Tax collections were reportedly $15 million above expectations for January, which is one of the biggest months for taxes, typically due to economic activity around Christmas. The preliminary report follows a shortfall of $4.6 million in December, based on the revised forecast from Gov. Butch Otter’s office.

Senate President Pro Tem Brent Hill, R-Rexburg, said the increase in state revenues is a good sign and could steer lawmakers away from setting a lower revenue target for the state’s balanced budget.

“Maybe we are going to come out of this,” Hill said. “I don’t think it’s going to change a lot, but if we’d had another downturn, there would have been some second thoughts to whether we’d have to revise it down. I’m not sure this will get us to revise it up, but at least we’re not looking to make additional cuts.”

Sen. Dean Cameron, R-Rupert, who co-chairs the committee that writes the budget, said he’s grateful for the news, but doesn’t want to overreact to the surplus. “It’s hard to tell where it’s coming from,” Cameron said about the rise in taxes and economic activity. “It’s not due to retail sales in December, which is what you’d think it would be. So it’s sort of a mixed signal.”

Cameron said January totals fit within the governor’s projected revenues, which are expected to grow 4.2 percent from last year.

The January revenue numbers will be the last Idaho lawmakers receive until they start setting the budget later this month, though there are other factors that need to be resolved. One is whether to comply with changes in federal tax rules that could reduce Idaho’s tax collections by $70 million in the next two years.

Rep. Ken Roberts, R-Donnelly, said lawmakers are working on a plan to partially comply with the new federal rules, which affect the deductions businesses can take for assets that lose their value. Roberts said the plan would mean Idaho would only be $20 million short on income taxes, rather than $70 million.

The partial compliance could be fast-tracked in the Legislature, since it’s affecting many taxpayers trying to finish their income taxes before the April 18 deadline. “There’s a huge backlog of people trying to get their taxes done,” Roberts said.

Roberts said the income tax plan would be introduced in an Idaho House committee Thursday.

The reasons for the added shortfall are a $70 million drop in revenue due to changes in federal tax law for businesses, a tax break for alternative energy producers costing $47 million more than expected, and a shortfall in December tax revenues leading to a projected $33.2 million gap for the current budget year. The governor’s staff said that $35 million in spending reductions already planned for next year lead to a total shortfall in the current and next budget year of $150 million.

Senate President Pro Tem Brent Hill, R-Rexburg, said the budget numbers have deteriorated, and it is important for lawmakers who write the budget to have all the facts. “We’re looking at some numbers that were not as favorable at this time,” Hill said. “This may require some additional cuts in that area. It may mean we aren’t able to give the small increase in education that the governor hoped we could.”

Hill said the shortfall increases the likelihood that lawmakers will raise taxes on tobacco, beer, wine and alcohol, though it doesn’t guarantee that taxes and fees will go up. “You’ve got to compare the pain of the cuts to the pain of raising taxes and try to make a reasonable judgment.”

House Speaker Lawerence Denney, R-Midvale, said he expects to see more reductions, but that it’s too early to know what the effects will be. “The picture wasn’t quite as rosy as what the governor had predicted,” Denney said.

“It just makes it that much more difficult,” said Sen. Dean Cameron, R-Rupert, one of the leaders of the committee that writes the budget. “We knew that there was some vulnerability in the governor’s budget.”

Hill, who is an accountant, said lawmakers didn’t have control over most of the shortfall, including the conformity issues with federal tax changes passed by Congress last year. Those changes let businesses take income tax deductions on some purchases when they buy them, rather than over a five- to seven-year period.

If Idaho complies with those changes, the state wouldn’t take an expected $70 million in taxes in the next 18 months, but would collect more in taxes from 2014 to 2021.

“There’s going to be some talk of possibly not going with complete income tax comformity to the federal code,” Hill said.

Lawmakers will likely decide on whether to comply with the federal income tax changes in the next few weeks, according to Hill. He said that the state could use those tax dollars to balance the current budget, but having different tax rules than the federal government would require them to keep separate books for federal and state taxes.

The other culprit for the shortfall is a sales tax rebate for alternative energy production, which is set to expire at the end of June. The Legislature passed the plan in 2005 with the assumption that it would cost the state just over $2 million a year. However, in January, energy producers such as wind farms have claimed close to $9 million in tax rebates. The governor’s budget staff predicts rebates could be $47 million more than expected in the current and next budget year.

Rep. Maxine Bell, R-Jerome, said said she’s not sure if the exemption for wind power is worth it, saying the exemption may have been a mistake. Lawmakers are debating whether to extend the sales tax rebate.

Denney said he thinks that if energy producers get a tax break in the future, it could be an income tax credit. “That’s a little more predictable for us than a rebate on the sales tax,” he said.

Otter doesn’t support extending the sales tax rebate in its current form.

Both Denney and Hill said that the shortfall could force lawmakers to look for additional cuts, but it might not lead to a longer legislative session this year. The shortfall could be an impetus for a shorter session, Hill said, in an effort to reduce costs to taxpayers.

“At some point, we’re going to debate to what we’ll budget to,” said JFAC co-chair Sen. Dean Cameron, R-Rupert. “At this stage, all we’re doing is accepting the report.”

Cameron questioned the leaders of the EORAC, Sen. John Goedde, R-Coeur d’Alene, and Rep. Cliff Bayer, R-Boise, about why the revenue target matched the governor’s. Idaho would collect almost $2.36 billion in the current fiscal year, which ends in June, and close to $2.43 billion in the next fiscal year. Last year, lawmakers set the budget for the current fiscal year based on a lower tax revenue figure, $2.29 billion.

Bayer said that while the average tax revenue projections by EORAC members for the next 18 months were $24 million lower than the governor’s recommendation, the committee felt it wasn’t a significant difference.

JFAC accepted the report on a 16-3 vote. Sen. Nicole LeFavour, D-Boise, who also served on EORAC, opposed the plan, calling the revenue targets too low. She said she’s worried that the number is below projections from the governor’s economist Derek Santos, as well as the Associated Taxpayers of Idaho, and state universities.

“It gives me a great deal of concern that the number we picked has absolutely no relation to the experts,” LeFavour said. “The process felt a little bit random to me. It seemed a little bit unusual that it ended up matching some unusual math on the part of the governor.”

Goedde said that it is better to budget to a lower revenue number. “We have found what happens when we’re overconfident in our revenue projections and it’s not good,” Goedde said. Last year, lawmakers set a revenue target below the governor and economic experts, and tax collections came in under lawmakers’ lowered bar.

Sen. Lee Heider, R-Twin Falls, said that when JFAC does set a revenue target, perhaps the committee should look at past tax revenues, which are below the growth projected by all sides.

JFAC also heard from Wayne Hammon, the governor’s budget chief, about the budgets for the governor and the Division of Financial Management (DFM), which Hammon leads. Hammon said DFM’s funding is at 1999 levels, thanks to vacancies, furlough and funding cuts, including no longer subscribing to the Wall Street Journal.

“It is lean, but we’re getting by,” Hammon said. He also said that he’s heard from many state workers that they prefer having unpaid furlough days rather than a straight salary reduction. “While nobody likes a furlough, it’s better than having a pay cut.”

Hammon also said he’s expecting the governor to appoint a new head of the Division of Human Resources (DHR) soon. Hammon currently leads DFM and DHR, with the two agencies sharing costs, including Hammon’s salary.

Rep. Marv Hagedorn, R-Meridian, questioned whether tax revenues will ever return to the highs of the past decade so that state agencies can end furloughs. “When does the time come when we recognize that maybe we need to change some statutes to meet what may be our new norm?”

Gov. Butch Otter’s proposed budget expects tax revenues to grow by 4.2 percent to $2.359 billion for the current budget year and by 3 percent to $2.429 billion in the next budget year, which starts in July.

The Economic Outlook and Revenue Assessment Committee (EORAC) Thursday on a 12-3 vote agreed with those targets, but could change its recommendation after new tax revenue numbers are available in early February.

“We don’t know what might happen in the month of January,” said Sen. John Goedde, R-Coeur d’Alene, who co-chairs of the committee. “It’s a huge tax collection month.”

Rep. Ken Roberts, R-Donnelly, said the committee should come back if the tax collections for January are out of line with the projections. “It sends a message that we’re watching revenues that are coming in December and January very, very closely.”

The EORAC’s revenue target isn’t binding, but rather a recommendation for lawmakers who write the state’s budget. Roberts said that leaders of the House and Senate will meet with the leaders of budget writing committee to set a revenue number in February, once the January tax numbers are available.

Of the three lawmakers who opposed the revenue targets, only Sen. Nicole LeFavour, D-Boise, recommended a higher number. She called the 3 percent growth in the next budget year unrealistically low, saying it would have dire consequences for people who depend on state services such as Medicaid. “It is truly impossible for us to know the number that will be the right one,” she said.

Sen. Bob Geddes, R-Soda Springs, said that it would be safer to set the budget with a lower projection than a higher projection. “What would be more dangerous than supporting a low number would be supporting a number that doesn’t come to pass,” Geddes said.

The two other lawmakers who opposed the plan, Rep. Janice McGeachin, R-Idaho Falls, and Rep. Grant Burgoyne, D-Boise, each said during the meeting that they projected tax revenues to be below the governor’s forecast.

Otter’s budget chief, Wayne Hammon, said the EORAC took an appropriate course of action. “All of us in state government need to be prudent in our handling of the taxpayers’ money and careful in the accounting thereof,” he said via e-mail.

Otter said state government will continue to deliver all the state services it can that’s within its means, but that spending reductions could be coming to balance the budget. “The government can’t be all things to all people,” he said Thursday. “I’m only going to spend the money I’ve got in the bank.”

The governor said he thinks Idaho’s method of reducing spending to keep the budget balanced could be copied by other states

Otter also said that he thinks state agencies and state workers have handled budget reductions well.

Legislative leaders echoed the governor’s belief that money will be tight and the focus of the next few months that lawmakers will meet in the Capitol in Boise.

“This probably is going to be another budget-driven session,” said House Speaker Lawerence Denney, R-Midvale.

“We’re going to have three major priorities in the Legislature this year,” said Senate President Pro Tem Brent Hill, R-Rexburg. “The first of course is money. The second is money. The third is money.” Hill also said that he expects the budget to be difficult because federal stimulus funds and state reserves, key to the current and previous state budgets, will be largely be gone for the next budget.

Both Hill and Denney said it’s very unlikely that lawmakers would approve an increase to a major tax, such as the state income tax or sales tax. However, House Minority Leader John Rusche, D-Lewiston, said Idaho doesn’t have enough revenue to fund state services and that the next budget would have a lasting impact.

“I expect we’ll be borrowing from the future as the budget is set,” Rusche said. He said reductions would increase future costs for health care, prisons infrastructure such as roads and bridges.

Senate Minority Leader Edgar Malepeai, D-Pocatello, said he hopes lawmakers of both parties and the governor can work together on the state’s looming issues. “If we’re going to solve the problems … of jobs and education, it’s going to require a collaborative effort,” Malepeai said.

Beyond tax and budget issues, Denney said there would likely be a full array of policy issues on the table, including job creation efforts and changes to urban renewal districts, illegal immigration, states’ rights issues, and wolves.

The governor will offer his proposed budget Monday in a speech to lawmakers. Following that, legislators will hear from state agencies before crafting spending plans.