We would be seeing even greater growth were it not for the backdrop of federal uncertainty and a fragile national economic recovery. It's good news that the state economy is largely resilient, but we are not immune to national economic dynamics. —Gov. Gary Herbert
SALT LAKE CITY — The latest state revenue estimates show growth in tax collections is expected to fall from $300 million to $264 million in the coming budget year, lawmakers learned Monday.
Legislative leaders blamed the drop on the ongoing fiscal fights in Washington, D.C., and credited Utah's healthy economic environment with keeping the state from sustaining a bigger financial blow.
"That's better than we had initially thought," House Speaker Becky Lockhart, R-Provo, said. "It's an indication the Utah economy is doing quite well and is able to overcome some of the impacts of the federal politics."
Gov. Gary Herbert, who spent the past few days in Washington, D.C., talking with other governors about the impacts of the looming federal budget cuts known as sequestration, said the gridlock is having a "chilling effect" on Utah's economic recovery.
"We would be seeing even greater growth were it not for the backdrop of federal uncertainty and a fragile national economic recovery," the governor said in a prepared statement. "It's good news that the state economy is largely resilient, but we are not immune to national economic dynamics."
Herbert later told CNN he and other governors are frustrated over the inability to get the federal budget under control and suggested the impact of spending cuts is being overblown.
“The sky is falling mentality permeates, I think, some of the efforts here in Washington, D.C.," he said. "I think that is hyperbole. I think it’s exaggeration, downright on the offensive side of the line. In most of the states, we've had to cut our budgets, live within our means, and we get are getting better outcomes than we had did before.”
The new estimates, agreed to by both the governor and the Legislature, are not as bad as had been feared at the start of the session. Then, it appeared that Congress' last-minute "fiscal cliff" deal raising taxes on the wealthy would strip $100 million from last fall's $300 million forecast.
The one exception to Monday's declining revenue estimates was in projected one-time or surplus income tax collections in the current budget year, which rose $40 million to $161 million. But the additional revenue is not expected to continue into the new budget year.
That's because the estimates for what will be left over when the current budget year ends June 30 went up due to a flurry of stock and real estate deals at the end of 2012 to avoid paying higher tax rates on the income.
The key factors contributing to the growth in ongoing revenue for the new budget year that starts July 1 are climbing wages and new construction, according to Juliette Tennart, deputy director of the Governor's Office of Management and Budget.
"Those are the biggest drivers," Tennart said, noting wages are still expected to jump 5.9 percent this year after being adjusted from last fall's 6.6 percent forecast, while residential construction in the state is expected to be up by 26 percent.
Tennart said the adjustments take into account the economic impact of mandatory furloughs for federal workers under sequestration, set to take effect Friday unless Congress and President Barack Obama reach agreement on tax increases and spending cuts.
Not included in the new revenue numbers, however, are the $40 million in federal funds anticipated in next year's budget that would be lost if the automatic cuts aren't stopped.
According to the Obama administration, federal budget cuts would hurt programs in many areas, including education, air and water quality, military, law enforcement and public health.
Sequestration could cost $6.2 million in public education funding, putting 90 jobs for teachers and teacher's aides at risk. In addition, Utah would lose about $5.6 million for 70 teachers, aides, and staff who help children with disabilities. Also, Head Start and Early Head Start services would be eliminated for approximately 400 children.
On the college level, 530 fewer low-income students would receive financial aid.
Lawmakers would have to find state dollars to fill those gaps, something they're not inclined to do.
"Those are federal programs funded by federal money, so that's the decision of the federal government to fund them or not fund them," said Senate President Wayne Niederhauser, R-Sandy.
Niederhauser said the need to divert state dollars to those programs would have to exceed the priority for state-funded programs.
"That is not a hole in our budget. That's a hole in the federal government's budget," said Senate Majority Whip Stuart Adams, R-Layton.
Some of the federal cuts are out of the Legislature's hands because that money goes directly to school districts and local government.
"They're not really our programs," Senate Budget Chairman Lyle Hillyard, R-Logan, said.
Lockhart ruled out any possibility that lawmakers might use the additional $40 million in surplus funds expected at the end of budget year to restore the federal cuts because using one-time money to pay for ongoing programs creates a structural imbalance.
The speaker also said she didn't want to set the precedent "that everything the federal government does is good" and needs to be funded. The surplus funds, she said, would be better used to pay for new government buildings and boost the state's Rainy Day Fund.
Hillyard said the growth in ongoing revenues is already stretched thin, with at least $100 million already earmarked for growth in public education and to cover a $25 million miscalculation from last year.
"That's 40 percent of it basically gone right there without even really doing anything else. We're going to have a struggle as to how to put these pieces of the puzzle together," he said, adding that 80 percent of the decision will be easy, but the other 20 percent will be tough.
Lawmakers won't be able to fund a 2 percent increase in the weighted pupil unit plus pay for retirement and health insurance, Hillyard said.
"I don't know if there's been a more difficult year than this year in putting together the figures," the Senate budget chairman said.
Herbert said education remains his top budget priority, and the state office of education is still hoping that both enrollment growth and the 2 percent increase in the weighted pupil unit will be funded.
"It looks like there's enough money to do that if they choose," State Superintendent of Public Instruction Martell Menlove said. "I'm generally optimistic. I think we're in good shape."
Contributing: Ben Wood