Show me the money - please

Finding enough new revenue and tax cuts to balance Florida’s budget in 2008 was a stiff challenge for the Florida Legislature. It took $2.2 billion in new taxes and fee increases along with $5.3 billion from the federal stimulus slush fund to balance Florida’s current $66.5 billion budget. It also took a lot of time, sweat, and wrangling to get it done. Other issues had to be ignored as legislators spent most of their time in last spring’s regular session with their green eye-shades on.

Most economists and government financial officials say the recession is over. It probably is. And that’s a good thing. But it’s too soon to say, “Ding dong, the witch is dead” and go back to old ways. The song may be over, but the melody lingers on.

One way it lingers on is in reduced revenue coming into the state. Much of Florida’s revenues come from the sales tax and from taxes and fees, such as doc stamps, based on real estate transactions. Spending by Florida residents and tourists visiting the state is down, and real estate transactions have tanked. Also real estate evaluations are down across the state, putting pressure on local governments. Floridians are driving less, so collections of gas taxes have gone down. And don’t even talk about what would happen if a major hurricane struck Florida.

As a result of all this, Florida legislators may have to find as much as $3 billion in additional spending cuts or increased fees and taxes this spring during the regular 2010 session in order to balance next year’s budget. And balancing Florida’s budget is not optional. Florida’s constitution requires it. No playing financially fast and loose like the federals do.

“We have to make cuts or increase revenues,” said J.D. Alexander of Lake Wales, chairman of the Florida Senate Ways and Means Committee. “We’re looking for something on the order of $1.6 billion in new Medicaid funds alone. And unlike our federal partners, borrowing from the Chinese or printing money isn’t an option for Florida.”

In addition to being an acute problem, the issue of state revenue is an uncertain one. Many different things determine how much money Florida will have to work with next spring.

“We’re trying to understand where we are,” Alexander said. “So much depends on what Congress does.”

The biggest portion of Florida’s budget is health care, about 40% of the total. The biggest line-item in this area is Medicaid, a program providing health care for the poor that is paid for both with federal and state funds. In the current budget, $18 billion of the $66.5 billion total goes to Medicaid, Alexander explained. And Medicaid rolls are expanding thanks to 11% unemployment in the state.

Alexander said that in pre-stimulus days, the federals paid 55 cents of each Medicaid dollar in Florida, with Florida picking up the remaining 45 cents. Under this arrangement, almost three cents of sales tax on every dollar went to Medicaid. Under the stimulus slush fund, the federals have been paying 67 cents on the dollar.

But this money will end next year. Will these funds be replaced by something in the mammoth health-care bill being considered in Washington? No one knows yet. There’s considerable push-back against The Bill That Ate Health Care, so we’ll all have to wait and see. There could be anything ranging from major changes to no changes at all in health care coming out of Washington next year.

And if this uncertainty weren’t enough, it’s far from predicable what the dimensions of Florida’s tax revenues will be. Revenues have been coming into Florida state coffers at a rate slightly above projections for the last three months. Revenues beat projections by 4.8% in September, thanks largely to increased home and car sales.

But much of the car sales increase for that month was accounted for by the “cash for clunkers” scam (where we borrowed money from China to buy cars from Japan to keep UAW members in their Cadillac health plans), which mostly just pushed car demand ahead a month. Strong car sales are unlikely to continue.

“It’s hard to know how these things will play out,” Alexander said. “It could get better or it could get worse.”

As 72% of Florida’s revenue comes from sales and other transactional taxes, some of the factors that would make things better include a healthy Christmas shopping season, continued home sales, and a good tourist season. It’s anyone’s guess how well these sectors will fare between now and then, though they’re all problematic.

“A lot of committees are looking at budget projections now, looking for further reductions,” said Tallahassee lobbyist Gene Adams, who represents NAIOP of Florida and the Florida Association of Realtors.

“But we’ve cut $5 or $6 billion in the last two years. There’s not a lot of fat left. Once we get past police, fire, safety, and health, legislators will be asking, ‘Can we afford this program any longer?’ There’s no point at all in talking about new programs because there just isn’t any money for anything new.”

At 30% of state spending, the second-largest general item is education at more than $20 billion in the current budget. Thanks to Florida’s temporary growth time-out, school enrollments across the state are no longer growing, even contracting in some jurisdictions. But education is not a fertile field for finding spending cuts.

Florida and its localities are now having to fund the requirements of the voter-mandated (but probably ill-considered) class size amendment. And while public schools have gotten top-heavy in administration over the years, the education industry is very powerful. It’s not politically wise to suggest spending cuts in education, even though no real connection has ever been established between spending a lot on education and student achievement.

Adams said because of several revenue conditions, consolidation of or outright elimination of state agencies may get a serious look in the spring session. One agency under the microscope is the Department of Community Affairs.

“It’s possible they could send some functions of DCA to other agencies,” Adams said. “That would save some administrative costs.”

And what effect would farming out the functions of DCA have on the development industry?

“There would be some disruption,” Adams said. “There would be different secretaries in charge. People may not be happy with the department and the current secretary, but it’s sort of a matter of the devil they know. It’s hard to know what the total effect would be of a change.”

What’s a mother to do?

The options facing Florida legislators in the spring are pretty limited. Most of the federal stimulus slush fund money comes to an end in 2010. So there will be no more funding of recurring items with non-recurring money (which is what that Italian guy, Ponzi, got into so much trouble over).

Florida TaxWatch, a non-partisan research and tax watch dog organization, is a bit removed from the action, and its analysts don’t have to be elected. But, their distance from where the rubber meets the road conceded, they’ve come up with some pretty good ideas over the years and some on-the-mark criticisms of the way Florida runs its business.

“You must be disciplined and focused to make the necessary strategic budget reductions and tax policy enhancement so that you can position Florida’s economy to rebound and thrive once again,” said Harvey Bennett, a Florida TaxWatch senior VP. “They (the Florida Legislature and Gov. Charlie Crist) didn’t do it. They squeaked by last year.”

Bennett gives good marks to Alexander and Rep. Dean Cannon (R-Winter Park), chairman of the House Strategic and Economic Planning Committee.

“They tried to buck the conventional approach of raising taxes when revenue fell,” Bennett said.

But Bennett, while cognizant of all the political disincentives to fiscal discipline, is critical of many legislators, and Gov. Crist, for acting as though federal stimulus slush funds would get Florida through the bad times. He’s particularly critical of Crist, whose attitude seems to have been, “We’ll be out of this thing in a couple of years,” and then back to the good times.

“Sunshine flows through his views and statements,” Bennett said. “But hope is not a plan.”

Bennett insists there is still a lot of waste and duplication of effort in state government, plenty of opportunities for state government to slim down by working smarter. Bennett’s observation that state legislators got “fat, dumb, and happy when the times were flush and no one was breathing down their backs,” is nonetheless true for being often repeated.

Among the options facing the state to increase revenues, Bennett says, include a re-look at some of the sales-tax exemptions, including those on services, the legislature has approved over the years. Many of these exemptions were made for very good reasons, others not so good. They’re worth a look.

Bennett suggests a real effort should be made to collect sales taxes on Internet sales, a step most real estate organizations have supported for years.

“The fastest growing component of retail is Internet sales,” Bennett said.

And there’s real money to be captured in this area. Estimates are the state is passing up about $2 billion in sales tax revenues annually by not going after Internet sales.

Bennett said there could be gains made by changing the way corporate sales taxes are collected that would provide more incentives for Florida corporations to hire and out-of-state corporations to locate in Florida.

One issue that probably won’t make the budget situation worse, according to Alexander, is funding for light rail. By the time this column reaches readers, a special session to consider funding for light rail will probably have been called for December. Improvements in commuter rail will likely increase the chances of Florida getting $2.5 billion in federal transportation funds to build the Orlando to Tampa high speed rail system. Alexander said a combination of federal grant money and rental car surcharges in the affected jurisdiction would probably be enough to fund the light rail projects.

Recount?

“There’s no way around it - it’s going to be another tough budget years,” Adams said. “This will probably make for a no-fun session.”

Perhaps this is why I’m hearing rumors that some members of the legislature who won their elections last fall are now asking for a recount.

Larry Thornberry is a Florida Real Estate Journal contributing editor.