Missouri will enter the new fiscal year Saturday in its best financial shape ever. But there are unmistakable signs that the massive surplus, now approaching $8 billion, has likely peaked.
Revenues have fallen by double-digit amounts during the last three months, and the state will meet the general revenue projection made in December only because interest earned on invested state funds has increased 927% during the year.
Gov. Mike Parson on Friday will sign the 17 bills making up the $50.7 billion budget, action that will almost certainly include line-item vetoes. The spending plan uses approximately $2.8 billion of the accumulated surplus. About half of the spending from the surplus is dedicated to a project to widen Interstate 70 across the state.
The I-70 appropriation isn’t likely to be reduced by Parson, but how big the surplus is a year from now could be altered by more than $1 billion by what he does on all the other spending.
There is plenty of surplus to cover the budgeted spending, and then some. But cuts are still expected, and are sure to spark outrage.
“The governor is supposed to base his vetoes on a lack of money available,” said state Rep. Peter Merideth of St. Louis, ranking Democrat on the House Budget Committee. “I understand that they want to be cautious about revenue in future years, but leaving this kind of money on the bottom line is completely unprecedented.”
Parson vetoed 31 items last year. On 17 of those vetoes, the governor cited as a reason that the spending wasn’t included in his original budget plan.
Last year’s vetoes included 20 of the almost 70 earmarked items lawmakers inserted into the budget. This year’s spending plan has approximately 275 earmarked items, costing $1.1 billion, in amounts ranging from $8,000 to $50 million.
The smallest is for rifles for the Lone Jack Police Department. The largest is to fund improvements near Arrowhead Stadium in Kansas City in advance of the 2026 FIFA World Cup soccer tournament.
There are other items Parson did not recommend that have large price tags, including $300 million to build a new state psychiatric hospital in Kansas City and $171 million to boost the pay of personal service providers for people with developmental disabilities.
There’s plenty of money for the increases Parson sought and received as well as the items added by lawmakers, said Senate Appropriations Committee Chairman Lincoln Hough, R-Springfield.
“I would hope the governor wouldn’t veto things based on not being in his recommended budget,” Hough said.
Big items in this year’s budget include:
• $2.8 billion, with $1.4 billion from the general revenue surplus and $1.4 billion from bonds, to widen I-70 from Blue Springs to Wentzville.
• $233 million to fully fund public school transportation for the second consecutive year.
• $56 million to expand pre-kindergarten programs and $78 million to increase child care subsidy payments.
• Boosts to higher education, including a 7% increase in institutional funding, plus projects that include a veterinary diagnostic laboratory and a research slaughterhouse at the University of Missouri.
• $250 million to increase pay for direct care aides and $32 million to increase funding for area agencies on aging.
“The budget does not need to be a situation where if it wasn’t the governor’s idea, we shouldn’t do it,” Merideth said. “I understand if there is a problem with the line or saying we don’t have the money for this. But simply not liking which senator put it in and that you didn’t put it in isn’t good enough.”
On several items vetoed last year, Parson told lawmakers they had chosen the wrong fund, or that he believed the way the money was being spent was an intent to get around state purchasing laws.
Two of the items were vetoed because of possible constitutional conflicts with the prohibition on state grants or credit for private entities. That issue also could decide the fate of a proposed $8.5 million no-interest state loan to Magnitude 7 Metals to help pay for pollution controls at its Marston smelter.
“I am open to there being line items where there are problems,” Merideth said. “As long as there is an analysis, I understand that.”
The December revenue estimate projected total general revenue of just under $13.1 billion, a growth rate of 1.4%, in the current fiscal year. Growth was projected to slow to 0.7% in the year that begins Saturday.
Through Wednesday, revenues for the year have exceeded the projection by $36 million and will end the year with growth of about 2.5%. In the fiscal year that ended June 30, 2022, growth was close to 15%.
The general revenue portion of the budget before Parson is $16 billion.
“The governor and the General Assembly have been very efficient in managing the budget,” said Jim Moody, a lobbyist and former state budget director under Republican Gov. John Ashcroft. “In the short term it is manageable, but it sure is sending some signals the game has changed.”
Income tax cuts that took effect Jan. 1, as well as swings in taxable income reported by wealthy taxpayers as investment returns change, have left income tax collections flat for the year. Sales tax collections, measuring greater spending from higher wages as well as inflation, have grown 6.7%, while corporate income taxes, which measure the profits of large industries, have grown 15%.
Parson has another tax cut on his desk – exempting all Social Security income from taxation – with a projected annual revenue reduction of $318 million.
The surplus started growing during fiscal 2021 when the state found ways to use federal COVID-19 relief funds in place of general revenue spending. At the end of May, the general revenue fund held $5.9 billion — $1.5 billion more than the balance a year ago and more than 10 times the balance on May 31, 2020.
Federal relief has contributed to the surplus in other ways, both directly by increasing support for programs like Medicaid and indirectly by boosting personal spending on taxable goods.
Those extra federal funds from direct aid have been shuffled to accounts that hold $1.9 billion and can be spent like general revenue.
Moody said he expects revenue to decline in the coming year as tax changes already in the law are implemented. Some small business owners will pay tax bills as much as 20% lower for 2023 than they did on the same income in 2021, he said.
“I don’t think we have come close to seeing the true impact of the tax cuts that have occurred,” Moody said.
The trend toward slower growth was clear as the budget was being crafted, Hough said. The 275 earmarked appropriations are unlikely to be repeated.
“I said that to the senators and representatives and everyone else parading through my office this year asking me to do this, or do that, for them,” Hough said. “I told every single person that walked through the door that this is not normal, don’t get used to this.”
