Missouri’s budget faces a fiscal cliff by mid-2028 when accumulated surpluses will be depleted, state Auditor Scott Fitzpatrick said in a report released Monday analyzing spending trends since 2000.
The report, following soon after revenue projections estimating general revenue will be $400 million less than expected, warns that a recession could deplete the surplus even faster, by the end of fiscal 2027.
“The time is now to make the tough decisions that will prevent drastic, emergency budget cuts from being necessary in the months and years ahead,” Fitzpatrick said in a news release.
Fitzpatrick, the auditor since 2023, was previously chairman of the House Budget Committee. When he was a lawmaker, from 2013 to 2019, state revenues were tight and often subject to large cuts when growth was sluggish.
Few current legislators have experienced shrinking budgets, Fitzpatrick said.
“Many current legislators have only been in office during these last few years during which strong economic growth and a huge influx of federal money have made hard budget decisions unnecessary,” Fitzpatrick said. “But they’re about to face the challenge of crafting a budget in the face of slowing revenue growth and reduced federal funding.“
Gov. Mike Kehoe on Jan. 13 will deliver his budget proposal for fiscal 2027. When he released the reduced revenue estimate on Dec. 17, Kehoe warned of a tight budget coming and a need to limit new spending.
There will be upward pressure on the general revenue fund from changes to shared federal programs and spending from soon-to-be-depleted funds that substitute for general revenue. At the same time, the estimate shows, there will be downward pressure on revenues due to the bill eliminating the state income tax on capital gains pushed through by Republicans in Missouri and changes to the federal tax code pushed through by Republicans in Congress.
The budget for fiscal 2026, which ends on June 30, projects general revenue spending on state operations at $15 billion, with another $725 million appropriated for building projects. General revenue receipts for the year should be about $13.15 billion, a decline of 2.1% over fiscal 2025, according to the estimate released Dec. 17.
If the estimate is correct, it would be the fourth consecutive year when state revenues lag behind inflation and the first time revenues have declined year-over-year outside of a recession or COVID-impacted fiscal 2020.
Previous estimates had projected revenue growth for the year.
The Dec. 17 estimate forecasts growing revenues in the coming budget year, and Fitzpatrick used the 25-year average of year-over-year growth to project further.
Fitzpatrick said if lawmakers add nothing to the current budget for three years, and the revenue estimate is accurate, the general revenue fund balance, which reached a record $5.8 billion on June 30, 2023, will be depleted before fiscal 2028 ends on June 30, 2028.
The general revenue fund balance was $3.4 billion at the end of November. The state will be about $370 million short in fiscal 2028, Fitzpatrick’s report projects.
If a recession hits and Missouri experiences a repetition of the worst decline this century, Fitzpatrick said, the balance will be depleted as much as a year earlier. The gap between revenue and spending could reach $3.8 billion, the report states.
“Economic trends are unpredictable and we need to make sure Missouri is ready to face any challenge,” he said.
Spending has exceeded revenues in each year since fiscal 2023, with the surplus providing the difference. The surplus was accumulated by replacing state funds with federal COVID-19 pandemic aid and year-over-year revenue windfalls due to inflation and rapid wage growth.
In a statement issued Monday afternoon, House Budget Committee Chairman Dirk Deaton, a Republican from Noel, said Fitzpatrick’s projection is not surprising.
“His analysis confirms what I have said both in private and public comments over the past year about the long-term condition of the state budget,” Deaton said. “Specifically, the concern about a structural deficit created when ongoing general revenue spending exceeds what the state collects within a given fiscal year.”
Keeping spending flat into future years will be difficult. This year’s state budget includes about $1.2 billion in spending from non-general revenue funds that will be depleted at the end of the fiscal year. Department budget requests have identified about $1 billion in spending in just a handful of large items that must come from general revenue for programs to continue at their current level.
“There are certainly significant mandatory increases that we’re going to have to deal with,” state Budget Director Dan Haug said in an interview with The Independent earlier this month.
Fitzpatrick’s report notes that Missouri has a budget reserve fund holding about $900 million but that it cannot be used to cover shortfalls except in an emergency.
The report does not address whether other funds, holding about $2.5 billion for major projects, should be recaptured for general revenue. It also does not estimate the potential impact of future tax cuts in law and being proposed.
Ongoing expenses have increased for public education, increased payments to medical and mental health providers and state employee payrolls. The budget has also been increased by lawmakers sprinkling hundreds of millions in earmarked projects into spending bills to fund local needs or help favored organizations.
State lawmakers asked by The Independent about the budget said they expect cuts in a number of programs when Kehoe presents his plan.
State Rep. Jeff Vernetti, a Republican from Camdenton on the House Budget Committee, said decreasing revenues will force spending reductions.
“I think every single department across the state, every single area, needs to be looked at so that Missouri can not have a crisis on its hands.”
State Rep. Betsy Fogle of Springfield, the ranking Democrat on the House Budget Committee, said Republicans are facing the impact of policies that put tax cuts ahead of state obligations.
The capital gains tax cut will reduce revenue by $500 million but Republicans, when it passed, insisted it was closer to $110 million annually.
“I do not understand how they think outcomes in this state will change when they continue to blow holes in our budget through things like the elimination of the capital gains tax,” Fogle said.
State Sen. Maggie Nurrenbern, a Kansas City Democrat on the Senate Appropriations Committee, echoed Fogle’s criticism of GOP tax policies. Additional costly tax cuts for top earners are already in state law, she said.
“Because of the decisions of Republican politicians to give tax cuts to the most wealthy, fundamental state services are going to suffer,” Nurrenbern said.
Reducing ongoing programs now will protect future budgets from cuts, Fitzpatrick said in the news release.
“The longer Missouri waits to take action,” Fitzpatrick said, “the harder this exercise will become.”
