Although the General Assembly is in adjournment this week, the third floor of the Capitol was still abuzz today as legislators began hearing from Governor Brian Kemp and other leaders from the Executive Branch on their budget proposals unveiled last week. Needless to say, with the proposed cuts of 4% and 6% for the current and prospective fiscal years, lawmakers lined the walls of the Appropriations Room in an effort to learn more about the spending propositions. Of most interest today were the first two presentations to the combined House and Senate Appropriations committees--an overview of State agency cost reduction efforts by Governor Kemp followed by a snapshot of Georgia’s economy for the coming months by State Fiscal Economist Jeffrey Dorfman, Ph.D. Details on each of these presentations inside today’s #GoldDomeReport.

In this Report:

• Governor Opens Hearings Touting State Agency Efficiency Efforts
• State Fiscal Economist Projects Slow Growth in Georgia

Governor Opens Hearings Touting State Agency Efficiency Efforts

As the Joint House and Senate Appropriations Committee convened for their first of three days of hearings on his Amended FY20 and FY21 state budget proposals, Governor Kemp opened testimony by calling for continued conservatism in budgeting and highlighting the innovative ways that State agencies rose to his call for budget reductions last year. Echoing last week’s State of the State address, Governor Kemp provided a simple reminder that, during his earlier life in construction, “he never had a project with an unlimited budget”, and the State does not have unlimited funds, either. With that in mind, his budget proposals were prepared with the goal of “reducing unnecessary costs of government” while improving the delivery of services to Georgians.

While last week’s State of the State address focused on specific policy goals and key budget priorities, Governor Kemp’s remarks this morning pulled back the curtain on how the budget proposals came into being. Specifically, Kemp touted the ways State agencies rose to his challenge to reduce discretionary spending by 4% in FY20 and 6% in FY21. For example, the Department of Community Supervision found $1.3 million in savings by implementing a virtual office system to reduce real estate and physical plant costs. The Department of Corrections saved $16 million in overtime through technology. Several other agencies realized cost savings through consolidating administrative functions and reducing duplication of effort. Among these, the Department of Natural Resources and Department of Community Affairs consolidated their historical preservation activities for a 25% savings on administrative costs. Governor Kemp thanked agency leaders for their creativity and focus on being good stewards of taxpayer resources.

Governor Kemp’s remarks this morning began the parade of Executive Branch leaders who will appear before the Joint Committee between now and Thursday to explain--and, in some cases, defend--the Governor’s budget proposals. Today, the Committee heard from the Departments of Revenue, Economic Development, Agriculture, Labor, Community Affairs, Transportation, Driver Services, and Natural Resources, as well as the Secretary of State, Public Service Commission, and the Georgia Forestry Commission. Tomorrow, the Committee will hear from Georgia’s criminal justice and education agencies before turning to health and human services on Thursday. A complete schedule of the hearings can be found here.

State Fiscal Economist Projects Slow Growth in Georgia

The State Fiscal Economist, Dr. Jeffrey Dorfman, followed Governor Kemp this morning and worked to portray a picture of Georgia’s economic situation that seems fairly positive.  He noted that 38 states have experienced recessions since the last national recession. In particular, Georgia has only had one such recession and that was in 2011 while Alaska has experienced six recessions.

Dr. Dorfman began by explaining the impact of international economy to our national and state economy and noted that there are six large economies in the world (US, China, Japan, Germany, United Kingdom, and France). These impact the United States and Georgia – particularly with trade and exports. Georgia is the 12th most trade dependent state in the country.

Dorfman explained that the manufacturing index in the United States has declined by around 12 percent. The service index has also been trending downward and only growing slightly around 1-2 percent. Retail sales, however, cannot really be explained in terms of trends. Household debt equates to disposable income and that number of household debt is going down (disposable income includes things such as student loans and car loans) with an average of 10 percent.

The United States and Georgia economy should be strong enough – unless as Dorfman pointed out – one of these takes a negative turn: the China trade war; a Germany and European recession; Brexit; the 2020 election; and the Middle East and oil markets.

The Georgia outlook, he noted, showed some positives. These included wage growth, although job growth is slow (only 1.4 percent); consumer sentiment has dropped; Georgia economy growth is slow with some added revenue but not as much as hoped.  Still, Dorfman predicts that Georgia’s tax collections, which have lagged, are likely to grow. Georgia has record employment, and the lowest recorded unemployment. 79 percent of recent plant openings in the state have taken place outside of metro Atlanta, and Georgia remains the number one state in the country to do business for the seventh year.

According to Dr. Dorfman, the state’s economy is “quite good” but the budget is tight.  Revenue is slow and retail sales are slow.  However, Georgia’s corporate tax is the “bright spot.”

Georgia’s 2018 income tax rate cut of 0.25 percent has been a hit to revenue of $500 million annually. TAVT (car tags) has also reduced state revenues by $170 million; that money has shifted to the county governments.

Dr. Dorfman reminded lawmakers that “priorities” are a part of the budgeting process.  Some of the areas of the budget, though, are on “auto pilot” – including growth in education and Medicaid.

The rainy day fund is at an all time high with $2.8 billion in reserves. This amount is 11 percent of the size of the state’s budget. He pointed out that, in 2007, the rainy day fund was 8 percent of the budget. He stressed that Georgia needed to remain prudent as this fund was the number one element which bond rating entities look at to provide AAA bond ratings which Georgia enjoys.

State funds per capita were also accented. Those were adjusted for population and inflation.  This remains a question as to whether to return funds to taxpayers.

There were a number of questions from lawmakers raised to Dr. Dorfman:

• Rep. Calvin Smyre (R-Columbus) inquired about discretionary items. Dr. Dorfman noted that one element is fully funding QBE and increases in Medicaid and land conservation.
• Rep. Lynn Smith (R-Newnan) asked about legislation passed which impacts discretionary spending. Dr. Dorfman reminded lawmakers that to reach the tipping point on this discretionary spending hinges in part on formulas passed by the General Assembly. He remarked that the cut proposed by Governor Kemp of four percent was a savings in the FY 2020 budget of $200 million. 80 percent of the budget though is on “auto pilot.”
• Rep. Jesse Petrea (R-Savannah) inquired about the rainy day fund of $2.8 billion.  He asked about how Georgia ranks nationally with its “fund.” Dr. Dorfman could not really provide a response but Georgia is likely near the top.
• Rep. Valencia Stovall (D-Forest Park) asked about the impact that the economy could feel with more jobs being automated. She had read one report and saw that 1.5 million jobs in Georgia could be impacted. Dorfman stated he was not worried about robots stealing jobs – he reminded lawmakers to look at agriculture where 1-2 percent of the population enjoyed jobs and many lost their jobs but found other jobs in other sectors.
• Rep. Sam Watson (R-Moultrie) inquired about trade dependency. Dr. Dorfman noted that the China trade agreement helps more soybean farmers in the state but there is an impact to Georgia pecan farmers. They have also opened up the Georgia poultry products and China needs our help due to problems with its pork industry. The US MCA agreement will help many Georgia farmers; however, that agreement will be hard on farmers who produce fruits and vegetables.
• Sen. Butch Miller (R-Gainesville) asked about consumer confidence.  He noted the “blip” in 2008 which was the beginning of the recession.
• Rep. James Beverly (D-Macon) asked about another reduction in the income tax. He asked in particular whether another income tax reduction is assumed in Governor Kemp’s budget; Dr. Dorfman said no it was not assumed in the FY 2021 Budget. If so, it would be a cost of $500 million.
• Sen. Steve Gooch (R-Dahlonega) asked about the hurricane damages to Georgia and when the state would see the recovery of the $2.5 billion. Dr. Dorfman indicated that the number of damages, $2.5 billion, was an accurate number. He explained that the state has not received all of the insurance and aid funding. Sen. Gooch followed with additional questions on unemployment and whether Georgia had reached its capacity and what it could do – whether to decrease the tax rate or something else. Dr. Dorfman indicated that Georgia could best be helped by funding education; that would be the smartest thing as it pays for itself. Also, he encouraged investment in infrastructure such as Hartsfield-Jackson and airports in Savannah and Albany as well as making repairs to interstates and added changes in the ports. Georgia could also grow its population and get companies to move to the state; however, lowering the income tax rate will not “move the bar.” Rather, making changes to Georgia’s permitting process would be helpful to encourage business to move.
• Rep. Mike Cheokas (R-Americus) asked about the marketplace facilitator legislation to capture more internet sales taxes.  Dr. Dorfman told the Committee that the General Assembly should encourage this bill’s passage and make it effective next week.  This bill could generate $120 million in the economy annually; for every month not being captured, it would be a $10 million loss.
• Rep. Clay Pirkle (R-Ashburn) asked about unemployment and what the “declining participation rate” is and whether Georgia is running out of workers to work.  Participation rate is going down more and men have higher numbers than women; he noted that it could be in part individuals who have left the workforce due to chronic pain.
• Sen. Marty Harbin (R-Tyrone) asked about what factors indicate a recession.  Dr. Dorfman stated he did not state Georgia was entering a recession; the last recession saw a decline over 1 ½ -2 years prior of home sales. There, however, is no government rule or definition of recession and economists generally look at whether the economy is shrinking over a six-month period (such as in areas of consumer spending and consumer confidence). Georgia is not close to a recession unless there is a large international event.
• Rep. David Knight (R-Griffin) inquired about “discretionary” funding.  He reminded everyone that Georgia’s entire budget was discretionary as the General Assembly decides the funding.
• Rep. Tom Kirby (R-Loganville) asked about per capita funding and whether the numbers were correct. Dr. Dorfman stated that those were the Governor’s numbers; thus, they are correct.
• Sen. Larry Walker (R-Perry) asked about the changes to federal tax law and itemization and standard deductions. Dr. Dorfman indicated that Georgia was smart in phasing in the income tax rate cut; it avoided a windfall.  He stressed that the state does not need another quarter point cut. He further stated that employees do not see the tax cut due to the effective date of January 1 and that is when those who have insurance see changes in the employee costs of health insurance.