|Capitol Pic of the Day|
Federal Funds Backdrop
Take a look at this interactive fiscal impact barometer by Brookings, specifically, the Federal Spending by Category shown here. As mandatory spending and interest payments from borrowing go up, discretionary spending trends down. Over the upcoming years, fewer discretionary dollars will be available for areas like military, education and transportation (see purple box below). The real point of pain comes as the top line (discretionary spending) intersects with the other lines (Health, SS & Interest). That is only about 10-15 years away!
To get a better idea of what mandatory spending pays for and what discretionary spending pays for, and how the federal budget works, take a look at the graphic below. Additional detail found here.
About 26% of our total state budget comes from federal dollars (see below). Due to the uncertainty of the federal spending trend and the recent display of inaction by Congress in addressing budget issues, Utah has taken proactive measures to keep the state in a position of strength, long term.
That being said, this is the backdrop against why the state behaves cautiously when accepting federal dollars. This may explain why Utah's Federal Funds Commission has developed a Federal Funds Risk Model that will help us assess vulnerable areas of our budget and ways we can mitigate the risk of losing certain pots of federal money.
These graphs depict last year's budget (FY15/16), since our new revenue estimates aren't expected until mid-February. Nonetheless, it helps us see the overall picture. The largest three funding sources are General Fund, Education Fund, and Federal Funds and most of that goes to education and social services.
When we look at the state budget, we speak about it in two contexts. One is in the context of our total budget, which includes outside sources like federal dollars (reflected above). The other is in the context of what we call "state dollars." When you hear about having a surplus or a deficit in our state budget in the news, they are referencing our state funds. State funds are primarily General Fund (source=sales taxes) and Education Fund (source=income taxes). Education Fund, or your income taxes, may only be used for education, while General Fund is more flexible and may be used at our discretion. Below, you can see that the bulk of our state dollars go toward education.
While the Education Fund had a surplus in the last quarter and has trended up, our General Fund is trending downward. So while it appears to be a good budget year, it is actually a challenging one when it comes to the money available to fund non-education related requests. Additionally, our appropriations chair informed us that certain economic indicators like severance taxes and capital gains are trending down. This is suspected to be an early indicator of an upcoming recession.
On that somber note, let's conclude with a positive note. Utah consistently takes a proactive approach in preparing for challenging economic times. I expect this principle to drive much of the policy decisions we make during this session. While it won't make some groups happy this year, it is the right approach to help position the state in a positive direction in the future.