General Fund receipts rose 3.9 percent in June Road Fund receipts rose 3.6 percent in June Preliminary fiscal year-end results

The Office of State Budget Director reported today that Kentucky’s General Fund receipts rose for the eighth consecutive year while the Road Fund grew for the second consecutive year. For the fiscal year that ended June 30, 2018 (FY18), General Fund receipts totaled $10,838.2 million or 3.4 percent more than FY17 collections. Final FY18 General Fund revenues were $119.8 million, or 1.1 percent, more than the revised official revenue estimate which projected 2.3 percent growth. For June, General Fund collections rose 3.9 percent on the strength of the major revenue sources, sales and use and individual income taxes. Total June collections exceeded their prior year level by $41.0 million. Sales and use receipts accounted for $26.0 million of the total increase while individual income tax receipts increased $53.4 million.

State Budget Director John Chilton noted that General Fund collections rebounded from a poor May on the strength of the economy and our two largest taxes. “The sales tax and the individual income tax were particularly strong in June, both signs that the Kentucky economy is solid heading into FY19. The individual income tax account grew 13.6 percent in June, indicating that payroll growth is robust and business owners expect a profitable year. June’s sales tax growth of 8.8 percent suggests that consumer confidence is on the rise and Kentuckians are making more taxable purchases. General Fund collections exceeded the budgeted estimates by $119.8 million, but challenges remain on the expenditure side due to cost pressures from public pensions, corrections, and Medicaid. A full FY 2018 budgetary update will be available later this month as we continue the official closeout.”

Revenue collections were strong throughout the year as the rate of growth of receipts strengthened through the first three quarters before falling slightly in the fourth quarter. Growth rates for the four quarters were 2.9 percent, 3.2 percent, 5.3 percent and 2.6 percent.

A summary of General Fund collections for FY18 and FY17 is shown in Table 1.

Individual Income Tax:
Individual income tax receipts posted the largest increase over FY17 levels, growing by $209.7 million. Three of the four components of the tax increased in FY18. Withholding collections rose $135.0 million, or 3.3 percent, while estimated payments grew by $75.0 million and Fiduciary receipts closed the year up $1.9 million. Net returns were down for the year, declining $2.2 million. Quarterly growth rates for the individual income tax were 3.0 percent, 4.2 percent, 8.9 percent and 3.7 percent.

Sales and Use Taxes:
Sales and use tax was the only other account to increase by more than $100 million over FY17 levels. Receipts grew $120.4 million, or 3.5 percent, in FY18. Collections in this account have grown for five consecutive years and bounced back from a lackluster FY17 when collections rose only 0.7 percent. Receipts were tepid in Q1 but strengthened for the remaining three quarters of the fiscal year. Quarterly growth rates were 0.8 percent, 4.7 percent, 5.0 percent and 3.4 percent.

Tobacco Taxes:
Cigarette tax receipts declined 4.3 percent, or $9.5 million, in FY18. Fiscal Year 2018 marks the seventh time in the past eight years in which receipts have fallen as national smoking rates decline. Quarterly growth rates in this account were -3.7 percent, -6.2 percent, -4.2 percent and -3.2 percent. Cigarette tax receipts should increase sharply in the new year as the 50-cent increase for each pack of cigarettes is implemented, increasing the per-pack rate from $0.60 to $1.10.

Business Taxes:
Corporation income tax collections grew $13.9 million compared to last year. This is the first annual increase in this account since FY15 when receipts increased 11.2 percent. This account exhibited large fluctuations across the four quarters with growth rates of 12.6 percent, -10.0 percent, 43.5 percent and -0.6 percent.

The limited liability entity tax (LLET) continued its long-run pattern of alternating growth years with declines in revenue. Collections were down 3.0 percent, or $7.5 million, for the year. Growth rates for the four quarters were 16.9 percent, 3.5 percent, -31.0 percent and 0.0 percent. Taken in combination with the corporation income tax, business tax collections grew at a pace very close to the estimated total.

Coal Severance Taxes:
Coal severance tax collections declined for the sixth consecutive year and reached an all-time low of $89.6 million. The decline has been dramatic considering this account reached an all-time high in FY12 with collections of $298.3 million. Receipts seemed to have stopped their slide in the final half of FY17 and the first quarter of this year where collections were positive, but sharp declines in the final three quarters of FY18 ensured another annual drop in receipts. Quarterly growth rates for this account were 5.9 percent, -18.4 percent, -18.5 percent and -10.3 percent.

Property Taxes:
Property tax receipts increased 3.2 percent, or $19.2 million, in FY18. Property tax collections have now grown in ten of the past eleven years. Tangible and real property components were the primary drivers of the increase. Together, they accounted for an increase of $19.3 million. Growth rates for the four quarters were 2.5 percent, 5.9 percent, -1.3 percent and -0.9 percent.

Lottery and Other Revenues:
Collections from the Kentucky Lottery Corporation grew $11.4 million, or 4.7 percent. The Lottery dividend was $10.0 million over the budgeted estimate on the strength of draw games and strong instant lottery sales. The “other” category, which includes multiple other taxes and fees such as investment income, bank franchise taxes, and insurance premium taxes increased 2.0 percent or $13.6 million. Quarterly growth rates for the “Other” account were 7.5 percent, 0.9 percent, 5.2 percent and -6.5 percent.

Table 2 compares General Fund collections to the official revenue forecast. Actual receipts were $119.8 million or 1.1 percent more than the official estimate.

For the year, three accounts were below estimated totals while six exceeded forecasted values. The errors ranged from -$47.2 million to $94.6 million. All of the revenue sources were near budgeted levels either in percentage or dollar terms. The LLET estimate was off the estimate by either measure; however, the corporation income tax and the LLET were estimated as a single number this year and that estimate was within $4.7 million, or 0.6 percent, of the forecasted total. While the individual income tax estimate was off the estimated total by $94.6 million, it was within 2.1 percent of the mark.

Sales and use tax receipts were spot on, missing the estimate by 0.2 percent or $6.2 million. The individual income tax exceeded the forecasted level by $94.6 million, or 2.1 percent. Corporation income tax receipts were forecasted with the LLET tax and exceeded budgeted levels by $4.7 million. Cigarette taxes were below the estimate by $2.5 million. The coal severance tax was $1.1 million percent above the official estimate while property taxes were 2.2 percent more than forecasted. Lottery receipts exceeded the official forecast by $10.0 million while all other taxes were 0.7 percent above the official estimate.

Road Fund
Road Fund revenues were stagnant again in FY18 as receipts totaled $1,511.0 million, an increase of 0.2 percent from the previous fiscal year. The past four years have seen revenues either fall or grow at negligible rates. Growth rates since FY15 have been -2.2 percent, -2.9 percent, 1.7 percent and 0.2 percent. Total FY18 receipts were $3.0 million more than FY17 levels as none of the major accounts saw significant growth. Motor vehicle usage and motor fuels tax collections together decreased $2.3 million. On net, the five remaining accounts increased $5.3 million compared to FY17 levels.

Total Road Fund collections declined in each of the first three quarters before growing in the final three months. Growth rates for the four quarters were -0.5 percent, -0.3 percent, -1.7 percent and 3.2 percent.

Details of Road Fund collections for FY18 and FY17 are shown in Table 3.

Motor fuels tax receipts were essentially unchanged, growing only 0.6 percent in FY18. The current tax rate on motor fuels has been in place since the fourth quarter of FY15 and, coupled with little to no change in consumption, receipts in this account have been flat. Quarterly growth rates for motor fuels taxes were 0.1 percent, -1.2 percent, 2.6 percent and 1.0 percent.

Motor vehicle usage taxes fell for only the second time in the past eight years in FY18. Collections were $6.7 million, or 1.3 percent, below prior year totals. Growth rates for the four quarters were -4.4 percent, 2.4 percent, -4.7 percent and 2.0 percent.

Motor vehicle license receipts grew 0.8 percent while motor vehicle operators’ receipts rose 4.2 percent. Investment income grew $1.3 million and “other” income rose $3.6 million.

Road Fund collections for FY18 exceeded the official consensus estimate by $7.7 million, or 0.5 percent, as shown in Table 4.

Five of the seven of the forecasted Road Fund accounts were above estimated levels with two below. In terms of forecast accuracy, five of the seven categories were within $1.0 million of their forecasted levels while the other two were within $4.0 million. Looking at the two largest accounts, motor fuels revenues came within 0.5 percent of their estimated level while motor vehicle usage collections missed the mark by 0.2 percent. As with the General Fund, the Road Fund ending balance for FY18 will be available later this month as we continue the official closeout.”

Year-end closing
In October 2017, the Consensus Forecasting Group (CFG) revised its official estimate of FY 2018 receipts that it had determined in December 2015. The October revised estimate (which was $155.6 million below the December 2015 official estimate) put cabinets on alert that a current-year budget reduction order was coming. The actual amount of the budget reduction order was determined by the official revision in December 2017. That estimate predicted receipts totaling $138.5 million less than the enacted estimate from December 2015. As a result, the Governor issued a budget reduction order that reduced budgeted spending by $138.5 million.

It is now clear that actual receipts for FY 2018 are higher than the CFG’s December 2017 revised official estimate (but lower than its December 2015 estimate).

The General Fund Surplus Expenditure Plan
2018 HB 200, the biennial budget bill, sets out the General Fund Surplus Expenditure Plan for the FY 2018 surplus. The surplus will first be used to pay FY 2018 authorized but unbudgeted

Necessary Government Expenses (NGEs). Then, the Office of State Budget Director will recommend to the Secretary of the Finance and Administration Cabinet that the remaining surplus funds be carried forward in the General Fund Surplus Account, making those funds available to offset NGEs that may arise next year.

The Legislature appropriately allows unbudgeted expenditures to cover unforeseen overruns of important basic governmental services that are difficult to predict – corrections, fire suppression, etc. In the last two fiscal years, NGEs have exceeded $80 million each year.

For Fiscal Years 2019 and 2020, the Legislature has wisely increased budgeted appropriations in the areas that, in the past, have resulted in unbudgeted NGE charges to the Budget Reserve Trust Fund (NGEs). Based on prior year spending levels, OSBD expects NGEs to be much less than $80 million.

It is important to note that the budget reductions imposed in the December 2017 Budget Reduction Order are unaffected by the Plan. [KRS 48.130(7) would have required the restoration of December 2017 budget reductions but both 2016 HB 303 and 2018 HB 200 removed that directive by specifically overriding that statutory requirement.]

The net effect of the FY 2018 Surplus Expenditure Plan is that the Budget Reserve Trust Fund (the “Rainy Day Fund”) will not be reduced by FY 2018 NGEs and any remaining funds will carry forward to offset NGEs that arise in FY 2019.

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