Major legislative issues await next governor

The turbulent 2010 legislative session that ended at midnight Thursday was a mere preview of the storm that lies ahead for state leaders.

Lawmakers passed a plan this session to fund transportation improvements, approved tough water conservation standards and property assessment reform, and cut spending to balance a shriveled budget.

But the state’s financial picture may only get worse, the lottery-funded HOPE scholarship program is sliding toward financial ruin and lawmakers are pledging to rewrite tax laws, most likely to begin taxing services on everything from haircuts to legal services.

Those are the issues that will confront the next governor and lawmakers after the November elections.

“We have some major, major issues that await us,” said Lt. Gov. Casey Cagle, who is hoping to win another four-year term this year.

All three issues — state finances, taxes and the HOPE program — will be front and center in this year’s campaign season. Voters will pick a new governor and all 236 legislative seats are up for grabs. State money issues are bound to be debated in every race.

The first problem — the shrinking budget — is a now familiar one for state officials. State finances have been in a near free-fall for two years.

Georgia’s budget — which funds schools, health programs, parks, prisons and a host of services — relies heavily on income and sales taxes that dropped dramatically during the recession.

The state budget lawmakers approved this time two years ago was $21 billion. The state budget lawmakers just approved for the upcoming year was $17.9 billion.

Lawmakers have cut spending in every area. Some state agencies, such as the Department of Agriculture and Department of Natural Resources, are smaller than they were in 2003.

K-12 schools and colleges have lost more than $1 billion in state funding during the recession. That will play out in the coming year in more teacher furloughs and layoffs in local school districts and in markedly higher tuition at state universities and colleges.

While the economy is showing signs of improvement, it usually takes a year or so for governments to make up significant financial ground.

But more importantly for the state, its budget is currently propped up with more than $1 billion in federal stimulus money, along with hundreds of millions of dollars more in one-time income or savings.

That won’t be available to the next governor and General Assembly. So lawmakers will consider another round of deep spending cuts, even as school and health care program enrollments grow.

It’s a problem state leaders have known was coming in 2011, but largely haven’t addressed. Instead, lawmakers this session approved legislation to gradually eliminate the tiny state property tax and income taxes on upper-income retirees, two moves that will cost the state $387 million by 2016 when they are fully phased in.

“We have not dealt with the fundamental issues,” said Alan Essig, executive director of the Atlanta-based Georgia Budget and Policy Institute. “Either we permanently cut the budget by another $1 billion to $1.5 billion, or we raise revenue by another $1 billion, $1.5 billion.”

While Essig’s group has advocated raising taxes and fees and targeted spending cuts, some conservatives welcome the chance to permanently downsize state government.

Cagle wants the state to consider consolidating government agencies, selling off property and renegotiating leases.

A task force he put together recommended freezing longevity raises for teachers and slashing state jobs. Republican gubernatorial candidate Karen Handel, a former secretary of state, has called for cutting 7,800 state jobs.

Republican leaders have made it clear that a broad tax increase — such as a hike in income or state sales taxes — is out of the question.

But changes in the taxes people pay are in the offing. A commission will spend the rest of the year putting together a proposal to rewrite the state’s tax system. Lawmakers are supposed to vote on that plan early next year.

The commission will almost certainly consider putting the state’s 4 percent sales tax back on all groceries, and it will look at taxing most services people use.

The big question is what the trade-off will be. With a Republican-dominated commission, the panel will recommend cutting some taxes if they want to charge the sales tax on more goods and services. Some lawmakers favor cutting property taxes with the additional sales tax money. Others support lower income taxes.

Agreeing to a new tax system and getting it passed into law will be a monumental task. But fixing the ultra-popular HOPE scholarship program may be even more difficult politically.

HOPE provides full tuition and book and fee money to college students who maintain at least a B average. It has long been considered the third rail of Georgia politics. Mess with it and get scorched.

HOPE and pre-kindergarten classes are funded by lottery proceeds. Although Georgia’s lottery is considered one of the most successful in the country, its revenues can’t keep up with the growth in the cost of the programs.

Lawmakers hoped they had fixed the program’s financial woes in 2004 by tightening up qualifications for HOPE and making some other tweaks.

But this year, for the first time, lottery revenue won’t generate enough to pay for the programs and state officials will have to dip into a $1 billion reserve fund.

“We’re projecting we will go into the red, probably in a pretty significant way,” said Tim Connell, who runs the Georgia Student Finance Commission. In the upcoming fiscal year, education revenue from ticket sales could be more than $200 million short of expenses.

Next summer, students who receive HOPE will see their book allowances cut in half from $300 to $150.

Connell and his staff are working on some options and hope to have some recommendations ready for the next governor.

Every time the Board of Regents raises university tuition, HOPE takes a major hit because the program pays the full tuition of eligible students. So, if tuition goes from $3,000 a semester to $3,500, the cost of each HOPE scholarship increases $500.

One proposal would make HOPE a grant program. Eligible students would get a flat amount each year — say, $6,000 — rather than a scholarship that increases each year, based on the cost of tuition.

Lawmakers may also consider eliminating book and fee allowances, or re-instituting parental income limits for eligible students. At first, the scholarship only went to students whose parents earned no more than $66,000 a year. Then that cap was expanded to students with parents earning less than $100,000. With lottery tickets more popular than expected, the income cap was eventually removed.

“We are looking at structural change,” Connell said. “We need to do something pretty soon.”

Lawmakers spent much of the 2010 session talking about how they had to make tough choices, mostly about the state’s failing financial health. But some legislators argue the General Assembly didn’t do enough this year about the state’s problems.

“It’s going to be a rough period coming up,” Sen. Doug Stoner (D-Smyrna) said.