Delicate Dance for Economists Forecasting Against Dizzying Federal Spending, Impending Rate Hikes, Inflation, and a Schizophrenic Stock Market
Both men’s cell phone texts are so backed up by 8 a.m., it takes a day to dig out. Both get swallowed whole by a 45-day menagerie of meetings, hallway huddles and committee hearings, carrying extra weight as the days erase. Even so, both concede the demands on their time make sense. After all, Jerry Stevenson and Brad Last are tasked to run point as chairmen of the Executive Appropriations Committee, dividing Utah’s multi-billion-dollar public purse — crowning winners and consoling losers — in an annual budget slog more complex than most Utahns likely realize.
Beyond simply taking cues from leadership or lobbyists and winnowing down wish lists from individual committees, Executive Appropriations is simultaneously engaged in a delicate dance with fiscal analysts, trying to forecast real revenue for prudent policy amid forces often outside their control.
Consider the Fed, and how its talk about raising interest rates to combat inflation could upend existing economic modeling. What about the chaotic stock market? And how long will the artificial infusion of federal pandemic spending, like funnel cakes fed to states on state fair sugar highs, take to work its way out of our system?
“That’s a huge challenge for the economists,” says Rep. Brad Last, R-Hurricane and House chair of the Executive Appropriations Committee. “The pressure is on them. Once they give us our number, then it’s on us. How are we going to allocate the revenue they tell us we have?”
‘It’s Just Really Kind Of A Crazy Year’
As the calendar flipped from January to February, tabulations were finalized for each legislative committee, according to Sen. Stevenson, R-Layton and Senate chair of the Executive Appropriations Committee.
“We have requests for just a little more than $2 billion,” Stevenson marvels. “It’s just really kind of a crazy year. We told the committees, ‘just take your requests and prioritize.’ Whatever the committee decides, we’ll take a look at.”
Problem is, legislators as a body have watched the combination of federal COVID-19 relief packages and soaring state tax revenues long enough to believe “we have bags of cash,” Stevenson says.
They’re only part wrong.
Back in November, the committee set aside $1 billion in one-time money along with $219 million in ongoing money. In December, it squirreled away another tidy $160 million for tax reform, lamenting then and since that it probably wasn’t enough.
Executive Appropriations “paid a lot of money forward,” Stevenson explains, pointing to a 2.5 percent bump in employee compensation, a fund to pay for the new prison bonds, as well as budget to combat future wildfires.
And yet, what the money men earmarked, mostly from federal surplus, was “inadequate,” Stevenson says. He points to still greater needs in things like education and employee compensation given the competitiveness in the job market fueled by a pandemic-frenzied private sector.
The Governor’s Office would like to see the Legislature allocate an additional 3.5 percent in employee compensation, raising the total pay hike to 6 percent, especially for employees who are under market.
“We’re in a very tight job market and we want to keep our best employees,” says Last, noting Utah Highway Patrol staffing is a big challenge. “We’re hearing a lot about frontline workers.”
Last says his approach on Executive Appropriations is to “let the body guide us” but is quick to add that his fellow lawmakers must prioritize.
“We have to make some judgements between the individual committees about what’s best for the citizens and the state of Utah,” he adds.
Ultimately, Last and Stevenson will sit in a room with their vice chairs and staff to review each section of the budget, “based on all the conversations we’ve had with lobbyists and other advocates,” Last explains.
But even then, Executive Appropriations must wait for concrete revenue numbers, delivered later this month from the state’s fiscal analysts before any budget can be set.
“There’s some pretty big things out there,” Stevenson explains, “so a lot of those (committee) requests are going to go by the wayside.”
‘The Wet Blanket in the Room’
Democrats on Capitol Hill have a legitimate argument that the super-majorities Republicans enjoy, combined with a lengthy GOP streak of controlling the Governor’s Mansion, make for lopsided state government.
But that hegemony across the branches has an upside, according to Sophia DiCaro, Executive Director of the Governor’s Office of Planning and Budget.
“We have a stability in politics in that we don’t fluctuate back and forth,” DiCaro says. “Whereas in some states you just swing back and forth from Democrat-Republican, Democrat-Republican. Here, the process remains stagnant.”
That means there is typically consensus in Utah between the executive branch and legislative branch regarding revenue projections compared to so-called purple states where politicians often wildly disagree.
Legislative leadership and the Executive Appropriations Committee rely on legislative fiscal analysts, economists with the Governor’s Office of Planning and Budget, and the Utah State Tax Commission for revenue modeling and projections to guide their budgeting.
State leaders are required to balance the budget under the Utah Constitution. The economists are also apolitical and conservative in nature, notes DiCaro, who jokes her office gets labeled “the wet blanket in the room.”
“We all get together every quarter and hash out all the details,” DiCaro adds. “Everyone will come to the table with their own analysis. Then, we just go through and compare spreadsheets.”
COVID-19, and the related federal spending, has presented a unique challenge for the state’s teams of economists on the executive and legislative side.
“It’s been an artificial injection of money that’s a one-time thing,” DiCaro says. “It’s a transitory thing that is going to leave the economy. That’s what we get nervous about…when that leaves and what the effects will be?”
During the session, Stevenson and Last meet with DiCaro once a week to analyze economic indicators and revenue trends. But Last worries about systemic economic problems that seem to be coalescing at once.
“The real pressure is on the economists that work for us, that work for the governor, that work for the tax commission,” Last says. “Right now, there is a lot of risk in the economy. You’re starting to see a lot of volatility in the stock market; interest rates are going to go up; we’ve got really high inflation.”
At the same time, Last praised the economists’ performance over the past several years, noting their conservative estimates resulted in some small surpluses for the state.
“They use the very best modeling tools that they have and they try to account for the risk,” he notes. “I have confidence in the work they do and the numbers they give us.”
The challenge for the economists, which will dictate the state’s fiscal budget, is to sort through the three economic pressure points with an eye on calculating the impact the pandemic spending has played so they can make accurate assessments.
“The state is in such good shape — we’re not borrowed to the hilt,” Stevenson says. “But if we get a little kick in interest rates, it will level off really fast.”
Stevenson predicts real estate sell offs, and even home price drops, to get rid of inventory should there be a significant rate hike. “And if they don’t get what they want with a half-point hike, they will hike another half.”
Suddenly in that scenario, the spending spigot on Utah’s Capitol Hill could trail off to a trickle.
‘Lots of Tax Bills’
Last year, Congress passed President Joe Biden’s $1.9 trillion COVID-19 relief bill, named the American Rescue Plan, without a single Republican vote. Now, red states, including Utah, are using the cash to fund regressive tax cuts.
In November, a federal judge in Alabama ruled in favor of Republican attorneys general in 13 states that sued because the COVID-19 relief bill barred states from using the relief money to offset tax cuts. The ruling found that the prohibition was too vague and “a federal invasion of state sovereignty.”
Soon after, Executive Appropriations in Utah designated $160 million in the relief funding to be used for tax cuts.
“The $160 million is something we will do for sure, but we could do more,” Last predicts.
On cue, his fellow appropriations chairman says the amount will likely be raised — or in this case cut — by an additional $40 million. “We can find another tax package to get us up to $200 (million),” Stevenson says.
Debates are still raging over the food tax as well as whether the current level of income tax cut will survive or perhaps some type of earned-income tax credit. Last says the House has different opinions regarding the earned income tax credit, “so we will debate it.”
“I don’t know where this goes because there’s lot of tax bills out there,” Stevenson says.
Stevenson concedes chairing Executive Appropriations can be a relentless grind but he praised leadership along with the legislative and governor’s staff for being a “good little team,” and said it doesn’t hurt that Last is “a dear friend.”
“There’s a light at the end of the tunnel,” Stevenson says. “For the next few weeks, it might seem like a train coming, but then we’ll get through.”
In the remaining weeks of the session, Executive Appropriations will be on a dual track: making the difficult calls on specific committee requests while watching anxiously for final revenue numbers from the state’s economists. No matter where that number lands, Last doesn’t expect a repeat of when the state was so flush with federal funding that the consensus was to make “generational investments.”
“We realize this is a one-time opportunity,” he says, “but we also realize our children and grandchildren will probably end up paying back the debt.”
