By Bobby Harrison

Daily Journal Jackson Bureau

JACKSON - The estimate of how much revenue the state will have for each upcoming fiscal year is not a number pulled out of thin air.

Instead, it is based on a consensus of five experts who make a recommendation during a joint meeting of legislative leaders and the governor. The meeting is the only time that members of the legislative branch and the head of the executive branch meet together in an official capacity to make a decision.

That meeting is scheduled for 9 a.m. Oct. 24. At that time, Gov. Ronnie Musgrove and the 14 members of the Joint Legislative Budget Committee will agree on the estimated amount of revenue the state will take in during fiscal year 2002 (July 1, 2001-June 30, 2002). That number will be the figure the Legislature uses during the upcoming session when budgeting for the various state services from the public schools and universities, to the Highway Patrol to the state parks.

The governor and legislative leaders do not have to take the recommendation of the five experts, but in most cases they do. The legislative leaders also can come back at a later date and change the estimate. But normally, they try to base their decisions on the recommendations of the five experts.

State revenue comes from various sources. Income taxes, sales taxes, corporate taxes and casino taxes are some of the bigger sources of revenue to operate the state's $3.6 billion general fund.

First step

"Typically when people talk about budgets, they think about spending," said Lee Lindell, director of the Legislative Budget Committee staff. "But estimating a revenue number is really the starting point for putting together a budget."

Before the governor and legislative leaders can meet Oct. 24 to officially adopt a revenue estimate, the five experts must do their work. Their work could be described as the equivalent of trying to hit the bull's eye blindfolded and as secretive as the method used to select a pope.

"We are sort of like the College of Cardinals," joked state Treasurer Marshall Bennett, who is one of the experts. "Each of us is a prince."

But Bennett and the other members of the group that provide a revenue recommendation say there is a method to their madness. That method is based on knowing the state tax system, studying trends and making informed guesses on what is going to happen up to 18 months in advance.

"You can never be exactly right," said Phil Pepper, the state's chief economist and a member of the group. "But what you try to do is be over and under (the actual revenue collections) an equal number of times and try to always be close."

In the decade of the 1990s, the group has estimated on the conservative side. Revenue consistently has come in substantially above the estimate of the group.

That is until this past year. Revenue grew by only 2.8 percent during the fiscal year that ended June 30. The official revenue estimate was for a 4.7 percent growth rate over the previous year.

That slower than expected growth is causing the crux of the budgeting problems state leaders currently are facing. Because the Legislature, by law, only appropriates 98 percent of the estimated revenue, no cuts were made this past year.

But continual slow growth this year and the residual effects of the slow growth last year are affecting the budget for the current fiscal year and the budgeting efforts for the upcoming fiscal year.

Because of the slow growth last year, the surplus was smaller than anticipated, resulting in less money to start with in the current budget year.

The current budget situation means the work of the group that provides the revenue estimate to the governor and legislative leaders will be particularly crucial in the coming weeks.

"We just need a good, honest projection," said House Ways and Means Committee Chairman Billy McCoy, D-Rienzi. "I think that's what we have gotten in the past and what we will get this year. ... We don't need them (experts) to give us a figure that is too liberal or too pessimistic or conservative. One is just about as bad as the other."

Unforeseen growth

To a certain extent, it could be argued that the unprecedented growth in the 1990s is playing havoc with the budget this year. During most of the 1990s, revenue came in at a much greater rate than the projections.

Legislators began to use the surplus money for recurring expenses. But when the surpluses ended this year because growth did not meet projections, that helped fuel the current budget crunch.

Pepper, the state's chief economist, admitted the group never fully appreciated the full impact of gambling on state revenue. Gambling, including new businesses created by gambling and massive increases in construction, helped fuel much of that growth.

Now that the gambling market has matured, the growth is continuing but not in the explosive rate as in the past. And in the mid-1990s, Pepper said manufacturing employment "turned down and continues to head downward."

Those are the issues that the estimating committee will have to deal with as they begin their work this week.

Lester Herrington, deputy tax commissioner, who participates in the hearings with Tax Commission Chairman Ed Buelow, said each of the five entities brings a different area of expertise to the table.

Herrington said the Tax Commission informs the group of historical trends in the collection of state taxes and how changes in state law might affect those collections. For instance, the Tax Commission has explained to the group the effects of the phased-in reduction in state income taxes so that a married couple does not pay more in taxes than two single people living together.

There is a train of thought now that the elimination of what is commonly referred to as the marriage penalty is having a greater impact on the collection of income taxes that anticipated when the Legislature passed the tax cut in 1997.

"There is a suspicion that it is costing a lot more than we estimated," said Sen. Ron Farris, R-Hattiesburg. Indeed, income tax collection is one of the primary areas where state revenue is coming in lower than it was originally estimated.

So when the estimating committee meets this week, it will be the responsibility of Tax Commission Chairman Buelow and Deputy Commission Herrington to examine that issue for the group.

Herrington said it will be the primary responsibility of Treasurer Bennett to explain to other members of the committee how much investment income will be earned on state money during the upcoming fiscal year. Those funds are included in the revenue estimate.

State Economist Pepper will present information on the condition of the state economy. Pepper said he does that by several different methods, including subscribing to and studying various nationally known economic forecasting journals.

"When looking at the nearer months, we will lean more toward what is the most recent trend," Pepper said. "The further out we go, we look less at the recent trends and more toward forecasting what the national economy is going to do and how that relates to the Mississippi economy."

The Legislative Budget Director Lindell, the Legislature's representative in the group, and his deputy, Tom Kynerd, also study various national models.

Gary Anderson, director of the state Department of Finance and Administration, is the governor's representative among the group.

Politics and its part

Herrington, who has probably been involved with the work of the estimating committee longer than anyone, said he has never seen politics influence the group's work.

"We are not to allow politics to be involved in what we do," Herrington said. "The fact that nobody has to accept the recommendation we make allows us to be more independent."

Generally, though, the Legislature and the governor do accept that recommendation. At times in recent years, former Gov. Kirk Fordice complained that the group's recommendation was too optimistic. Generally, during the 1990s, though, the reverse was true.

Pepper said all five entities currently are studying the revenue picture. Each will have its own proposal when the group meets this week.

"We come to a consensus," Pepper said. "We don't always come to a unanimous decision."

Bennett said it has been interesting to be involved in the process during the years. He said there have been times when the representative from the Legislative Budget Committee has been the more optimistic, wanting to set the higher estimate and there have been times when the Department of Finance and Administration director representing the governor wanted to set the higher estimate.

New Department of Finance and Administration Director Anderson, who was appointed by Gov. Ronnie Musgrove in January, will be participating in the process for the first time.

"I believe Gary Anderson will be straightforward and honest, and I will back him up," Musgrove said. "We need to deal in real figures and to be prudent."

And if the members of the revenue estimating committee do that, the best they can do is be close. They are never exactly right.

"It's extremely hard to do," admitted Pepper. "But it has to be done. They (legislators) have to have a number to use to appropriate."

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