Kasich Budget Proposal In-depth

Ohio Governor John Kasich introduced his FY 2016-17 $72B state operating budget and five core areas are primed for debate: K-12 education, higher education, health care, taxes and economic development. This special edition of the Montrose Way focuses on these five key budget categories for Governor Kasich’s proposed budget that will dominate the Ohio Statehouse debate for the first half of 2015. The Kasich budget is contained in Ohio House Bill 64, sponsored by House Finance Committee Chair Ryan Smith as is the tradition.

Annual Budget

The dominance of Medicaid spending compared to all other state government programs continues with the availability of substantial federal dollars and a special hospital tax covering the majority of the expenses. While K-12 education gains another substantial increase, higher education is becoming a smaller and smaller portion of the state budget. More troubling for higher education, state government leaders are also focused on reducing tuition rates while at the same time not making up for billion dollar past cuts in funding. Ohio’s higher education system is being starved of cash and will face challenges developing the workers’ Ohio company’s need.

Governor Kasich proposes substantial changes in the state’s tax code that will shift a larger share of tax collections against consumption rather than income producing activities and benefits small business over larger companies. The clear goal is to reduce the state’s reliance on the income tax for its spending and shifting more to the sales tax and special taxes on tobacco and oil and natural gas exploration. In fact, income tax revenues will drop from $9B to closer to $6B under the Kasich proposal while sales tax shifts from providing almost $12B under the proposal compared to $10B in past budgets.

The state’s General Revenue Fund is the largest state fund supporting state government and receives the largest share of state taxes. However, federal funding for targeted programs such as Medicaid also dramatically impact state policy decisions as they provide billions in financial support for programs the federal government wants supported.

Debate is raging on the Kasich Administration budget both from a spending and revenue standpoint. Tax increases on businesses will prove a challenge as many of them have been rejected in the past; however, the Republican dominated General Assembly is likely to support the general notion of shifting the state’s tax policy toward consumption and away from income producing activity.

House Bill 64’s K-12 Education’s $10B Spending Proposal is an Ohio Record

House Bill 64 will increase spending for K-12 institutions, make major policy changes geared toward improving the performance of the state’s charter schools and continue to embrace school choice to better serve Ohio’s students. The Ohio Department of Education oversees an education system comprised of 613 public school districts, 49 joint vocational school districts, 52 educational service centers, and 381 community or charter schools. Each public school district is governed by a locally elected school board that exercises taxing authority subject to voter approval and Ohio’s traditional public schools are funded by a mix of a substantial state subsidy supported by locally vote property tax. The department also oversees the chartering of nonpublic schools governed by charter school sponsors. The Department of Education is governed by a 19-member State Board of Education with eleven of the board members are elected by the citizens, one from each of 11 districts composed of three contiguous Ohio Senate districts. Eight board members are appointed by the Governor. Day-to-day administration of the department is the responsibility of the Superintendent of Public Instruction, who is hired by the State Board of Education. The department has approximately 530 full-time employees.

A couple important notes on charter schools:

  • Stanford University’s Center for Research on Education Outcomes found that about a third of the charter school students were doing better than their traditional public schools counterparts;
  • Following Hurricane Katrina, Louisiana created a Recovery School District that serves over 80% of New Orleans students and is producing higher graduation rates than the rest of the state;
  • Ohio’s charter school law born in the 1990s has crept regulation into the operation of Ohio’s charter schools while offering half the funding of traditional urban public schools; and
  • Nationally, according to the University of Arkansas, charter schools receive $3,059 less per pupil than traditional public schools but, in Ohio, public charter schools receive far less than the national average.

Governor Kasich’s proposed operating budget proposes funding for fiscal year 2016 is $10.8 billion (or a 1.4% decrease from fiscal year 2015) and funding for fiscal year 2017is $11.1 billion (or a 3.2% increase from fiscal year 2016). The budget increases funding for traditional, joint vocational, and community schools and makes improvements to the student centered funding formula that will more appropriately measure the capacity of a district to raise revenue and direct additional resources to districts with the least capacity. $23M and $31M for school choice voucher scholarships are provided and a 144% increase in charter school facility funded is provided in the Kasich Budget. Special education constitutes over $500M annually for Ohio’s school from the state budget.

It also provides over $300M in targeted funds for special needs, career-technical, and K-3 students which constitutes roughly flat funding against prior years. Direct additional funds for chartered nonpublic schools to support the purchase of secular services and materials as well as to reimburse nonpublic schools for mandated administrative and clerical costs are also provided. Kasich’s Straight A Fund, which provides schools with grants to make innovative and transformative changes in the classroom to meet the learning needs of all students, will continue with $100M in funding for both fiscal years. In addition, to encourage Ohio students to attend college, the Governor proposed funding for the College Credit Plus to help teachers in economically disadvantaged high schools get the credentials needed to teach college level courses and reward districts and schools who increase student participation in College Credit Plus and Advanced Placement courses. The Kasich budget also provides over a 20% funding increase for early childhood education and increases the number of opportunities for economically disadvantaged students to enroll in high quality preschools. Fund summer literacy camps and early literacy training to ensure schools and disadvantaged students are prepared for the Third Grade Reading Guarantee. In addition, many traditional public schools will receive more funding and some will receive less money. However, the Governor’s budget contains a guarantee that traditional public schools will not take more than a 1% cut in funding from previous years.

The Kasich budget also contained substantial reforms geared toward improving the performance of charter school sponsors to create a sponsor metrics, additional funding for successful sponsors and then the ability for successful charter sponsors to gain access to additional facilities funding and local property taxes connected to traditional public school districts. The per pupil ‘opportunity grant’ amount for Ohio charter schools in HB 64 is $5,900 in FY 16 and $6,000 in FY 17, up from $5,800 currently. The K-3 literacy funding increases by $15 per pupil in each of the next two school years and HB 64 provides $200 per FTE for community school facilities. Charter sponsors would be approved of and ranked by the Ohio Department of Education and provides additional benefits for highly ranked or ‘exemplary’ sponsors and the closing of sponsors ranked ‘poor.’ Charter schools sponsored by ‘exemplary’ sponsors can access a $25M in facilities grant funding, be eligible to seek local property tax dollars by asking the local school board to place a ballot issue before voters, and be eligible to offer preschool under HB 64. These additional construction dollars would be for the purchase, construction, or renovation of facilities of highly ranked charter schools with innovative approaches. HB 64 also prohibits a sponsors from selling goods or services to the schools they sponsor and eliminates current law which permits operators to appeal a governing board’s decision to terminate or not renew its contract with an operator. HB 64 also promotes fiscal independence for charter schools and require charter school governing authority contracts with an attorney, accountant or entity specializing in audits that they be independent from the school’s operator and loans from a charter school management company would need to be documented and made at a fair interest rate.

HB 64 has substantial budget and reform agenda items for traditional public schools and their charter school counterparts.

House Bill 64 Only Offers Small Funding Increase for Higher Education

Governor Kasich built on his strong partnership with the state’s public higher education leadership that produced a funding formula tied student success and not just enrollment. Kasich’s proposes a higher education budget for FY 2016 is $2.5B (3.6% increase) and $2.6B for 2017 (1.7% increase). The University System of Ohio is one of the largest comprehensive public systems of higher education in the nation. Ohio’s public colleges, universities, and adult education programs serve almost 600,000 students and offer every option from a GED to a Ph.D., ensuring that all Ohioans have easy access to a high-quality, affordable higher education. The System includes: 14 universities with 24 regional branch campuses; 23 community colleges; and Over 120 adult workforce education and training centers statewide.

The University system of Ohio is a national leader with keeping tuition increases in check.

The State Share of Instruction (SSI) subsidy provides general operating support to state assisted colleges and universities and a renamed Ohio Department of Higher Education oversees the operation of the University System of Ohio by implementing SSI awards, student financial aid programs, and special funding for research, public service, medical education and specific initiatives.

Highlights of House Bill 64’s Higher Education budget include:

  • State Share of Instruction- A 2% increase in each year of the biennium, with each increase building on the preceding year;
  • Tuition- A 2% increase cap in FY16 and a 0% (flat) increase in FY17;
  • Innovation Fund- Formerly known as both the Excellence and Success Fund, appropriates $20M in FY17 to incent innovation;
  • Competency Fund-$4M in FY16 and $4 million in FY17 based on courses initially but, if progress is not demonstrated, then the requirement will be to default to the WGU plan;
  • Ohio College Opportunity Grant- $1M increase in FY16 and $1M increase in FY17 with funding will be on a 2-1 basis – public to private—and proprietary schools will be funded separately;
  • Student Debt Relief- establishes a $120M fund appropriated from unspent FY15 GRF funds with $30M million a year for four years to be distributed according to need, whether the student is pursuing a degree in an in-demand job area, and whether the student stays in Ohio after graduation;
  • College Credit Plus- $5M in FY17 to increase K-12 student participation in the program and $13.5M for getting more teachers credentialed – to help economically disadvantaged high schools to hire and train more college level teachers;
  • Campus Safety- $2M in FY16 to help campuses with training and to develop a safety and security plan;
  • Career Counseling- requires public institutions to have a plan in place by the end of calendar year 2015 but abolishes funding for the popular co-op and internship program;
  • Task Force on Affordability & Efficiency- creation of a task force to develop recommendations for higher ed affordability and efficiency;
  • Teacher Prep- Chancellor to set admission standards for teacher preparation programs; and
  • Research Incentive Program- funded at current level of $8M with, up to $2M will be used for water quality research and up to $1M for research on infant mortality in the state and the remaining amount will be available for general research.

Senate Republicans have announced plans to require public higher ed institutions to reduce costs for students by 5% even though state revenues for higher education have declined substantial in the last decade and Ohio is a leader in keeping tuition increases down.

House Bill 64’s Medicaid Budget Dominates State Spending Again at $25B Annually

Healthy workers are more productive and longer life expectancy leads to additional productivity. High-quality and affordable health care is essential community infrastructure. Companies expect their workers to have access to high quality and affordable health care. Health care jobs are a critical part of the American advanced service economy. Ohio’s largest employers compared to the 1990s have transitioned from manufacturing to health care.

Ohio’s Major Employers (Source, Ohio Development Services Agency)

Ohio’s Major Employers (Source, Ohio Development Services Agency)

Five of the Buckeye State’s largest employers are hospitals or own a hospital. Ten of the 20 fastest growing occupations are in the health care industry, and by 2018 the health care industry will generate 3,200,000 high-wage jobs. Thus, the large role health care plays in a state economy like Ohio illustrate why the state’s Medicaid Program is the largest single line item expenditure in the Kasich Administration budget at $25 annually.

Four years ago, Governor Kasich made the tough decision to expand Medicaid coverage as permitted and funded by the federal Affordable Care Act. Through a serious of reforms over the years, today, nearly 4 of every 5 individuals on Medicaid receive their benefits through a private managed care organization not through a government fee for service model. More importantly, in 2014, for the first time ever, Ohio Medicaid spent more on home and community based services than it did on nursing homes producing a substantial cost savings and keeping more Medicaid patients in their homes. Kasich also launched in 2013 a new online Ohio Benefits system transforming eligibility determination in Ohio by removing barriers for low income residents to obtain health care benefits. Ohio is also leading innovative efforts by resetting the basic rules of health care competition to reward better care, not just more care. In 2014, the federal Center for Medicare and Medicaid Innovation recognized the progress the state is making by awarding Ohio a four‐year grant to test innovative new payment models that improve overall health system performance.

Governor Kasich’s budget not only seeks a continuation of Medicaid expansion but also proposes number of new steps:

  • requiring premiums for Medicaid enrollees with incomes above 100% above the poverty line;
  • shortening the timeframe Medicaid enrollees exceed the income levels that they can stay on Medicaid from one year to six months;
  • individuals currently receiving coverage from prior Medicaid legacy programs can remain in them if they choose and newly eligible individuals will be enrolled in either Medicaid or an exchange plan, as dictated by their income;
  • retaining of all breast and cervical cancer outreach and screening programs, as well as continue all efforts in those programs to enroll women in health care plans to ensure they get the follow up care they need;
  • improving health care for children in foster care by providing them the coordinated care benefits of Medicaid’s managed care plans instead of the old, government run fee-for-service program;
  • individuals with developmental disabilities will have the option to enroll in private health plan coverage;
  • nursing facilities will be eligible to receive new performance payments if they reach more rigorous quality benchmarks;
  • a temporary 5% hospital rate increase provided by Ohio Medicaid to help hospitals weather recent financial hardships will be allowed to expire;
  • Medicaid will launch new efforts to improve health outcomes and help hospitals control costs with new strategies that increase quality and prevent errors that can cause unnecessary and potentially harmful readmissions;
  • Ohio Medicaid will increase reimbursement rates for primary care and dental services to ensure that Ohioans can access necessary services when they need them and before any health problems worsen;
  • Ohio will improve oversight of this care by transitioning to a home health agency-only model, ensuring that individual caregivers operate within the oversight of a larger organization that can provide increased accountability;
  • Ohio will incorporate state-of-the-art electronic verification tools to improve honesty and accuracy in provider billing;
  • new $316M investment to ensure that every Ohioan with a developmental disability who wants to live and work in the community can do so;
  • adds additional services to the Medicaid behavioral health benefit package, strengthens housing and other community supports, and improves care coordination through managed behavioral health care;
  • sustains recent increases in state funding to support affordable housing, enables more Ohioans to avoid entering an institution unnecessarily, and prioritizes federal, state and local housing resources for at-risk populations, particularly youth making the transition to adulthood;
  • provides enhanced maternal services through Medicaid health plans for every woman living in neighborhoods most at risk for poor infant health outcomes; and
  • enhancements to pay for additional services provided to children at the 580 Medicaid in Schools Program sites, and significantly reduces the financial burden on local school districts serving 61,000 Medicaid eligible students.

Governor Kasich’s Medicaid Budget increase General Revenue Funding for FY 2016 a total of $17.9B (or a 21.9% increase from fiscal year 2015) and for FY 2017 at $19.0B (or a 6.1% increase from fiscal year 2016). All funds spending reaches $24.5B in FY 2016 (a 2.1% increase from FY 2015) and $25B in FY 2017 (2.4% increase).

House Bill 64 Tax Policy Creates Substantial Debate in 2016-17 State Budget

Governor Kasich will not stop cutting the income tax and finding ways to raise the other taxes and reduce agency spending but how the General Assembly responds to the Governor’s $500M tax cut targeted at small business and lower income Ohioans but the proposal is offset by a large per-pack cigarette tax hike, an increase in the Commercial Activity Tax that applies to Ohio business, additional sales tax revenue and higher oil and gas severance taxes. In his first term, Governor Kasich cut taxes $3 billion by reducing income tax rates 10 percent, cutting small business taxes 50 percent (increased to 75 percent for 2014), eliminating the estate tax and giving targeted tax relief for low- and middle-income workers. The tax cuts along with the revival of the auto industry and growth of shale oil development, spurred Ohio’s economic recovery– creating 280,000 new private sector jobs created since 2011 and our unemployment rate is at its lowest level since 2001.

House Bill 64 contains tax cuts and tax increases as the overall size of the state budget has increased. Kasich’s proposal removes from the income tax rolls small businesses making less than $2M and 200,000 low income Ohioans. Kasich’s proposed tax cuts include:

  • Elimination of income tax for all small business with annual gross receipts of $2M or less
  • 23% cut in income tax for all Ohio Taxpayers by lowering the marginal rate to 4.1%
  • Increasing state income tax personal exemption from $2000to $4000 for those earning between less than $40,000 and from $1950-$2,850 for those earning $40,000-$80,000.

Proposed Tax and Allocation of Tax Changes
in the FY’s 2016-2017 Executive Budget ($ in millions)

Proposed Tax and Allocations

Kasich’s tax increases hit tobacco companies and users, oil and gas drillers, retailers and consumers and larger, Ohio corporations. Kasich suggests almost doubling the cigarette tax, and expanding the state’s severance tax on oil and natural gas drillers to 6.5% at the wellhead and 4.5% downstream. The severance tax would be eliminated for small, conventional natural gas producers and 20% of the severance tax revenues, after regulatory needs are met, would go to support local government infrastructure needs impacted by shale development. Probably the most controversial tax increase the Governor proposes is an increase in the Commercial Activity Tax—which is the prime corporate tax paid to the state on company gross receipts. Finally, Governor Kasich proposes a whole range of sales tax changes including a fifty cent overall increase and expansion of the sales tax to an array of professional service firms such as cable TV subscriptions, parking, lobbying, public relations, market research/opinion polling, management consulting, travel packages and tours, and debt collection services. Exemptions to Ohio’s sales tax costs the state over $5B annually.

Shifting Ohio’s tax system away from its excessive reliance on income and toward a greater reliance on consumption helps combat migration of income to other states, gives Ohioans more control over how they are taxed and the taxes they pay, and better aligns Ohio’s tax system with the growing service sector in our economy. Sales tax discounts for used cars and watercraft trade-ins would also be reduced and Ohio retail shops ability to keep .75% of the sales tax they collect to cover administrative costs would be limited to $1000 a month. Finally, the Governor proposes means testing a number of long-time tax deductions and credits for those Ohioans with more than $100,000 in annual income, including the retirement income credit, Social Security deduction, $50 senior credit, and the lump sum senior credit. Those breaks would no longer be offered to the most affluent Ohioans.

House Bill 64 State Economic Development Budget Remains Steady With Changes to Job Creation Tax Credit Program in Play

Governor John Kasich’s divided the state of Ohio’s economic development work among two distinct groups that work together to encourage the development of jobs and capital investment. JobsOhio is a private sector economic development corporation that operates based upon a $100M plus annual subsidy gained from the sale of the state of Ohio’s liquor profits to JobsOhio. JobsOhio may have $300M in the bank during 2015. However, few realize the large job left to state government with the large role of the Ohio Development Services Agency. State government still has a large number of economic development programs they administer and the state plays a major role in the Ohio’s economic growth and success.

House Bill 64’s proposed budget for the Development Services Agency will ensure it remains focused on implementing the state and JobsOhio’s economic development strategy but its focus also includes implementing community development programs, energy programs, minority business programs and serves as the staff for Ohio’s Third Frontier Program- a nationally acclaimed technology based economic development program. From an economic development standpoint, the Ohio Development Services Agency administers a large number of programs critical to business growth, including:

  • Alternative Fuel Transportation Program
  • Alternative Stormwater Infrastructure Loan Program
  • Business Incentive Grant Servicing
  • Career Exploration Internship Program
  • Contingency Grant Servicing
  • Conversion Facilities Tax Exemption
  • Collateral Enhancement Program (CEP)
  • Economic Development Grant Servicing
  • Energy Loan Fund
  • Innovation Ohio Loan Fund Servicing
  • InvestOhio
  • Ohio Brownfield Fund
  • Ohio Capital Access Program
  • Ohio Coal Research and Development Program
  •  Ohio Community Reinvestment Area
  • Ohio Incumbent Workforce Training Voucher Program
  • Ohio Job Creation Tax Credit Servicing
  • Ohio Motion Picture Tax Incentive
  • Ohio Enterprise Bond Fund Servicing
  • Ohio Enterprise Zone Program
  • Ohio Historic Preservation Tax Credit Program
  • Ohio Minority Business Bonding Program
  • Ohio Minority Business Direct Loan Program
  • Ohio New Markets Tax Credit Program
  • Ohio Training Grant
  • Ohio Vacant Facilities Fund
  • Ohio Workforce Guarantee
  • Regional 166 Direct Loan
  • 166 Direct Loan Servicing
  • Roadwork Development (629) Account Servicing
  • Research and Development Investment Loan Fund Servicing
  • Research and Development Investment Tax Credit
  • Research and Development Sales Tax Exemption
  • State Small Business Credit Initiative
  • State Energy Program
  • Targeted Investment Program
  • Tax Increment Financing
  • Technology Investment Tax Credit Program
  • Volume Cap
  • Qualified Energy Project Tax Exemption

Governor Kasich’s Development Services Agency proposed budget calls for fiscal year 2016 spending for all funds at $1.3B (6.1% increase from FY 2015) and the same amount for FY 2017 (1.2% increase from FY 2016). Development Services Agency proposed budget highlights includes some winners and losers.

DSA_Winners-Losers

The Development Services Agency will remain an important player in the implementation of tax credits, investment programs and monitor of local tax abatement programs. The Ohio Job Creation Tax Credit is an incentive based on jobs created and new payroll tax generated and is performance-based and, in 2013, 106 Job Creation Tax Credits, reflecting commitments to create 8,792 new jobs, retain 35,667 jobs, generate $366.7 million in new payroll and invest $885.5 million in fixed-assets were awarded.

The Governor’s proposed budget has big changes for the JCTC program; the amount of the JCTC will now be based on a percentage of new payroll created by employers, minus baseline payroll. Under current JCTC provisions the JCTC is based on the amount of new income tax revenue created, minus existing revenue. However, as the personal income tax has been reduced the amount of the credits has also been reduced. This budget provision means that employers will receive larger credits as they increase their payroll. Current agreements that are based on income tax revenue may request that the Tax Credit Authority convert to the new payroll based system. The Governor’s budget also proposes eliminating the refundable Job Retention Tax Credit (JRTC); the non-refundable JRTC remains in place.

The Ohio New Markets Tax Credit Program is another program administered by the Development Services Agency. It provides investors with state tax credits in exchange for delivering below-market rate investment options to Ohio businesses in low-income communities and works in tandem with the successful federal government program by the same name. In FY 2014, the program supported the investment of more than $12.8M into five different businesses in low-income communities across the state. Development Services Agency’s Collateral Enhancement Program provided 60 loans which generated $27,970,486 in private investment during 2013. The Capital Access Program provided 92 loans totaling $1,145,554 in state and federal funds, and the Targeted Investment Program provides financing to small businesses that demonstrate high growth potential over a relatively short period of time and have received first or second round equity investments.

The Ohio Historic Preservation Tax Credit is another important element of the state’s economic development strategy. Across 41 different communities in Ohio, the program is leveraging the private redevelopment of 272 buildings. Former schools, theaters, department stores, churches and industrial buildings are being transformed for new uses with modern amenities while retaining significant historic features and spaces. In 2014, the program accomplished: 80 Total Completed Projects that have led to $1,022,464,608 Total Project Investment, 85 Buildings rehabilitated, 2,428 Housing units created, and 21 Communities with completed projects through a competitive award of a tax credit equal to 25 percent of Qualified Rehabilitation Expenditures incurred as part of historic rehabilitation projects leveraged with the 20% Federal Historic Preservation Tax Credit.

The Ohio Development Services Agency is also a major player in energy related projects. The Energy Loan Fund provides low-interest financing for Ohio businesses and communities to improve energy efficiency and provide technical assistance to convert to renewable energy. In FY 2014, 16 projects were funded through the Energy Loan Fund. The Ohio Coal Development Office continues to fund a range of projects from applied research to deployment of full-scale demonstration projects that enhance the viability of Ohio coal while reducing environmental impact and maintaining affordability and $30M in projects were administered during FY 2013-14. New in FY 2014 is the Ohio Port Authority Loan Loss Reserve Program that provided credit enhancement to eligible Ohio Port Authorities as they originate loans for energy efficiency projects.

Ohio’s Development Services Agency has plenty going on, and the 2016-17 Kasich budget proposal insures its activity will continue.