Missouri is sitting on a huge budget surplus. But without FRA extension, cuts loom

With three weeks before the new state fiscal year begins, top legislative budget writers think progress in discussions on medical provider taxes could allow Gov. Mike Parson to issue a call for a special session by the end of the week.

Parson has said he will only issue the call if lawmakers can work quickly. 

Without a deal, Parson will be faced with the strange dilemma of imposing restrictions on spending for things like higher education and school transportation at a time when the state is sitting on an unprecedented surplus of $2 billion or more by June 30.

A call by the end of the week “seems to be likely at this point,” House Budget Committee Chairman Cody Smith told The Independent on Tuesday. “I couldn’t predict what that call will look like, the terms or the time frame, but we are trending in that direction.”

Lawmakers passed a $35.1 billion operating budget for the coming year that includes $10.5 billion in general revenue and $2.5 billion from medical provider taxes known as the federal reimbursement allowance, or FRA. About $1.8 billion of the FRA funds are in jeopardy if the taxes are not extended before they expire Sept. 30.

“My hope is that we will go in and pass the bill before the end of this month and I have been advocating for that since it became clear that we were not going to renew FRA in the regular session,” Smith said.

Renewal was held up in the regular session by a fight initiated by anti-abortion lawmakers who want to bar Medicaid from paying for some contraceptives and stop Planned Parenthood from providing non-abortion health services to Medicaid recipients.

Smith, R-Carthage, and Senate Appropriations Committee Chairman Dan Hegeman, R-Cosby, said they have been in talks with staff in Parson’s office and the state budget office.

If lawmakers had done as their predecessors did 16 times and renewed the taxes in the regular session, there would be no doubt that Missouri could pay for everything in the operating budget and cover the $600 million in construction and repair spending in capital spending bills.

“All of this is the most frustrating conversations you could imagine because we should not be in this mess,” said state Rep. Peter Merideth, D-St. Louis. “Because of some absolute incompetence on the part of Republican leaders, we did not get a basic tax passed that everybody wants.”

Renewing the FRA taxes before they expire requires a special session and so would budget changes to replace missing FRA funds with other money. And because that may require more than the available surplus, Parson told reporters Monday that he is preparing to restrict spending in the new fiscal year.

It would take as much or more general revenue than is currently used in the Medicaid program to replace the provider taxes. And because almost everything provided by Medicaid in Missouri is a required service, there is little to cut except to reduce provider payments.

That would likely make spending restrictions fall on higher education, school transportation and other programs.

“Much of that would have to be redirected to the Medicaid program,” Hegeman said. “That gives us even more desire to try to work something out.”

Financial stratosphere

Missouri has more un-obligated money on hand, and more coming in, than at any time in the state’s history.

The state general revenue fund held $2 billion on May 31, almost five times the balance on May 31, 2020. Another fund, money from extra federal help for Medicaid that can be spent like general revenue, held $578 million.

Revenue estimates haven’t been updated since Parson’s January budget proposal projected a $1.1 billion on June 30. Lobbyist Jim Moody, who was Gov. John Aschroft’s budget director, said Tuesday that the actual surplus will likely be more than double that projection.

Available data supports Moody’s estimate. The state has already, as of Monday, exceeded that January estimate by $236 million. Just matching June 2020 receipts would push the additional surplus to more than $750 million.

A change in the filing calendar for high-income taxpayers will bring a burst of revenue about June 15, Moody said. That will push receipts to about $1.2 billion over the January estimate, he said.

Imposing restrictions until lawmakers pass FRA renewal, not tapping the surplus to replace it, is a prudent step, Moody said.

“Managing all this money and not creating ongoing obligations with one-time money is going to be a real challenge,” Moody said.

The COVID-19 pandemic, which upset the rhythms of state government as it did every other aspect of life, is largely responsible for the surplus. State revenues tanked as businesses shed jobs in March and April 2020 and Parson withheld hundreds of millions from state spending in fiscal 2020.

The normal April 2020 rush of tax filing revenue was delayed until July and the new fiscal year and the state began finding ways to replace general revenue spending with pandemic relief funds.

The federal emergency declaration included a boost in federal support for Medicaid on the condition that states did not remove anyone from the rolls until the emergency ended. That brought the state $324 million in fiscal 2020 and $578 million so far this year.

To continue receiving that money, Brian Colby, vice president of public policy for the Missouri Budget Project, said the state can’t cut Medicaid.

The surpluses should be used for projects that have broad public benefits, Colby said.

“From our point of view, it is a good thing we have surpluses that we can use in a once-in-a-decade situation,” he said. “Using those funds in place of a provider tax would be a bad idea.”

A special session should be about what that money can do for the state, Meridith said, not to prevent it from being consumed to pay for Medicaid.

In addition to the tax surplus, Missouri is slated to receive $2.7 billion from the American Recovery Plan bill passed in March.

The state has enough money that Parson should not begin the budget year with spending restrictions, Merideth said.

“Of all times, now is not the time for withholdings,” he said. “Now is the time to do our damn jobs.”

FRA politics

When Sen. Paul Wieland, R-Imperial, first brought up his amendment to block Medicaid from paying for some FDA-approved contraceptives, the 21-12 vote that approved it halted the bill in its tracks.

From that point forward, the issue added to the fractures besetting Republicans in the Capitol. The GOP has more than two-thirds of the seat in both legislative chambers and all but one statewide office. 

Yet the year has been marked by fights between Parson and House leaders over the venue for the State of the State address and calls from Wieland, after the session, for Republicans to replace Senate President Pro Tem Dave Schatz and Majority Leader Caleb Rowden.

The politics of the legislature mean that it is almost certain the FRA extension cannot be passed without some version of the language sought by anti-abortion lawmakers. The difficulty is to write a bill that anti-abortion lawmakers will accept, that lawmakers who support abortion rights won’t filibuster and that Parson will sign.

“We’re working on something,” Hegeman said. “We are not there yet.”
Wieland said Tuesday that he’s had talks with Smith but hasn’t been asked to review anything specific. He’s optimistic he will see something soon.

A version passed in the House late in the session to seek a federal waiver allowing Wieland’s language to take effect is not acceptable, he said. 

“I don’t think we need to ask the federal government before we do things,” he said.

Every member of the General Assembly who voted for the appropriation bills that pay for Medicaid has already voted for having the provider taxes, Smith said. 

The price of failure, he said, is too high.

“We built the budget, frankly, with that revenue in mind,” Smith said. “It would be contradictory for the legislature to not renew FRA after passing a budget with FRA dollars.”