After multiple votes in the General Assembly, 47 vetoes by Governor Kasich, and 11 veto override votes in the House of Representatives (the most in 40 years!), Ohio now (almost) has a final two-year budget. 

The Senate has yet to act on the House’s veto overrides, so more changes could be made, but it seems safe to take a look at the good, the bad, and the ugly of the final budget as it now stands.

The Good

Spending
Spending restraint is a hallmark of the final budget, with relatively minor spending increases of 2.4 percent for Fiscal Year (FY) 2018 over estimated FY17 and 2.1 percent in FY19. By comparison, total spending increased by 3.7 percent and 3.4 percent in FY16 and FY17, and by 5.4 percent and 6.1 percent in FY14 and FY15, respectively.

Furthermore, the new budget projects state-only General Revenue Funds (GRF) will decrease 2.4 percent in FY18 and then increase 2.4 percent in FY19, making FY19 GRF spending approximately the same as expected in FY17. Such modest growth rates show steps in the right direction.

Although more cuts to agency budgets and administrative costs could be pursued, several examples illustrate the General Assembly’s effort to achieve this historically low spending growth:

The Department of Safety spending will decline 14.3 percent from an estimated $164.7 million in FY17 to $141.2 million in FY18, with another 4.8 percent cut in FY19 to $134.5 million. Similarly, the Ohio EPA’s $196.5 million FY17 budget will fall nearly eight percent to $181.4 million in FY18.

Not content to reduce agency spending, the General Assembly even managed to trim its own budget in a few places. House Speaker Rosenberger found ways to cut the House’s budget by nearly 5.7 percent in FY18 and maintain that in FY19. Likewise, Senate President Obhof deserves praise for reducing the Senate’s spending by six percent from $15.9 million to $15 million in FY18 and maintaining that for FY19. 

Auditor of State Yost also managed to reduce his office’s budget by roughly .7 percent in FY18 and maintained a less than two percent increase in FY19. Meanwhile, Secretary of State Husted deserves a hearty round of applause for exhibiting the fiscal discipline to remove his office from being funded with tax dollars. Instead, he is using business filing fees that had already been lowered while also shrinking his budget by 18 percent in FY18.

At the (near) end of a very long and winding road, fiscal prudence has carried the day. This is good news for Ohio and Ohioans. Sustainable state spending will help secure prosperity for current residents and future generations.

This analysis uses the Legislative Service Commission Budget in Detail document that was published on July 6, 2017. This document included the estimated FY17 expenditures that were expected at the time of its publication. 

Taxes
Revenue shortfalls prevented the General Assembly from pursuing major tax reforms during this budget negotiation, but the final budget does include meaningful changes to the municipal income tax by giving businesses the option to file their net profits tax online through the Ohio Business Gateway portal. This reform is merely the frosty tip of the most complicated local-tax iceberg in the nation, but we have to start somewhere and some reform is better than no reform. 

And the General Assembly wisely rebuffed and eliminated several tax increases proposed by Governor Kasich.

This is important, as income taxation leads to reduced economic growth. Smart, pro-growth taxation policy would shift Ohio from a reliance on income tax to a consumption tax base system, which The Buckeye Institute continues to support. However, we also recommend leveraging fiscal discipline as a way to continue lowering the personal income tax before making any large-scale shift of this kind.

Medicaid
As the proverbial 800-pound gorilla sitting in the corner of any state budget, Medicaid consumes 37 percent of the entire budget—and without significant reforms, that percentage will rise every single year. If Medicaid isn’t reformed, it will crowd out other vital spending priorities, such as education and public safety.

The final budget includes several steps in the right direction. However, the reforms will only be realized if the Senate joins the House in overriding the Governor’s veto.

The budget requires Mr. Kasich to resubmit the Healthy Ohio waiver to Washington for the new administration’s approval. The program would enroll abled-bodied Medicaid recipients, not the aged, blind, and disabled recipients.

Healthy Ohio includes critical reforms for Medicaid, including:

• Availability of Health Savings Accounts (HSA);
• Rewards for healthy lifestyle choices;
• Requirements for abled-bodied individuals to pay into HSAs; and
• Creation of “bridge accounts” so individual can use unused HSA dollars to pay premiums for private health insurance. 

Other Medicaid reforms wisely return authority and oversight to the General Assembly for expanding the program, and require the Kasich Administration to receive Controlling Board approval before spending the state share of Medicaid. By reasserting its proper oversight role, the Ohio House sent a clear signal that it, as the elected representatives of the people, is the proper body to approve spending increases.

Controlling Board Reform
The final budget includes reforms that will ensure that when Uncle Sam offers Ohio large new sums of money to participate in new federal programs the General Assembly—and not just the Controlling Board—must agree to sign-up for the program. 

The Governor vetoed this provision, but the House has voted to override those vetoes and the Senate may yet override them, as well. If enacted, such reform will rein in the Controlling Board’s spending authority and allow the legislature to reassert its role in setting state policy. This, in turn, should help maintain fiscal discipline and will enable voters to more easily hold their elected representatives accountable for spending increases.

Criminal Justice
The new budget achieves major criminal justice reforms, including creating a 180-day limit on prison terms for most fourth-degree felonies, and providing resources to Ohio communities through the Target Community Alternatives to Prison (TCAP) program. 

TCAP will allow local judges, law enforcement, and prosecutors to help low-level offenders (many struggling with addiction and mental issues) get necessary treatment. Already successful in eight pilot programs throughout the state, TCAP is an evidence-based policy that will save taxpayer dollars and improve safety in our communities by keeping non-violent offenders from learning from hardened criminals in state prisons.

The Bad

Education
The final budget’s successes unfortunately do not include adequate school-funding reform. The General Assembly has retained some of the Governor’s initial proposal to move, slightly, away from the caps and guarantees in the school funding formula. 

The distortion in the school funding formula caused by the caps and guarantees functionally means that districts with declining enrollment continue to receive nearly the same funding despite the lower enrollment, while districts with booming student populations have their funding artificially capped.

This unfair system funds districts rather than students, and school funding will continue to plague state budgets until the system is changed.

The Ugly

Medicaid Freeze
The Governor’s veto of the proposed Medicaid freeze remains the biggest disappointment emerging from the current budget process. 

The Medicaid expansion was originally projected to grow enrollment to 440,000 by 2020. However, the program has already surpassed that estimate and currently standing at more than 700,000 enrollees. Without significant reforms, the program will crowd out other important spending priorities and saddle our children and grandchildren with unsustainable government debts and spending.

The Ohio Senate courageously voted to freeze enrollment in the Medicaid expansion beginning July 1, 2018. Governor Kasich vetoed the Senate’s freeze. The House subsequently convened to override 11 of the Governor’s vetoes—but the Medicaid freeze was not among them. 

This is disappointing. The Senate’s Medicaid freeze would have helped ensure that Medicaid remains sustainable and focused on helping the truly needy.

MCO Replacement Tax
It is also disappointing that the House voted to override the Governor’s veto of the Health Insurance Corporation (HIC) franchise fee. This override enables local governments to escape accountability for how they spend taxpayer dollars, by allowing them to shift the responsibility to Columbus.

The way the HIC gimmick will work is:

• A “temporary” tax will be assessed on all health insurance plans in Ohio;
• Then, based on how much taxes that raises, Ohio will be required to get federal approval to draw down additional federal money to be distributed by Columbus to counties and transit authorities;
• Then local governments will spend these tax dollars on local projects and on public transit authorities.

Sounds great, right? Wrong! These are your tax dollars, and instead of your local officials convincing you that these projects are worthy of your money, they are spending money that is gathered using hidden tax increases collected by the state.

This is problematic for several reasons.

• First, taxes are hardly ever “temporary” as governments perennially lobby to maintain every funding and reimbursement source they can. 
• Second, although that sales tax had been a windfall for counties and transit authorities after the Medicaid expansion, it had been obvious for years that the federal government would disallow the tax. In fact, The Buckeye Institute warned policymakers of this concern before Governor Kasich announced his intention to expand Medicaid in 2013. Local governments and transit authorities should have known better than to rely on these tax proceeds to fund local services. 

If the Senate follows the House’s lead in overriding this veto and raises the HIC franchise fee, it will enable ​local governments to blame Columbus for “cutting” funding whenever they want to avoid making tough spending decisions that use local dollars most efficiently.

Conclusion

While not all good, the budget does make a number of smart policy decisions on spending and taxes, and restores the General Assembly’s oversight role in approving spending increases. However, to realize some of these the Senate must act on the House veto overrides. Doing so would improve Ohio’s budget further; implement smart, pro-growth tax and spending policies; and would reign in the unsustainable growth of Medicaid.

Greg R. Lawson is the research fellow at The Buckeye Institute.