Excerpted from the Home Builders Association of Tennessee‘s “Legislative Briefing,” Jan. 26, 2012:

2012 Legislative Agenda

The Home Builders Association of Tennessee Board of Directors approved the 2012 Legislative Agenda during the membership’s recent Fall Annual Meeting. We have worked diligently to craft the proper language of the proposed legislation and to secure outstanding sponsors who will carry the bills in both the Senate and the House…

Tennessee Home Construction Jobs Development Act

The legislation (SB1296-Johnson /HB0730 Casada) is more commonly referred to as the Building Homes – Building Jobs Act.

This legislation is a carry-over from 2011. Construction, especially homebuilding, is one of the state’s weakest sectors. From the employment peak in 2007 to the fall 2010, construction employment estimates indicate a loss of 36,300 jobs. The loss of 36,300 jobs resulted in a loss of $9.08 billion in output, $2.69 billion in earnings, 72,600 total jobs, and $168 million in state taxes. A substantial share of the shortfall of state taxes was associated with the decline in this industry. The positive effect of this proposal on the creation of approximately 4,900 new jobs across the state is borne out in a recent study by the Sparks Bureau of Business and Economic Research at the University of Memphis. This economic development legislation, which would grant $6,000 to approximately 1,666 new home buyers, would have a positive impact on every county and every community in Tennessee.

Legislation to Prevent Single Family Residential Fire Sprinkler Mandates

Simply put, proposed legislation (SB2492 Tracy/HB2639 Watson) would mimic several other states’ legislation that prevents any county, municipality, city or town from requiring the installation of fire sprinklers in single-family residential construction. Legislation would NOT prevent nor dissuade any home buyer or homebuilder from installing fire sprinklers. It just would prevent any mandates to require them. It is our belief that current building codes offer significant fire safety features, including the installation of hard-wired smoke detectors, in new construction. A recent University of Tennessee study underscores the fact that the majority of fire safety issues are in those homes built using pre-1998 building code construction.

Tennessee Public Improvement District Act

This legislation (SB1865 -Overbey / HB1643-Dennis) is also a carry-over from 2011. The legislation, based on similar current laws in Alabama, Mississippi, Arkansas, Florida, Georgia, Texas and Louisiana, would provide an alternative financing mechanism for municipalities and developers to pay for infrastructure needs. With the current state of the financial markets, which limit borrowing for these type projects, we see this as an option that will serve as an economic development tool for cities, counties and developers that will help stimulate new housing construction opportunities.

Property Tax Relief Legislation

As proposed, this would be enabling legislation that would allow counties to delay the reassessment of improved land until a time at which the property is sold to the first owner. Currently, the land is reassessed once a plat has been recorded to subdivide the land into lots and again when the builder improves the lot with constructing a new home. This legislation would defer the reassessment until the lot is sold to a builder and the lot would not be reassessed until a new home is sold to a homeowner. This deferral would significantly help our members during recessions to carry their real estate for longer periods of time by significantly reducing their annual carry costs.

Tax Assessor Legislation

Proposed legislation would require that the Tax Assessor’s office establish new parcel ID numbers immediately upon recording a subdivision plat after January 1 in a given year. As it stands now, the Assessor establishes a parcel ID number for each parcel of real estate on January 1 of each year. No matter what happens to that property throughout the year, even if it is subdivided and homes are constructed on it, when the tax bill comes out, it is billed under one number.

If a closing occurs prior to January 1 of the following year, then taxes must be paid on the entire property. But if it is still under the original parcel number, then the seller has to pay the entire tax bill, even on land that the seller doesn’t own. A closing cannot take place without the entire tax bill being paid.

The proposed legislation requires the Assessor to establish parcel identification numbers for subdivided lots effective at the time subdivision plat is recorded rather than waiting for the following January. The Assessor shall prorate the assessment on such real property for the year for the parent parcel from January 1 to the date of subdivision. And for resulting parcels, the assessment would cover the period from the date of the subdivision to the year-end. Any supplemental tax resulting from added value, shall be assigned exclusively to such resulting parcel to which the value was added.

As always, your assistance in helping educate your legislators on the importance of these issues will be most important in securing successful passage of these matters. As you look at the emphasis of our proposed legislation this year, you will see the one overriding powerful belief, and that is:

HOUSING = JOBS!

In the packed chambers of the Tennessee House of Representatives, Gov. Bill Haslam delivered his second State of the State address Monday night before a joint session of the state General Assembly.

Many in there were armed with laptops, cell phones, and for most of the time, an internet connection.

Haslam’s speech focused on his budget proposals for the coming fiscal year, as well as legislative initiatives including cuts to the estate and grocery sales taxes, efforts to curtail violent crime and drug use and changes to the way the state’s hiring and employment practices. Throughout the 40 minute address, he aimed to outline an effective, efficient state government that he said should stand in contrast to gridlock in Washington.

Below is the story of the day in tweets, Facebook statuses and YouTube videos from people watching the speech in the Capitol and around Tennessee.

Gov. Bill Haslam is proposing a budget he says will make the state more efficient, but it is actually bigger than the one he proposed last year.

But his budget plan — complete with a 2.5 percent pay boost for teachers and state employees and more than a quarter billion dollars for higher education and capital improvements — is still 2.7 percent less than the current year’s spending plan.

“(Taxpayers) want a state government that is accountable and spends their tax dollars as carefully as they spend their own dollars. But that’s the problem, isn’t it?” Haslam asked a crowded joint assembly of state House and Senate members Monday night at his annual State of the State address.

“It is very hard for folks to spend other people’s money as carefully as they spend their own. Even worse, it is easy for those of us in government to begin to think that the tax dollars are ours. It is here that it is best for all of us to remember what Mark Twain said about the taxpayers’ dollars: “It’s tainted. ‘Taint yours and ‘taint mine.”

Haslam unveiled a $31.08 billion spending plan for the next state budget year. His proposal assumes a 4.03 percent growth in revenues in the budget year that runs from July 1, 2012 to June 30, 2013.

“So, what is the state of our state? Well, in many ways we are doing great,” Haslam said, lauding the state’s low taxes and debt, balanced budget and slowly falling unemployment rate.

“But yet, all of us realize that we have serious issues to deal with. Unemployment is still too high, and we are consistently only in the mid-40s when states are ranked for educational achievement. I don’t think any of us should be satisfied. So I stand here tonight and ask you: Is the current state of our state good enough? I think the answer is no. I think we can believe in better.”

The governor’s budget includes eliminating 1,166 state government jobs, through layoffs of 617 workers and nixing 549 vacant positions. The state employs about 45,000 people.

“We have been cut to the bone here in as far as state services,” said union leader Bob O’Connell, with the Tennessee State Employees Association, which opposes the governor’s call to reduce staff and change how the state hires government workers. ”There’s no more fat to offer and from here on out it’s all muscle so it’s going to hurt to cut those folks out. We hope that money can be found to restore all of those positions.”

Meanwhile, the administration wants to dole out 2.5 percent pay raises for state employees, teachers and higher education workers at a cost of $123.8 million. That would mean an extra $95 pre-taxes a month for the average Tennessee teacher, who makes $45,891 a year.

Haslam also wants to readjust salaries for some state employees to bring them up to comparable market rates, costing taxpayers about $30 million a year.

His proposal includes cutting the tax on food and raising the threshold for exemptions to the inheritance tax, which combined will mean a collective reduction of $33 million — or less than 1 percent of the state’s total revenues.

“I’m well satisfied with what he’s laying out here,” Lt. Gov. Ron Ramsey, R-Blountville, told TNReport after the 40-minute speech. “Not only are we going to be able to cut taxes in the state of Tennessee, with the death tax and the tax on food, but also we’re going to increase services, and I think the governor’s set the priority in the right place to make Tennessee an efficient and effective government that serves the people well.”

Democrats say they like some of what they heard from the governor, but are concerned with some of the issues he didn’t talk about, like his plan to give school districts the authority to adjust class sizes.

“Our teachers just went through a year with a different kind of ABCs,” said Sen. Lowe Finney, D-Jackson. “They were attacked, they were belittled and they were criticized. This year it seems to be new math: fewer teachers with bigger classrooms is supposed to equal better results. But that really does not add up.”

The budget comes after months of the governor speculating the state would be in tough shape come the next budget year amid growing yet unreliable tax revenues. He has asked state agencies to plan for cuts up to 5 percent, although departments average about 2 percent cuts in the governor’s plan.

Haslam’s budget for the current fiscal year was proposed at $30.2 billion and relied heavily on former Gov. Phil Bredesen’s spending strategy.

The Legislature ultimately endorsed his plan after making a handful of edits. But between increases in revenues and a stack of federal funds officials say couldn’t be spent right away, the budget ballooned to $31.93 billion, or 5.7 percent greater than proposed, according to the governor’s administration.

State funds make up 45 percent of the governor’s proposed budget while federal funds account for 39.5 percent of the state’s spending plan. The rest is made up of other funds including higher education tuition and bonds. The federal portion is down from making up 41.1 percent of last year’s state budget.

Steven Hale contributed to this report.

Gov. Bill Haslam is scheduled to pitch his roughly $30 billion spending plan to lawmakers on Capitol Hill Monday evening. During the annual State of the State address before a joint session of the Tennessee General Assembly, the governor is expected to outline his fiscal priorities and policy vision for the coming year.

It’s unclear exactly what the governor’s budget for fiscal year 2013 will look like. But Haslam and his staff have consistently said it will include some cuts.

Lt. Gov. Ron Ramsey told reporters Thursday he doesn’t expect many surprises in Haslam’s proposed budget, which lawmakers will spend the next weeks and months delving into and fine-tuning before they adjourn to hit the campaign trail.

Ramsey warned, though, that the various government program constituencies shouldn’t get too excited by the state’s growing tax revenue.

“I think there will still be cuts in this year’s budget, but compared to what we’ve been through the last two or three years, it’ll be easier,” said Ramsey.

The state anticipates collecting about $300 million more in tax revenues next fiscal year than this year as the economy continues to recover. However, rising costs mandated by state or federal law in education, TennCare and pensions will mean roughly $500 million in additional expenses this year, according to the administration.

“Our job (in state government) is to provide the very best service that we can at the lowest price,” Gov. Haslam told civic and business leaders in Cookeville Monday. “People every day depend on the State of Tennessee to go get a driver’s license and not have to wait in line forever, to make sure that I-40 out here is safe, to make sure TennCare is provided for our most needy families.”

Over the last six months, state agencies have handed several cost-cutting proposals to the governor’s office. One plan showed how Tennessee government departments and personnel would acclimate if the feds lopped off 30 percent of their Volunteer State spending. The resulting $4.5 billion budget contraction would require state government to lay off 5,100 of its roughly 40,000 employees. That plan acted mainly as a test exercise to prove to federal bond rating agencies the state is not overly dependent on federal dollars, according to the Haslam administration.

The other budget requests, presented during a series of budget hearings around the state in November, revealed how each department would cut 5 percent from yearly spending, with many departments writing off unfilled jobs.

With the state’s financial future looking rosier now than it did when the governor asked for those cuts, Haslam has signaled he’s willing to make some fiscal moves that previously he’d said weren’t in the cards for 2012. The administration is indicating tax cuts are now a possibility — like  trimming back the food tax, which would mean the government eating up $18 million less of Tennesseans’ aggregate food purchases. Another priority for the administration is raising the exemption on the estate tax — sometimes referred to as the “death tax” — which would mean a $14 million reduction in state revenue. The governor has also suggested allocating $6 million toward anti-crime measures annually.

“We’re all just kind of sitting on pins and needles waiting to see what the governor will recommend in the budget,” Board of Regents Chancellor John Morgan told the Higher Education Commission Thursday. “We’re very hopeful that this is going to be a good year for our education budgets, which would be a very pleasant experience given the string of the last several years, which had not been so good.”

Haslam has hinted a willingness to put money in his budget to check the immigration status of people collecting government entitlements like food stamps, which would cost $5.8 million, according to a 2011 estimate.

The governor has asked each commissioner to conduct a “top to bottom” review to identify how each would rebuild their organization to find efficiencies and better determine what services state government should be providing. Whether or how the governor will build the results of those studies into state government in the next year is not known.

The governor will unveil his budget plan at 3 p.m. followed by his State of the State address at 6 p.m.

Here are stories we’ve written about state agencies’ budget proposals:

Board of Regents

Bureau of Investigation

Department of Correction

Department of Education

Department of Health

Department of Tourism

Department of Transportation

Departments of Economic and Community Development, Financial Institutions, Labor and Workforce Development, and Safety and Homeland Security

Departments of Safety and Homeland Security, Human Services, Intellectual and Developmental Disabilities, Labor and Workforce Development

Letter from Gov. Bill Haslam; Jan. 27, 2012: 

A Campaign Promise Kept

Throughout the campaign and my first year as governor, I’ve been quite serious about tracking our performance and using data to measure our progress.

Let me explain: as a candidate for governor, I promised to take a data-driven approach to governance and accountability by building a “dashboard” to measure our progress against a set of objectives and measurements. I made this promise in Nashville at a meeting of the Nashville Rotary Club on Monday, September 13, 2010.

As I expected, it’s taken a while to establish a set of objectives and measurements, but now that our comprehensive review of state government is almost complete, I’m proud to announce the creation of the Tennessee Data Dashboard » Our team has worked incredibly hard on this important resource, but this is very much a first step. We’ll be updating the tool over the days and months to come, so feel free to share your ideas and feedback for version two.

Thanks so much for your continued support and please remember to tune-in to next Monday’s State of the State address at 6:00 p.m. CST at the State Capitol. I’m very much looking forward to sharing more of my plan aimed at moving Tennessee Forward.

Regards,?Bill

Statement from Tennessee Comptroller of the Treasury, Justin P. Wilson, Jan. 24, 2012:

Section 3-7-103(d)(1), Tennessee Code Annotated, directs the Comptroller to make quarterly reports to the Fiscal Review Committee concerning the state’s fiscal affairs. In this report, we provide a global look at the fiscal affairs, and in future reports, we plan to delve into topics of particular interest.

Tennessee state government is in sound fiscal condition.

• Our current budget, adopted unanimously by our General Assembly, is balanced not only as required by Article II, Section 24 of our Constitution, but also on a recurring basis.
• For the first five months of the current budgetary year, general fund collections have exceed- ed our projections by approximately $188 million.
• Our current state debt is not excessive.
• We have budgeted on a recurring basis for payment of principal and interest on state-issued bonds.
• The state’s retirement plan is sound.
• The post-employment benefit obligation for our retirees is manageable.
• Our unemployment trust fund is solvent.

This favorable financial outlook is in large part a result of the willingness of the General Assembly to enact budgets that have forgone, reduced or eliminated expenses and services as well as the ability of the administration to create efficiencies in operations.

This means, absent some catastrophic event, the state can for the foreseeable future, continue to operate and provide basic services to its citizens, but not necessarily at current levels.

Over the next few years, the cost of funding program increases already projected by current and prior administrations exceeds optimistic revenue projections. These projected increases do not include potential federal mandates, as of yet of uncertain scope, that may be required under President Obama’s healthcare plan. It is doubtful that over the next few years, the state can, with current revenue levels, finance all the services currently provided. It certainly will not be able to make needed capital improvements and rebuild its reserves, unless the state continues to reduce expenses and to operate more efficiently.

If the General Assembly does not continue to reduce expenses and if the administration does not continue to increase the efficiency of operations, an optimistic scenario for the next few years would be a weak continuation of existing funding with inadequate reserves, as if the status quo were embraced as the priorities of the current administration and General Assembly. This is surely so if the General Assembly reverses the cuts it has already made and does not implement those projected. The priorities of the administration and the General Assembly would be determined by past, not current members. Tax reductions designed to spur our economy would become increasingly difficult or impossible to implement.

As we look toward the future, it is essential to plan for and stay cognizant of the challenges ahead.

Impact of Federal Cuts

Tennessee’s budget is nearly $32 billion, of which $11 billion is attributable to state taxes, and approximately $13 billion is federal revenue. The remainder is represented by interdepartmental revenues, receipts from the state lottery, tuition and fees, etc. Recent activities in Washington indicate substantial uncertainty as to the level of federal funding the state may receive in the future. There could be a significant impact on the services the state is able to deliver.

The Governor’s administration has produced a plan to demonstrate it can appropriately react to the discussed 15-30% reduction in funding from the federal government. While a reduction would certainly cause hardship, the state could continue to operate and provide services traditionally provided for citizens. Given the current status of the federal debate, where the cuts will be made and how services will be affected is yet to be known.

Our local governments continue to depend on state and federal governments to fund a large portion of their local budgets. As the federal funding decreases, local governments will be affected as well and should be planning for probable reduced funding scenarios.

Basic Education Program (BEP)

The BEP consumes about $3.8 billion, or 37% of the taxes in the general and education funds. The formula for determining BEP funding is complicated. It should nevertheless be transparent, verifiable, and understandable. Our reviews show the formula is none of these.

The BEP was conceived and the formula has, for the most part, been modified in an era without charter schools, virtual schools, Achievement School Districts, dual enrollment, dual credit, STEM academies, etc. As we continue to implement and evaluate the many education reform programs in the state, we should maintain our focus on the integrity of the funding process.

Tennessee Consolidated Retirement System (TCRS)

The Tennessee Consolidated Retirement System (TCRS) is a defined benefit pension plan covering four large groups of employees: state employees, higher education employees, K-12 teachers, and local government  employees if the local government  elects to participate in TCRS. The state is responsible for the pension liabilities associated with state employees and higher education employees.

The TCRS ended the 2011 fiscal year with net assets held in trust for pension benefits of $33.7 billion. The unfunded accrued liability at June 30, 2011, based on the actuarial value of assets totaled $1.6 billion for state and higher education employees. The actuarial value of asset methodology defers for these employees $1.0 billion of net market losses that will be recognized over the ensuing ten years. Using the market value of assets (no deferral of market losses) instead of the actuarial value of assets, the unfunded liability at June 30, 2011, totaled $2.5 billion for state and higher education employees.

In addition to investment return volatility and deferred investment losses, the TCRS faces issues related to improved longevity rates and increased pension liabilities. These may be offset in part by increasing the contribution that the state, as employer, makes. Since 1972, every General Assembly has appropriated the funds required to make the employer contributions to the system in the amount recommended by the system’s actuary. It is essential that the TCRS and the General Assembly continuously review the plan to provide reasonable benefits while containing costs.

In comparison to the plans of other states, the TCRS is in very good position and if the General Assembly continues its practice of making the recommended employer contributions, the plan appears to be financially stable and the benefits appear secure.

Overall State Risk Assessment

It is important for the state to engage in an enterprise risk assessment. Currently, risk assessments are performed at the department level, but an examination of the state’s risks, as a whole, is needed to ensure resources are allocated appropriately and the most significant risks that prevent the state from achieving its strategic objectives are mitigated. Other oversight functions should be strengthened as well, including oversight of contract monitoring and systems implementation activities.

In 2011, our Division of State Audit released the Review of Tennessee’s Contract Monitoring and Management Systems. In that report, we recommended that the Department of Finance and Administration and the Chief Procurement Officer study the state’s contract monitoring and management systems to identify specific actions to address central oversight issues and to report actions to be taken by October 1, 2012.

In an effort to improve processes and reduce costs, departments look for technology solutions to help them meet their unique needs. As with other states and private companies, Tennessee has had its share of information technology (IT) system development delays and failures. Most delays and failures can be attributed to scope creep and/or lack of adequate planning which leads to increased costs. These systems involve large sums of money. In 2010, after problems with initial Edison module implementations, the Division of State Audit recommended that a list of best practices and lessons learned be developed to assist the departments and agencies in identifying and mitigating risks with future systems development projects. Since that time, problems were identified with the systems development projects of the Department of Children’s Services’ TFACTS system, the Department of Revenue’s TRUST system, and the Department of Human Services’ VIP system. Based upon our experience over many years, until a formalized process is established which involves a central, and meaningful point of approval and on-going review of the acquisition and deployment of systems to provide independent accountability and transparency for these expensive and resource intensive projects, it is very likely delays in implementation, complete failures and ultimate abandonment of systems and wasted material expenditures of tax dollars that can be avoided will be repeated.

While the implementation of the Edison system has been completed and the system does seem to be functioning more appropriately, the state has still not fully utilized the functionality of the system.

Reserve Funds

For the year ended June 30, 2011, the reserve for revenue fluctuations (rainy day fund) had a balance of $283.6 million. The TennCare reserve fund had an unobligated balance of $234.7 million. The 2011 Appropriations Act sets the rainy day fund at $327.7 million and the TennCare reserve fund at $228.7 million at June 30, 2012. Combined, total reserves are projected to be $556.4 million at June 30, 2012.

The rainy day fund has not yet been adequately restored. Section 9-4-211, Tennessee Code Annotated, requires the governor to propose in his budget an amount at least equal to 10% of the estimated growth in state general fund tax revenues to be allocated annually to this reserve, until the reserve total reaches an amount that is equal to 5% of the estimated general fund revenue for that year.

The rating agencies have questioned the adequacy of the state’s current reserves. This office believes the reserves should be increased. The increase will help the state withstand future unanticipated (or uncontrollable) events and help protect its citizens from loss of essential services during difficult years.

Financial Reporting

This year’s Comprehensive Annual Financial Report (CAFR) was released December 29, 2011, allowing the state to meet the timeliness requirement for the Government Finance Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting. The state is also currently on track to release the state’s Single Audit Report by March 31, 2012, reporting on the state’s compliance with federal requirements regarding disbursement of federal funds. Annual financial reports for Tennessee’s 95 counties are ahead of schedule for release prior to March 31, 2012. Last year marked the first time in several years all Tennessee counties met this goal.

There has been a national discussion about the need for earlier government financial reporting. Currently, most state governments are able to release their CAFRs six months after the fiscal year end and release their Single Audit Reports nine months after the fiscal year end. The federal government is reexamining the 9-month Single Audit Report deadline and will likely shorten it. Much effort will be required at both state and county levels to meet any condensed time frames.

For decision-making purposes, the General Assembly often has to rely on unaudited interim financial statistics of questionable value provided by the departments. Such statistics may drive legislative decisions and, if incorrect, could result in incorrect decisions. We strongly recommend examining what can be done to gain more confidence in the interim figures, including interim reports, and we understand that the administration is addressing this issue.

The state does not currently have state-of-the-art project management and project accounting systems for capital projects. A system improvement would allow enhanced monitoring of capital projects and management of the capital outlay funding process. If the enhanced system allows access to all agencies involved in the capital outlay process, it would also provide much-needed transparency and accountability to support better timing of the state’s debt issuances.

Civil Service

Although the Department of Human Resources has made significant changes in some areas to provide agencies more flexibility in hiring, the civil service system is still plagued with antiquated restrictions; subjective, complex, and time-consuming assessments for rankings; and other problematic issues, such as personal interviews not being conducted until after the registers are established, applicant’s credentials not being verified until after the register is closed, and registers being saturated with large numbers of applicants who are not interested in the position. In fact, long-term employees must be on these registers to be eligible for promotions within their own department.

The dysfunction of the state’s hiring process is driven home to officials seeking new staff who discover on the back-end of the process, after untold time and dollars have been spent, that the candidates lack the essential skills to perform the job.

Likewise, the procedures for termination of employees are antiquated and need substantial improvement, if not a complete overhaul, to allow state departments to manage their staffs more effectively and to allow state employees to better serve the people of Tennessee.

Changes in State Finance

The statute for management of state debt was written in the 1930s, and while it has been amended from time to time, should be reviewed in its entirety to reflect current conditions. For example, the revenues included in Section 9-9-106, Tennessee Code Annotated, include the gasoline tax and the special petroleum tax. This section of the code was last amended in 1973, when the state was issuing bonds to construct highways. The last bonds issued for highways were redeemed in 1988.

Other parts of the statute should be amended to conform to technical changes made at the federal level and to ensure compliance with the federal securities and tax regulations.

Changes in Local Finance

The Local Government Public Obligations Act of 1986 revised much, but not all, of the authority for local government debt, relocating those provisions in a single chapter. Anticipated centralization of the remaining debt authority did not occur and subsequent statutory authorizations have been codified elsewhere.

Investment Statutes

Likewise, the local government investment statutes must be reviewed. Given current market conditions, local governments are under pressure to maximize the return on idle cash while ensuring safety and liquidity. Short-term treasury bills provide no yield. Fewer banks are interested in purchasing certificates of deposit. However, the principles of safety and liquidity, not yield, should always be the foundation of investment policies. Investments should not be of a speculative nature. Due to current economic conditions and the need to maximize investment income, the statutes should be reviewed, simplified, and made both current and forward-looking.

State Procurement Office

Chapter 1098 of the Public Acts of 2010 set the course toward procurement reform through restructuring the procurement organization and creating an appointed leadership position to steer the state toward the creation of efficient and effective processes; more transparency, accountability, and competition; and making it easier for vendors to do business with our state. The state saw the appointment of the first Chief Procurement Officer in July 2011. The Advisory Council on State Procurement, which consists of representatives from the executive and legislative branch, vendor community and government procurement profession, met for the first time in November 2011. To date, all indications are that steps have been and continue to be taken toward properly implementing the procurement organization that will recommend changes to the process that could bring substantial improvements and cost savings to the state. If improperly implemented, the risk of waste and abuse increases, which would threaten the integrity of the process and increase litigation costs. The fiscal review committee should continue to closely monitor the progress of this restructure and changes in processes.

Status of County Governments

Compared with county governments elsewhere in the country, the financial condition of Tennessee counties is generally good. Of course, all counties have been affected by poor economic and market conditions.

Managing debt service obligations in the face of decreasing revenues is a serious challenge. Some counties have a high long-term debt per capita ratio. There are also debt management issues regarding the amount of variable rate debt being held by county governments and the structuring of the debt that results in excessively high payments in later years.

In many counties, the same findings are repeated year after year without any effort being made to correct them.

Observations about Local Governments

The State Funding Board established a requirement that all governmental entities incurring debt have a written debt management policy in place by December 31, 2011. Many governments met the deadline and voluntarily submitted copies to the Office of State and Local Finance. During the last fiscal year, that Office approved 329 short-term debt issues (in an approximate amount of $608 million) for local governments and reported on 70 plans for refunding debt (for a total of $1.316 billion) submitted by local governments.

In addition to work done by other investigative entities, the Office of the Comptroller of the Treasury issued investigative reports on 26 local government entities monitored by the Division of Municipal Audit during the year ended December 31, 2011. Frauds totaling $645,000 were discovered in 13, or one half, of the investigations, while $2,805,000 was related to waste and abusive use of public funds. Twenty (20) cash shortages resulting from fraud, mismanagement, or accounting errors totaling $689,284 were identified in county entities for the calendar year. County government internal controls help to expose the misuse or improper accounting of public funds. For local governments, the economy could be a factor affecting the number of cash shortages. As local government budgets are squeezed by the economy, shortcuts are found and, in those cases, internal control is sometimes compromised.

At the time of this report, 94 of the 95 counties have successfully completed redistricting at the county level.

In upcoming quarterly reports, we plan to examine in detail some of the topics mentioned above, or any other pressing issue.

Justin P. Wilson
Comptroller of the Treasury

Those who thought the question was long ago settled as to whether state and local governments in Tennessee possess the legitimate power to levy taxes on income look to have thought wrong.

The state House of Representatives, following the Senate’s lead, recently backed a proposed amendment to the Tennessee Constitution specifically banning earnings taxes.

On a 73-17-3 vote, support for the measure handily surpassed the two-thirds majority, or 66 votes, needed in the House next session to trigger the statewide referendum. The Senate vote was 26-4 last spring, where 22 votes will be needed next session to achieve the two-thirds requirement.

So it appears that, in keeping with Tennessee’s grueling process for altering the state Constitution, there’s a good chance voters in 2014 may get an opportunity to impose a binding cease-fire in one of the most politically bloody and protracted skirmishes of the past two decades. They will be asked to endorse or reject proposed language to the Constitution declaring that state and local governments can’t tax a company’s payroll or an individual’s “earned personal income.”

But is a vote of the people on a constitutional amendment banning an income tax even necessary — let alone desirable?

There’s little current doubt where GOP lawmakers, who currently dominate both the Tennessee House and Senate, stand on the question of a state income tax’s merit as public policy.

Republicans happily attribute their party’s ascension to the legislative majority over the past several years at least in part to their unified hostility toward an income tax. Indeed, soon after last Thursday’s House vote, Tennessee Republican Party chairman Chris Devaney blasted away at “Tennessee Democrats (who) once again showed their liberal mindset by reinforcing their belief that government should not be restricted from dipping into your paycheck.”

Democrats are in fact still deeply divided on the key legal and political questions surrounding an income tax — although they fully concur in their resentment toward Republicans for continuing to exploit their ambivalence on the issue.

During the House vote, nine Democrats voted in favor of sending the income-tax ban amendment to the people, 17 against.

Democrats voting for the measure, Senate Joint Resolution 221, included Reps. Gary Odom and Craig Fitzhugh, the chamber’s past and present Democratic caucus leaders, respectively.

Voting against the “No State Income Tax” amendment were Jimmy Naifeh, D-Covington, and Charles Curtiss, D-Sparta. Tennessee’s House speaker for 18 years prior to 2009, Naifeh was, along with former Republican Gov. Don Sundquist, a leading proponent of enacting an income tax when it was last seriously considered from 1999 to 2002. Curtiss, formerly chairman of both the House Commerce and Fiscal Review Committees, supported an income tax as well.

But perhaps the most telling sign of the political frustration that grips the party with respect to the income-tax issue is that seven Democrats refused to cast a definitive vote for or against SJR221, which is sponsored by Sen. Brian Kelsey, R-Germantown, and Rep. Glen Casada, R-Franklin.

Knoxville Rep. Joe Armstrong, along with Reps. Janis Baird Sontany and Brenda Gilmore, both of Nashville, opted to finger the “Present Not Voting” button.

And in an apparent protest gesture against even having to publicly consider the income-tax amendment, four Democrats declined to press any button whatsoever. Even though they were present for the day’s chamber floor session, House Caucus Chairman Mike Turner, Nashville Rep. Sherry Jones and Chattanooga Reps. JoAnne Favors and Tommie Brown made no effort to participate in the SJR221 vote.

Turner later accused Republicans of using SJR221 as a “political ploy.” He suggested their true intentions are to attempt to capitalize on what they perceive as strong public opposition to an income tax and further marginalize the Democratic Party in the halls of Tennessee state government power.

Turner called the SJR221 income tax amendment “a gimmick to get people out” to vote. Another constitutional amendment approved for the 2014 ballot last year, Senate Joint Resolution 127, which would grant state lawmakers greater authority to regulate or perhaps even attempt to outlaw abortions, serves a similar purpose, he said.

“I think it’s clear in the Constitution that the income tax is already banned,” said Turner, an Old Hickory firefighter who came unexpectedly close to getting singed in his 2010 House district re-election bid against Goodlettsville bison rancher Charles Williamson.

“I thought that was playing politics,” Turner said of SJR221. “Therefore I chose not to vote for it.”

Rep. Jones had a similar beef with the income tax amendment.

“It was just a political thing for the Republicans — it was just crap,” she told TNReport. “We’ve been all through this. When we went through the income tax last time it was determined that it was unconstitutional.”

“I am not saying that an income tax is not a good thing,” Jones added.

One thing is currently certain, though, she continued: There’s clearly not enough popular buy-in among voters to enable politicians to sell an income tax now or in the foreseeable future.

Fault for the electorate’s present-day income-tax loathing, said Jones, can ultimately be traced back to the most visible Republican who kept pressing for it in the late 1990s and early 2000s — Gov. Sundquist. Jones complained that the Sundquist administration never really did the legwork necessary to educate the public about its purported benefits. “That gave people the opportunity to bash an income tax so that nobody would like it,” Jones said.

“Will we have an income tax in the future? Nobody knows,” she said. “You never know what is going to happen to your funding in government, so why cut out your options? If it is unconstitutional, what’s done is done. I just don’t know why we keep fighting about it all the time. We’ve been fighting about it for 10 years.”

But is an income tax really “banned” in the Tennessee Constitution?

That very issue was at the center of those polarizing tax-policy feuds of yesteryear. And nothing’s really officially happened since then to put the issue to rest — save the reverberating electoral echoes of those famous honking horns.

The consensus a decade ago among stalwart income tax-phobes and -freaks alike was that the state Constitution was silent on the matter — even if the state Supreme Court had in earlier times interpreted that silence to mean the Legislature possessed no authority to impose such a tax in absence of a constitutional amendment.

(Note of Clarification: In the comment section below, former Republican Party spokesman Bill Hobbs raises the point that many who opposed the income tax during the period when it was last seriously considered by the Tennessee Legislature argued that because the state Constitution does not explicitly authorize the Legislature to tax incomes, then such a levy is indeed prohibited.)

“It long has been the ‘conventional wisdom’ in Tennessee that a general Tennessee tax on personal income would be unconstitutional,” wrote Chattanooga Times Free Press associate publisher Lee Anderson, an unwavering income-tax opponent over the years. “But look carefully in the Tennessee Constitution, and you will find not a single word saying such a levy is unconstitutional — or that one would be constitutional.”

Those who believed that an income tax was fully constitutional included not just politicians and activists, but legal scholars and state attorneys general. They were always quick to argue that absent any prohibitory language in the Constitution, the Legislature had all the power it needed to move forward with an income tax or virtually any other revenue-generating option it favored.

In a January 2002 op-ed for the Memphis Commercial Appeal, Donald Polden, at the time the dean of the Cecil C. Humphreys School of Law at the University of Memphis, wrote, “If the words of the Constitution explicitly permit or forbid the action or policy taken by the legislature, then the legal controversy can be resolved decisively.”

“However, in many cases the language is not clear and the court must determine the meaning of the Constitution by resorting to other analysis – for example, the history of the constitutional provision or prior court cases,” continued Polden, who is now dean of the Santa Clara University School of Law in California.

Polden wrote that legislators shouldn’t really even concern themselves with the issue of an income tax’s constitutionality. The job of lawmakers is to write laws, and the job of testing those laws against the government’s guiding document is properly left to judges, he argued.

He furthermore suggested that by then in 2002 “many constitutional experts” had concluded that the Tennessee Supreme Court opinions most often cited as precluding the state Legislature’s ability to collect an income tax — Evans vs. McCabe in 1932 and Jack Cole Co. vs. MacFarland in 1960 — were “not authoritative and therefore are not binding.”

Polden said that at the end of the day Tennessee lawmakers’ arguments against an income tax which were based on constitutional grounds “lack merit and may reflect efforts to avoid responsible state fiscal policy-making.”

Interviewed after the House vote on SJR221 last week, Speaker Beth Harwell brushed off charges that Republicans keep pulling the income-tax trump-card out of their sleeves unfairly and out of turn.

“Members reflect the will of the people that elect them,” said Harwell, herself a veteran of the income tax wars. “And to many folks in the state of Tennessee it is important that we clarify and put in our Constitution, for sure, that an income tax is unconstitutional.”

Press Release from Gaylord Entertainment and the Dollywood Company, Jan. 19, 2012:

Two of the biggest names in Tennessee tourism are teaming up to bring a major family entertainment zone to Nashville. Gaylord Entertainment (NYSE: GET) and Dolly Parton’s Dollywood Company have entered into a memorandum of understanding (MOU) for a 50/50 joint venture to develop a 114-acre family entertainment zone adjacent to the Gaylord Opryland Resort & Convention Center. The Dollywood Company will serve as the operating partner. Phase one of the project is a yet unnamed approximately $50 million water and snow park, the first of its kind in the United States. A late 2012, early 2013 groundbreaking date is expected with the park opening slated for summer of 2014.

Tennessee Gov. Bill Haslam and Nashville Mayor Karl Dean joined Dolly Parton and Colin V. Reed, chairman and chief executive officer, for Gaylord Entertainment at today’s announcement at the Grand Ole Opry House at Gaylord Opryland.

“Tourism is the second largest industry in Tennessee, generating more than a billion dollars in tax revenue annually and employing more than 170,000 Tennesseans,” Haslam said. “This project will be a welcome addition to the wide variety of attractions and destinations across our great state, and I applaud the collaboration and spirit that has led to this announcement.”

“Music City has become a travel destination unlike any other in the country,” Dean said. “The addition of this family entertainment complex near Opryland adds a critical missing piece to our tourist offerings. It provides a unique leisure attraction that will further enhance our already booming hospitality industry, which is one of our city’s top private sector employers.”

The water and snow park will anchor the project which offers room for future expansion. The park will provide a mix of high energy water activities for the summer season and designated snow activities for winter play. Once open, first year attendance is projected at 500,000, a large portion of which will come from out of state, bringing in substantial tourism revenue to Tennessee and Nashville. Dollywood expects to employ 450 full- and part- time employees.

This proposed attraction furthers Gaylord’s focus on growing the leisure side of its business and continuing to drive revenue through its top-notch entertainment attractions throughout the year. The Dollywood Company is responsible for managing Dolly Parton’s Dollywood and Dollywood’s Splash Country in the Smoky Mountains of East Tennessee, as well as her dinner theatre attraction, Dixie Stampede. Annually, these attractions attract approximately four million visitors and have won some of the industry’s most coveted awards including “world’s best theme park” and “America’s most beautiful water park.”

“I’m so excited about this opportunity,” Dolly Parton said. “I am confident that partnering my Dollywood Company with a great company like Gaylord will create something truly special. We’re all working on new types of entertainment to do in the daytime and nighttime for the whole family so we bring new folks to the area year round.”

“We are thrilled by the prospect of bringing to Nashville a family focused entertainment center with one of the preeminent theme park owners and operators in the country,” said Colin V. Reed, chairman and chief executive officer, for Gaylord Entertainment. “I am confident this proposed attraction, which will be a destination not only for our hotel guests but also for the entire Nashville community, will meaningfully enhance our transient and leisure strategy by providing a fun, family environment at the doorstep of the Opryland Hotel. With Dolly Parton’s country music legacy and strong ties to Nashville, we can think of no better partner for this venture than Dolly’s Dollywood Company.”

“We hope that some other developers with great ideas will join us for phase two of this project. We’re saying the water and snow park are the first phase, but who knows, if we see some great ideas we could be developing the entire zone by the time the snow and water park open. Wouldn’t that be great for Nashville and the state,” Parton said.

“We are in the early stages of planning and will make certain that any project we pursue is done so under the appropriate economic conditions and provides adequate returns for our shareholders,” said Reed. “We are reserving approximately 35 acres for expansion and complimentary regional attractions and we have been working closely with state and city officials to ensure we have the proper infrastructure agreements in place for the project to move forward. We are looking forward to working on the next steps of this project and to it becoming a valuable part of the Nashville tourism community.”

Based in the picturesque Great Smoky Mountains, Dollywood is a 150-acre family adventure park which operates nine months a year (late March through December) and offers more than 40 rides and attractions; award-winning live entertainment featuring country, bluegrass, gospel and mountain music; and a dozen crafters authentic to the East Tennessee region. A family-friendly vacation destination, Dollywood also includes the 35-acre Dollywood’s Splash Country, voted America’s “Must-See Waterpark.” Dollywood offers all-inclusive vacation planning with a variety of overnight lodging options. For more information, call 1-800-DOLLYWOOD or visit dollywood.com.

Gaylord Entertainment (NYSE: GET), a leading hospitality and entertainment company based in Nashville, Tenn., owns and operates Gaylord Hotels (http://www.gaylordhotels.com), its network of upscale, meetings-focused resorts and the Grand Ole Opry (http://www.opry.com), the weekly showcase of country music’s finest performers for 85 consecutive years. The company’s entertainment brands and properties include the Radisson Hotel Opryland, Ryman Auditorium, General Jackson Showboat, Gaylord Springs Golf Links, Wildhorse Saloon, and WSM-AM. For more information about the company, visit http://www.GaylordEntertainment.com.

UPDATE: The House passed SJR221 today, 73-17. The measure will come up again for a second vote in both the House and Senate in the next legislative session, when it must pass by a two-thirds majority.

The House of Representatives is set this week to move toward amending the state Constitution to clarify that an income tax is banned in Tennessee.

Senate Joint Resolution 221, sponsored by Sen. Brian Kelsey and Rep. Glen Casada, both Republicans, has already passed in the Senate. A vote was postponed in the House last spring on the request of House GOP Leader Gerald McCormick, who was hesitant to dive again into the historically contentious debate when the measure came to the floor in the waning hours of the 2011 session.

The text of the proposed amendment to the Tennessee Constitution reads as follows:

Notwithstanding the authority to tax privileges or any other authority set forth in this Constitution, the Legislature shall not levy, authorize or otherwise permit any state or local tax upon payroll or earned personal income or any state or local tax measured by payroll or earned personal income; however, nothing contained herein shall be construed as prohibiting any tax in effect on January 1, 2011, or adjustment of the rate of such tax.

Should a majority of House lawmakers vote in favor of SJR221 on Thursday, and it is expected to pass by a large margin, then Tennessee’s constitutional-amendment process — one of the most lengthy and politically arduous in America — will require that the measure come back before members of the General Assembly next session and be passed by a two-thirds majority in both Houses. If it succeeds, it would go to the people on the 2014 general election ballot.

The question of whether the state ought to have an income tax was once one of the most polarizing issues in Tennessee politics. In the late 1990s and early 2000s the looming prospect of politicians imposing an income tax on Tennesseans sparked nascent Tea Party protests outside the state Capitol.

That was then, this is now: Proponents of enacting an income tax have largely been vanquished from the Legislature and the mainstream of Tennessee politics.

“There aren’t too many left,” said Casada. “The voters took care of a lot of them over the years.”

Indeed, SJR221 was approved last year in the Senate with only four lawmakers, all urban Democrats, opposing it.

In the House, SJR221 has broad bipartisan support as well.

Democratic Leader Craig Fitzhugh and Democratic Caucus Chairman Mike Turner have both indicated they’ll probably vote for the measure. Both said they support giving Tennessee voters the opportunity to weigh in directly on the issue at the polls.

The Tennessee Constitution currently states, “The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem.”

Opponents of an income tax tend to believe that because the Constitution gives no direct authority to the Legislature to tax income in general, then it legally can’t. Supporters of an income tax have argued that because the Constitution doesn’t prohibit the Legislature from taxing all income, then nothing would legally stop it from doing so.

Asked Tuesday whether he believes taxing work income is currently prohibited under the existing wording of the state Constitution, Fitzhugh said he “doesn’t desire to rehash that again.”

The state’s most vocal proponent of enacting a tax on personal income is Tennesseans for Fair Taxation, which also includes other member-organizations like the Tennessee Education Association, the Tennessee Public Employee Association, the League of Women Voters and various other labor union, community activist and progressive advocacy groups.

Members of Tennesseans for Fair Taxation believe it would be fully constitutional — and desirable — for the Legislature to enact an income tax statutorily, and they staunchly oppose the effort to eliminate the General Assembly’s power to do so on its own.

“We feel that the (state constitutional-amendment) process is so in-depth and unlikely that it would essentially tie the hands of future legislators to use that option,” said Elizabeth Wright, executive director for TFT.

Constitutionally prohibiting the state from collecting income taxes in the future “would be devastating for Tennessee,” she added. Wright said members of TFT will likely join with Occupy Nashville protestors to demonstrate against the House passing SJR221, as they did last week when the Legislature convened to kick off the 2012 session.

Speaking on behalf of Tennessee’s League of Women Voters chapter last Legislative session, lobbyist Stewart Clifton told the House Finance Committee that the hands of future legislators “should not be tied at either the state level or the local level, as (SJR221) does.”

“An income tax is obviously nothing that anyone is proposing right now, but we don’t know what the future holds,” Clifton said.

The League of Women Voters has declared that it supports “a broad-based personal income tax and repeal of the Hall income tax in order to enhance the equity and balance of the tax structure and to produce adequate state and local government revenue.”

The League has also concluded that “the statewide income tax should be adopted by Legislative action rather than Constitutional amendment.”

Tennesseans for Fair Taxation has suggested that “there is no language (in the Tennessee Constitution) that specifically prohibits any kind of state tax based on income which is why the last three attorney general’s have all said that, properly worded, an income tax is constitutional.”

Former Attorney General Paul Summers, who served as the state government’s chief legal counsel from 1999 to 2006, twice declared that the Tennessee Legislature could conceivably establish a tax on people’s earnings in Tennessee, first in 1999, then in 2003, when he wrote that “there are various means by which the General Assembly could levy a tax on, or measured by, salaries, payrolls, or income.”

While SJR221 sponsor Casada says he thinks the current wording of the Tennessee Constitution prohibits an income tax — and points out that the Tennessee Supreme Court has endorsed that interpretation in the past — he agrees that SJR221 will tie the hands of future lawmakers.

That is, of course, kind of the point, he said.

“There are some things that are just so onerous that you don’t want to do them,” said Casada. “I think taxing a person’s income is one of those things.”

Casada disagrees, however, with the assessment that the income tax ban is in the truest sense “permanent.”

All that amending the Tennessee Constitution to prohibit an income tax would really do is slam the door on any backdoor maneuvering to sneak an income tax through the Legislature without a vote of the people, said Casada, who guesses that support in the general pubic for the thrust of SJR221 is “north of 60 percent.”

“There is no such thing as a permanent ban on anything in our constitutional democratic republic,” said Casada. “Granted, it takes work and time. But as long as there is a mechanism to change the Tennessee Constitution, there is a mechanism to change anything that is in it.”

State lawmakers have yet to pick through Gov. Bill Haslam’s list of priorities going into the legislative session, but so far many favor his plan to ever-so-slightly cut the food tax.

That group of fans includes Republicans who not so long ago scoffed at the idea of taxing groceries at a lower rate.

“I think it’s great. It’s a way for all Tennesseans to be able to participate in a tax cut,” said Rep. Gerald McCormick, the House Republican Leader. Back in August, when Democrats proposed using higher-than-expected sales tax revenues to offset a grocery-tax cut, McCormick labeled the idea “irresponsible.”

But McCormick stood by his earlier assessment Wednesday, telling TNReport he still believes the Democrats’ tax-cut proposal over the summer was a “political ploy.”

“I thought it was irresponsible, considering that we were mired in a recession, in a deep recession. The economy is recovering now, and I think that’s reflected in our sales tax numbers. So it’s become a possibility, whereas six months ago I think it was simply political posturing on the part of the Democrats,” said McCormick.

Lt. Gov. Ron Ramsey belittled talk about reducing the food tax as recently as last month, telling reporters cutting the food tax is “more psychological than it is anything else.”

“We’re never going to do away with (the food tax) completely. So I don’t think that lowering it really does help that much, and I think we can concentrate more on the tax that we can actually eliminate,” Ramsey, R-Blountville, continued. He has since said he’ll back the governor’s tax plan.

House Speaker Beth Harwell, too, showed little interest in touching the food tax three weeks ago, saying, “we don’t have the revenues available to do it.”

The governor’s plan would mean about $18 million less that the government sponges up in revenue from the private sector. Haslam’s plan would reduce the grocery tax by 20 cents for every $100 spent on food. That would save a family of four on a modest grocery budget $21.24 a year.

Despite the scant savings taxpayers would see, Democrats said they’re pleased the governor has made cutting the grocery tax an acceptable topic of conversation among the Tennessee General Assembly’s Republican majority.

“Well, it’s obviously probably not enough,” said House Democratic Caucus Chairman Mike Turner about the tax cut. “Anytime we get the opportunity to lower the sales tax I’m for it, even with the incremental steps it’s not going to be a real noticeable impact. … Hopefully one day we’ll get a full percentage point knocked off.”

Lawmakers reduced the tax back in 2007 by a half cent to 5.5 cents on the dollar. Sales tax on non-food items is 7 percent.

Democrats pushed last summer for legislative leaders to consider cutting the food tax even further, although GOP leaders at the time dismissed the idea, saying the state revenues had to recover first. But Haslam said Tuesday he’s making it a goal to reduce the food tax from 5.5 percent to 5.3 percent this year with plans to reduce it to 5 percent in three years.

Senate Majority Leader Mark Norris, Ramsey’s right-hand man in the upper chamber, says he, too, is content with the governor’s proposed plan to cut the food tax.

“It’s a great start. I mean I think some of us wish we could do more more quickly. And maybe through the budget hearings we’ll find that there is a little bit of flexibility. Perhaps we can do more. But it’s a great place to start.”

The governor’s plan is do-able, says the Republican chairman of the powerful House Finance Committee.

“This year, I think the funds will be available, so I don’t see a problem in this year’s budget. I’m not saying we don’t have to make some other cuts, but funding will be available with the increase in revenue that we have,” said Chairman Charles Sargent, R-Franklin.

The governor’s legislative priorities also include broadening the exemption from the inheritance tax from $1 million to $1.25 million, which would benefit an average of 200 people a year, a plan House Democratic Leader Craig Fitzhugh said he can support if the state can spare the funds.

“It doesn’t have the broad effect that the sales tax on food does, but it would be something that if we can afford it, it would be an appropriate thing to look at,” said Fitzhugh, D-Ripley.