Gov. Bill Haslam’s proposal to cut Tennessee’s sales tax on food by a half percentage point over three years has been joined by several other proposals from Republican and Democratic legislators alike.

The volume of bills related to the tax has prompted lawmakers to move all of the proposals to a special meeting of the House General Subcommittee of Finance, Ways and Means, toward the end of the session, after the committee approves the budget, said Rep. Curtis Johnson, R-Clarksville, vice chair of the sub-committee.

“I think that’s wise, what the chairman of the finance subcommittee did,” said Rep. Glen Casada, R-Franklin, “because what it says is ‘Gentlemen, you’ve got until late April to figure out where to come up with those things you want to do,’ and, in other words, don’t just come to us and say, ‘I want to cut the sales tax on food,’ and then complain, when that’s all you bring, is an idea, and you don’t propose a way to do it.”

One such bill, HB2239, sponsored by Casada, proposes to cut the sales tax on food from 5.5 percent to 5 percent and would take effect July 1 of this year. A family of four spending $884 on groceries per month would save about $53 a year under Casada’s plan. Tennesseans would pay about $46 million less in grocery taxes annually, and Capitol researchers estimate they would spend some of that money on other items subject to sales tax.

The net effect would be a $42 million loss to state coffers.

Casada has requested the bill be moved to the special tax committee in order to find a way to offset the decrease in revenue to the state.

“That’s why I put the bill on notice and put it behind the budget,” Casada said. “That way it becomes public. Everyone knows what’s going on and knows exactly what I’m trying to do, and I’m looking for other legislators to help me find areas they may know about, where we could find this $42 million.”

Haslam’s proposal to cut the sales tax follows eight months of tax revenues increasing by 5 percent or higher. Republican lawmakers, who recommended against cutting the sales tax several months ago, have said the uptick in revenues has given them a reason to support the proposal.

While Democratic lawmakers have put forward bills that would make steeper cuts to the tax, they have said they view the proposal positively. Lt. Gov. Ron Ramsey, R-Blountville, has said that although he doesn’t view a reduction to the sales tax as a priority, the gradual reduction proposed in the governor’s plan is prudent.

Lawmakers spent much of last year riding a political roller coaster to define Amazon.com’s role in collecting sales taxes from online shoppers. This week they made their first move to approve a deal reached between the state and the online retail titan.

Just a day before Gov. Bill Haslam toured the new Amazon warehouse in Chattanooga Thursday, a House Finance subcommittee easily approved legislation to seal a deal with Amazon to collect sales taxes from its online shoppers beginning in 2014. It will amount to about $23 million a year, according to legislative analysis.

“These sales taxes are already due,” House Majority Leader Gerald McCormick, R-Chattanooga, told the committee as he pitched the bill. “This simply is a collection issue, and they have agreed to collect the sales tax.”

The deal means Tennessee taxpayers who shop online will get to hold on to about $40 million in revenue that could be collected between now and 2014, according to legislative staff.

Haslam and Amazon.com executives announced a deal in October where the Internet retailer would make a $350 million investment by opening distribution centers in Hamilton and Bradley counties. The Internet retailer is opening additional centers in Lebanon and Murfreesboro.

The arrangement, which was called “Project Tango” by officials, grew out of a deal struck between outgoing Gov. Phil Bredesen and Amazon executives just weeks before Haslam took office.

Lawmakers quickly split on the issue. Although they liked the prospect of Amazon creating thousands of jobs in the state, some argue the company ought to be forced to collect money from Tennesseans for the government just like any other business located here.

One of those critics, who says he is satisfied with the current deal, says he doesn’t see the bill hitting any snags making its way through the Legislature, even though Amazon has brokered deals in other states that require the company to collect sales taxes as soon as September.

“There are a number of states that are not collecting a penny, and this is something we were able to work out, plus the benefit that we are going to have four distribution centers in the state of Tennessee. I think that’s a good thing,” said House Finance Committee Chairman Charles Sargent, R-Franklin.

The issue is one of national significance. Amazon has argued there is no uniform law that requires it to collect sales taxes and that the company doesn’t meet a legal threshold called “nexus” for collecting the taxes because it doesn’t have brick-and-mortar sales facilities in many states seeking the tax.

Giving the Internet retailer a pass on collecting sales taxes is unfair to Tennessee business with a physical state presence because they have to charge customers the tax, says critics with the Tennessee Alliance for Main Street Fairness, a fierce opponent to the Amazon deal in Tennessee and across the country.

Only a federal law requiring the retailer collect sales taxes in all states would trigger Amazon to collect sales taxes any earlier than 2014.

House Speaker Beth Harwell, who met with Amazon executives Wednesday, said she too sees no trouble writing the deal into state law, but wants a national solution from Washington.

“Our federal government has got to take action on this issue, and until they do, all of our hands are tied,” she said.

The state legislation is up again for discussion in both the House Finance committee and the Senate tax subcommittee Tuesday.

The governor’s proposed reduction to the food tax is laudable, but Democratic lawmakers believe it doesn’t go far enough.

During the Democratic response to Gov. Bill Haslam’s State of the State address, Sen. Lowe Finney, D-Jackson, said that they applaud Haslam’s proposed reduction from 5.5 percent to 5 percent over a few years, but said that they would like to see a gradual elimination of the food tax.

“This would indeed help all Tennesseans,” Finney said. “This would help everybody around the state. And I think especially if you go in and you look at low-income areas, you look at rural areas around the state, you would see that this legislation could have a really positive impact.”

The gradual elimination of the grocery tax has support from Democratic leaders in both chambers of the General Assembly.

“We’re actually glad that the governor’s doing this,” said Rep. Mike Turner, D-Old Hickory. “But we’ve already had bills filed. We’ve got several different bills filed from last year that we’re carrying forward.”

One sponsored by Turner aims to cut the sales tax from 5.5 percent to 5 percent in the first year and to 4.5 percent in the second year.

“We’re a very sales tax-dependent state, so it’s hard for us to cut sales tax, but it’s a step in the right direction,” Turner said. Sales taxes make up about 54 percent of Tennessee’s state tax revenue.

Turner also suggested that instead of making the cuts the governor has proposed to the inheritance tax and the Hall income tax on investments, which he says will only benefit the wealthy, that the Legislature take that money and apply it to steeper cuts to the grocery tax to benefit everyone.

Turner’s bill, HB1529, originally scheduled to be debated in the House Finance Subcommittee Wednesday, was deferred to be debated alongside other sales tax legislation, including Haslam’s bill. Turner said that he expects it to be taken back up within the next few weeks.

In addition to the governor’s bill and his own bill, Turner said that Rep. Jimmy Naifeh, D-Covington, had several amendments to attach to Turner’s bill that would make steeper cuts to the grocery tax.

Turner and Naifeh would need political support from their colleagues in the GOP — who control both chambers of the Legislature and the executive branch — for their proposals to have any chance of passage.

Tennesseans for Fair Taxation, one of the state’s most vocal opponents of taxing food purchases, in fact does not support Haslam’s grocery tax reduction, or any other tax cut that isn’t offset by an increase in revenues somewhere else.

“We’re all about removing the tax on groceries, but we also want to make sure there is still adequate funding for public services,” TFT executive director Elizabeth Wright told TNReport. “We feel that Tennessee has a budget crisis, and we can’t really afford to lose any more income coming in because people are losing jobs, services are being cut and the quality of our public services is declining even further than it has been.”

Craig Fitzhugh, the House Democratic leader, says that in fact because revenue estimates were lower than what the state has actually collected, the proposed grocery tax cut is essentially revenue neutral.

“We have the revenue to do this, because the revenue has increased since revenue estimates were made,” Fitzhugh said. “I think the governor recognized that, and we’re glad that he did — and I’m glad see him support our measure that we came forth with.”

Bill Howell, TFT’s Middle Tennessee director, doesn’t buy Fitzhugh’s reasoning. Cutting any of the state’s taxes without finding ways to bump tax collections up in other places will “result in a steady ratcheting down of the state’s revenues,” Howell said.

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 said the budget he’ll pitch to legislators Monday evening is one that reflects the state’s priorities “with strategic investments, painful but necessary cuts and some savings for the future.”

The governor will reveal his budget proposal for the coming year tonight in his second State of the State address before a joint session of the state’s General Assembly.

In a preview of his address Monday morning, Haslam told reporters that increased flexibility in the budget-planning process due to “stronger than anticipated revenue” was balanced by $160 million in one-time federal money leaving the budget. While the state had more revenue to work with than the administration had expected, Haslam said the amount of money coming in is just now beginning to return to where it was in 2007.

Among the budget priorities highlighted by the governor were the restoration of a number of core services that had been cut in the previous budget and a continued effort to build up the rainy day fund. He also called attention to tax cuts he has proposed to the state’s grocery and estate taxes and said he will propose a pay increase for state employees. However, he did reiterate his opposition to across-the-board raises.

“I want to emphasize, I don’t think giving nominal, across-the-board raises is the best way in the long run to recruit, retain and reward great employees,” he said.

The governor has often compared his vision of an ideal government to that of a successful business and forecast a similar message for tonight’s address.

“What you’re going to hear from me tonight is this: State government’s role is to provide the very best service we can at the very lowest price for our citizens,” he said.

Follow @TNReport and #TNSotS on Twitter for live updates during the governor’s State of the State address, beginning at 6 p.m. tonight.

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

Press Release from the Tennessee Alliance for Main Street Fairness, Jan. 26, 2012:

Sen. Alexander, Gov. Haslam Voice Support as Businesses Gather in Six Cities, Including Nashville

Nashville, TN – Businesses across Tennessee joined together today to support giving brick and mortar merchants a level playing field with online and catalog retailers. Such retailers are currently exempt from collecting and paying the state sales tax, which puts local stores at a huge price disadvantage.

In Nashville they gathered in Green Hills at Nashville Trunk and Bag.

“As long as the government continues to say you can buy this product at our store and pay sales tax or buy it online and save the sales tax, we’re going to continue losing business because of that policy,” said Susan Cavender, owner of Nashville Trunk and Bag. “That’s just wrong. Cities need local businesses and we need a level playing field.”

Cavender, Ron Shuff of Ron Shuff Music and Lori Elam of My Sister’s Closet are among those joining a steering committee of the Alliance for Main Street Fairness to push for a fair online tax policy. Merchants also gathered in Memphis, Chattanooga, Knoxville, Oak Ridge and Johnson City. They heard from both Senator Lamar Alexander, who is sponsoring a bill to close the online tax loophole and Governor Bill Haslam who supports the legislation.

“This legislation would give states the ability to close the online sales-tax loophole, created when out-of-state sellers don’t collect, and purchasers don’t pay, the state sales tax – even though they still owe it. This loophole subsidizes out-of-state businesses at the expense of Tennessee businesses and subsidizes some taxpayers at the expense of others. Tennessee is losing hundreds of millions of dollars that could be used to improve services or avoid a state income tax. The legislation addresses a states’ rights issue: preserving the right of states to collect – or to decide not to collect – taxes that are already owed under state law.”

“Tennessee’s brick and mortar retailers are significant investors here, employing thousands of Tennesseans, and as a state that relies heavily on sales tax revenue, we must focus on maintaining a healthy and competitive environment to grow Tennessee jobs,” Haslam said. “I appreciate Sen. Alexander’s leadership along with the support from members of our congressional delegation to find a national solution as we work to become the No. 1 location in the Southeast for high quality jobs.”

Support for the federal legislation to close the sales tax loophole is widespread. Senator Bob Corker is a co-sponsor of the Senate bill. In the House, both Reps. Steve Cohen and John Duncan Jr. are co-sponsors of a similar bill. Metro Mayor Karl Dean has voiced support along with Memphis Mayor AC Wharton, Knoxville Mayor Madeline Rogero, Knox County Mayor Tim Burchett, Chattanooga Mayor Ron Littlefield, Hamilton County Mayor Jim Coppinger and Mayor Tom Beehan of Oak Ridge. The legislation also has the support of the chambers of commerce in Knoxville, Memphis, Chattanooga, Oak Ridge and Johnson City, with more endorsements expected.

The Alliance for Main Street Fairness includes businesses all across the state. The steering committee will focus on generating even more support for online fairness and making sure that support is communicated to the Congressional delegation.

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