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Another round of budget cuts will sweep across state government this fall, cutting deeper and hitting more agencies than reductions and layoffs announced in July.

On Wednesday morning, Budget Director Dan Villa notified state agencies with general fund budgets — including some outside the governor’s usual authority, such as the Office of Public Instruction — that they have just over a week, until Sept. 8, to submit plans for how to cut spending by up to 10 percent.

The memo outlined that up to $117.9 million could be cut in the current fiscal year that started July 1, and another $119.2 million in FY 2019. Although that adds up to $236 million, Villa said current projections suggest they will only need to reduce spending by $226 million, at least to start. 

That's on top of $70 million in cuts finalized in July for the current fiscal year. Most of that reduction was made by taking half of the fund the state uses to fight wildfires and using it to patch holes elsewhere in the $4 billion general fund budget. Programs that are primarily funded with federal revenue, like the Department of Transportation, or with fee collections, like Fish, Wildlife and Parks, will be shielded some from the slashes to come.

“The law is very clear,” Villa said. “The governor has an obligation to meet that no matter how painful it may be.”

Villa and Democrats blame the cuts largely on the Legislature's Republican majority for opposing tax increases. GOP leaders have said they prefer spending cuts to weather what they see as a temporary economic downturn and not a symptom of a tax system in need of overhaul. Both parties agree, however, that an unusually active fire season has complicated budgeting.

“This is just incredible what we’re going through. As I’m looking out the window, I’m seeing smoke that could be cut with a knife,” House Appropriations Chairwoman Nancy Ballance, R-Hamilton, said.

If the maximum possible reduction of $236 million is not enough to keep the state in the black, Gov. Steve Bullock would have to call for a special session of the Legislature to write a new budget for spending through June 30, 2019.

Agencies under the governor's authority submitted plans for cutting 5 percent earlier this month as part of normal budgetary precautions. Villa said those proposals could help guide cuts made by legislators should a special session be called, and if those same cuts weren't already made under the request to 10 percent. Last week, when discussing the 5 percent plans, the governor’s office had said they were not expecting to make any more cuts this year.

After Villa receives memos from agencies on possible places to cut, his budget team will craft a draft plan. Two legislative committees — Revenue and Transportation as well as Legislative Finance — will then provide feedback to the governor by Sept. 25. Bullock can take or leave their suggestions before asking agencies to implement cuts.

State programs will be hard pressed to find cuts that would not reduce services to the public or include layoffs.Those made earlier this summer already resulted in 20 part- or full-time jobs being cut; reduced hours and services at the Montana Historical Society; fewer social services for the elderly, people with disabilities and children in foster care. Those earlier cuts also left local school districts without long-awaited increases to special education funding, among other reductions.

While most agencies are required to submit the 10 percent plans, some are excluded by law. Villa said the legislative and judicial branch and the Montana School for the Deaf and Blind are exempted, but have been asked to voluntarily participate. Both branches willingly made reductions in 2002 and 2010.

Other exemptions include salaries of elected officials and principle interest on state debt. The Department of Justice, State Auditor, the Board of Regents and the Office of Public Instruction — all agencies over which the governor does not directly control the budget — cannot be reduced by more than the average cut made at other departments.

What caused the cuts?

Bullock, a Democrat, blamed Republican legislators and an active fire season for the budget crunch.

“You'll remember that during the session, the governor's office very clearly warned that the revenue estimate adopted by Republicans was unrealistic and politically motivated,” Marissa Perry, Bullock's press secretary, said in an email.

The governor's office has repeatedly bashed Republican legislators since the session ended in April for failing to support a number of new or increased taxes that Villa estimates would have brought in an additional $204 million in revenues, although some of that would have been earmarked for expanding programs. That, coupled with a disagreement over which revenue projection to use to build the budget, is why the state has had to make emergency cuts, Villa said.

Ballance disagreed that Republicans had strong-armed the governor’s office to accept the Legislature’s higher revenue estimate. She noted that Villa, along with legislative budget leaders, negotiated a plan for cutting spending should revenue gains be slower than expected — and that’s exactly what happened in July.

“He was in agreement at the time we signed Senate Bill 261 that those triggers were there to do exactly that, to hedge against our being wrong on the revenue estimates,” she said.

Ballance questioned whether the rush to cut state spending might be too soon or too deep, still holding out hope that revenue growth recovers in 2019. Legislators had bet the state’s revenues would grow about 6 percent, while Villa estimates they will only increase about 4 percent.

“Who is right on that? We don’t know,” Ballance said.

Earlier this summer, Republican leaders defended their decision to block tax increases.

The slowed growth of state revenues is largely a result of slowed oil and gas development, according to analyses by Villa and the Legislative Fiscal Division. It also could be because many financial advisers told the wealthiest Montanans to delay reporting some income and corporate gains in hopes that President Donald Trump would follow through on promises to cut those federal tax rates. Much of that income will be required to be reported in the next tax year, which could result in a collection bump.

All those are temporary dips that are best solved by cutting, not by making permanent tax increases, said Ballance and other Republicans.

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Villa and Democrats have argued the challenges are not as temporary as they might seem, saying that the state needs to update its tax structure. He said the economy is doing well under Bullock’s tenure — citing strong entrepreneurship, wage growth and a low unemployment rate — but Montana’s tax system is not designed to capture revenue from growing industries or to make wealthy families pay a fair share.

“It’s that we have a tax system that is not really reflective of what our modern economy is,” Villa said.

When asked why Bullock didn’t push back on the final budget that Republicans sent to his desk, Villa said it would have been unfair to allow a government shutdown.

“Actually shutting down the government is something no Montanans wanted and that was the option put before us,” he said. “If there is going to be any change in this, Montanans need to steer those objections toward the folks who can legally change it,” he said, referencing legislators.

It’s the same reason the governor’s office has decided to make cuts itself rather than call a special session to craft a new one with legislators: Villa said the Republican majority hasn’t provided any suggestion that they would support tax increases.

“There’s no point in calling an expensive special session when the outcome is going to be the same,” he said.

Villa also responded to criticisms voiced by some Republicans in recent months that Bullock had asked for unnecessary spending increases or new programs that could, at minimum, be delayed until revenues improve. He argued those requests were all for services with a public benefit, such as K-12 aid, increases to the Montana University System, improving access to health care and adding employees in Child Protective Services.

“If that’s what they’re opposed to, (Republicans) should just say it,” he said.

Villa conceded that at least some of the shortfall can be attributed to one of the worst wildfire seasons in the state’s history.

As of Wednesday morning, the state spent $44.5 million fighting fires and the fund will be empty by the end of the week. He said part of the spending cuts to state programs will go toward replenishing the fund with $40 million so the state has enough money to pay for ongoing fire suppression this year and next.

"The state will not stop paying for fire suppression efforts across the state," the governor's office said in a statement. "The safety of firefighters, Montanans and their property is the governor's top priority."

Ballance agreed that the unusually active fire year has complicated state budgeting.

“I think that’s been the one big surprise," she said. "The other issues that drive this, I don’t think are as big of a surprise.”

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