CHICAGO — Ohio began its new fiscal year with revenues down only slightly from expectations and a surplus of just under $140 million, but the good news ends there as the state is bracing for a deficit that could be higher than $8 billion as it heads into a new biennial budget next year.

The General Assembly last year created a budget commission to begin addressing the expected loss of federal dollars that were essential to balancing the current two-year budget. The commission, made up of a bipartisan group of six members of the House and Senate, will hold its second meeting this afternoon.

State budget director J. Pari Sabety is expected to provide an overview of the state’s fiscal position as well as estimates of the size of the looming deficit. The commission will also hear from officials from other states to solicit ideas on overcoming budget shortfalls.

By the end of November, the commission expects to release a report outlining a “menu” of recommendations for future budget makers and lawmakers, members said.

The budget debate begins amid a tough election season for many Ohio politicians. Democratic Gov. Ted Strickland is running neck and neck with Republican candidate and former congressman John Kasich.

Debating a budget amid the political pressures of a tough election year will be one of the commission’s key challenges as it considers issues like the size of the deficit and one-time revenues, members said.

“I’ve heard the deficit is anywhere from $8 billion to $10 billion,” said Sen. Shannon Jones, R-Springboro, who co-chairs the commission with Rep. Vernon Sykes, D-Akron.

“I hope [Sabety] can shed some light on that number,” Jones said. “I understand the political realities here, but in the end it doesn’t matter from the commission’s perspective who the next governor is going to be, the number is what the number is. We have to be brave enough to talk about it.”

Sykes estimated the deficit in the range of $4 billion to $8 billion.

Double-A rated Ohio, which has a negative outlook from two rating agencies, is an active bond issuer but maintains a moderate debt burden compared to other states. The state and its related agencies have at least 11 borrowings on tap over the next several months.

Like other states, Ohio has suffered years of declining revenue. General revenues have fallen for the last four straight years, and in 2009 experienced the largest drop since 1976.

The decline has moderated so far this fiscal year, according to the state Office of Budget and Management. The office noted in a recent report that revenue through May  totaled $21.6 billion compared to estimates of $22.2 billion, marking a decline of only 2.8%. And the state ended fiscal 2010 on June 30 with a surplus of $139 million, the OBM said, mostly due to a drop in Medicaid spending.

The state’s current two-year, $52 billion budget was balanced by relying on one-time revenue measures that some say total up to $8 billion, or 20% of the general fund. “There are certainly structural issues in the past that have contributed to the position we’re in today, but that $8 billion is a huge acknowledgement of the world of hurt we’re going to be in for the next [budget] go-around,” Jones said.

Strickland and OBM officials have said they expect additional federal dollars to help balance the next budget, and aides said the governor believes the federal government has a “special obligation to provide assistance to states during the slow recovery from this national recession.”

But Jones and Sykes agreed that the commission would assume that at least $6 billion built into the current budget would not be available in the coming biennium.

“We cannot count on receiving those monies from the federal government until they’re in hand,” Sykes said. “That’s one reason why we’re meeting now — we’re trying to prepare ourselves for the worst scenario, which is not receiving a significant amount of federal dollars.”

Among the one-time measures in the current budget is an estimated $740 million in relief generated by restructuring a chunk of Ohio’s debt. Year-to-date spending on debt service was 15% below expectations and 37% below the same period last year, the biggest line-item decline in spending, the OBM report indicateed.

The debt restructuring pushes out near-term maturities but the shift will drive up debt service payments in future years. Nevertheless, it preserves the state’s rapid amortization rate on its tax-supported debt. All of its debt matures within 20 years, and nearly 80% of the debt amortizes in 10 years, according to Fitch Ratings.

Ohio also received $3.9 billion of stimulus funds in the current budget, of which it spent about $3.85 billion, the OBM said.

The state drained its once-substantial rainy-day fund to balance the current budget. The fund, which totaled more than $1 billion through 2008, was tapped this year, one year ahead of Strickland’s original schedule, reflecting Ohio’s “diminished financial flexibility,” according to Moody’s Investors Service.

The state has a total of $10.7 billion of tax-supported debt. Moody’s rates Ohio Aa1 with a negative outlook. Standard & Poor’s rates its general obligation debt AA-plus with a negative outlook, while Fitch rates it AA with a stable outlook.

Despite the political and economic challenges in the next several months, Sykes said Ohio would craft a balanced budget as it always has.

“We have always taken measures to make sure it stays balanced, and we plan on doing that again,” he said. “There may be more drastic adjustments that we have to make this time, but we have always complied with the constitutional requirement to balance our budget.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.