Report Says State Budget Surpluses Don't Mean That Much

A new report forecasts that most states will end the fiscal year in the black. But it may be too early to celebrate.
by | June 13, 2013

A new study shows that many states could end the current fiscal year with surpluses in their general funds. While that may seem like good news, it's probably too early to get excited.

That's because those positive numbers are largely the result of one-time influxes of tax revenue that came when investors sold off assets late last calendar year to avoid higher federal tax rates that came in 2013.

This fiscal year -- which concludes at the end of the month in most places -- states had particularly strong growth on personal income tax collections, which increased 6.2 percent. But the experts behind the study say that figure is largely due to one-time surges of revenue that probably don't mean much.

Because almost all states are required to pass a balanced budget, any one-time increase in revenues will almost automatically mean a surplus, said Dan Crippen, head of the National Governors Association.

"I wouldn't make too much of the surplus issue... it's just not surprising," Crippen said in a conference call with reporters Thursday morning.

Sales tax collections, on the other hand, have failed to rebound quickly since the recession -- a fact that Crippen attributed largely to the growth of online sales, which generally aren't subject to state sales tax and are at the center of Congressional debate.

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The findings, in a study released by the National Governors Association and the National Association of State Budget Officers, also warns of declining federal funds for state programs and the growing financial pressures of programs like Medicaid and education.

States are particularly worried about the so-called "woodwork effect," in which many people who are already eligible for Medicaid are expected to enroll in the program as publicity about expanded eligibility under Obamacare spreads. But states will have to pay for those residents' Medicaid enrollment under the existing formula, rather than the new one in which the feds largely pick up the tab, due to their existing eligibility.

The report did contain some good news, but even that was muted. Scott Pattison, head of NASBO, said that for the first time, both state revenue and spending have returned to pre-recession levels. However, that's not the case when you adjust those numbers for inflation.

Crippen said the takeaway is that state budgets still aren't growing quickly enough to make up for the the challenges brought on by inflation, and federal cuts on the horizon will likely only exacerbate the situation.

And there's not much hope for a major boon in FY 2014 either. The report forecasts general fund spending to increase 4.1 percent next year -- below the historic average -- and general fund revenue to increase by 2.8 percent -- a slower rate of growth than even this year.

"The fact that growth is happening is good," Pattison said, "but it's still under what we've seen in the past."

One sign of hope, however, is the shrinking number of states that have had to make mid-year cuts to their budgets. In FY 2010, for example, 39 states had to adjust their budgets after they were passed due to less-than-expected revenues. But inFY 2013, only 11 states had to cut their spending midway through the year, and 16 states actually enacted mid-year spending increases.

The report also revealed positive news about year-end balances, including "rainy day" funds that can help states though turbulent fiscal times. In FY 2010, states' balances fell to $32.5 billion, or just 5.2 percent of their expenditures. In recent years, that figure has been steadily climbing, and they're currently estimated at $57.5 billion, or 8.3 percent of expenditures.

That figure, however, is largely the result of especially healthy balances in just two states, Alaska and Texas.

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