Economic rebound creates budget surpluses for states
Years after a recession hammered state budgets, forcing across-the-board cuts to programs and services, the economic recovery is bolstering personal and corporate incomes, and swelling state coffers beyond expectations.
Initial reports show that many states ended fiscal year 2014 with budget surpluses, thanks to growing tax revenue. In some cases, states have hundreds of millions, or even billions, of dollars to spend. Other states pulled in just a few million dollars over the break-even point. But even the smallest surplus is better than the tide of red ink that washed over states during the depths of the recession.
California ended the fiscal year with $1.9 billion left over in its state general fund, Controller John Chiang said last week, the first time the fund ended with a positive cash balance since 2007, the year before the recession began. The state Department of Finance has projected a $4.2 billion surplus for fiscal year 2015, which began July 1.
Ohio netted an $800 million surplus, marking its fourth-straight year of black ink. New Hampshire ended the fiscal year $5.6 million over budget. South Dakota notched its third consecutive surplus. Indiana, Arkansas and Georgia all reported surpluses just days after the fiscal year ended.
The balanced budgets are creating a stable outlook for the vast majority of state bond ratings, according to Moody’s Investors Service. The bond-rating agency says 44 states have stable outlooks, and two more earn positive outlooks.
In one measure of the post-recession stability created by higher tax revenue, for the first time in years every state adopted its budget for the upcoming fiscal year on time.
The surpluses, however, aren’t all positive news. Tax collections in many states were lower than they were in the previous year, when wealthy taxpayers took personal income early in hopes of avoiding the fallout from the “fiscal cliff.” That gave states an artificial boost in revenue in that fiscal year and forced budget analysts in most states to plan for lower revenue in the following year.
“When the federal tax laws changed at the end of 2012, there was a significant shift in income out of calendar year 2013 into calendar year 2012,” said Tim Keen, director of Ohio’s Office of Budget and Management. “We spent a lot of time when we made our revenue estimates considering that fact.”
California attributes its booming budget to a robust stock market and a dramatically improving economy. By June, the state had just 1,800 fewer jobs than its pre-recession peak.
Still, Democratic Gov. Jerry Brown has warned that the capital-gains tax revenue that has given the state so much money is fleeting. In the 1990s and early 2000s, at the height of the internet boom, the state spent much of those capital-gains taxes on ongoing programs. When the money evaporated as the stock market cratered, California was left with billions in budget deficits. And even a $4 billion surplus looks small compared with the $156 billion budget Brown signed last month.
“The idea that you’d take this little bitty surplus and go on this big spending spree strikes me as odd,” Brown told the Washington Post in an interview earlier this year. “I think that kind of ping-pong budgeting, where first you ping and then you pong, makes no sense. And not only do I not think it makes any sense, the vast majority of Californians don’t think it makes any sense.”
Many states are using their surplus dollars to rebuild rainy-day funds sapped during the recession. California will sock away $1.6 billion this fiscal year, with more money to come in later years. Ohio’s rainy-day account stood at just 89 cents when Republican Gov. John Kasich took office in 2011; today, it’s at $1.5 billion, the statutory limit. Indiana has saved $2 billion in reserve, though its $106 million surplus this year came from $150 million in cuts to programs such as state colleges and universities, the Family and Social Services Administration, and the Department of Correction.
Not every state has registered a surplus. The administration of Democratic Gov. Terry McAuliffe reported last week that Virginia’s budget would come in $439 million below expectations, the first time state revenue has shrunk outside of a national recession, in part because of lower-than-expected capital-gains taxes.
Kentucky will have a $90.9 million budget shortfall in its general fund and $22.2 million in red ink for its road fund. Income tax growth has been far lower, at 0.7 percent, than in the previous three years.
Most states are still clearing their books and accounting for the end of the fiscal year, with final revenue and spending projections to come in the weeks ahead. The full picture of state fiscal health probably won’t be known until near the end of this calendar year.