Surpluses Await Some States in 2013 Sessions

Indiana Governor-elect Mike Pence (AP Photo/South Bend Tribune, James Brosher)

With a $500 million budget surplus and $2 billion in reserves, Indiana Governor-elect Mike Pence has pledged to give back some of that money when he takes office next week by cutting personal income taxes.

“An across-the-board tax cut for all Hoosiers would send a strong signal that we are managing our funds wisely and also reducing the tax burden on our taxpayers and businesses,” the former U.S. Congressman said while campaigning to replace outgoing fellow Republican Mitch Daniels as governor.

Indiana is not alone going into the 2013 legislative session with extra money in the coffers and policy makers figuring out how to spend it.  Through a combination of downsizing, changes in tax policy and sometime the luck of having energy and commodities, some states have weathered the recession better than others.

Iowa is looking at an $800 million surplus. Florida’s is more than $400 million. Michigan, which was in a recession years before the country entered one in 2007, has an extra $1 billion in its general funds.

And of all places, even California, which every year for the past decade had to dig out of multi-billion-dollar deficits, is expected to fix its projected $1.9 billion budget shortfall by June of this year and possibly show a $1 billion surplus in 2014–15, growing to more than $9 billion in 2017–18. This dramatic turnaround is due in large part to voters approving Governor Jerry Brown’s temporary tax increase last November. 

Despite the extra funds, don’t expect a spending spree. States say that much of their surpluses will cover sweeping cuts anticipated in federal funding later and increases in Medicaid costs. 

“States aren’t talking about new extravagant array of new programs,” says Sujit M. CanagaRetna, a senior fiscal analyst at the Council of State Governments. “State Medicaid bills are continuing to surge, so whatever little surplus states might have generated will likely go back into that” as well as programs that were put on the backburner during the recession, such as their unemployment insurance trust funds, pensions and infrastructure.

Medicaid Costs Loom 

In Tennessee, Republican governor Bill Haslam has said that much of the state’s $580 million surplus is already spent. Obamacare is expected to increase enrollment in TennCare, the state's Medicaid program, by more than 60,000 Tennesseans. The governor also has indicated he wants to increase the budgets for the Department of Correction to address overcrowding and to the Department of Children's Services to increase the number of case workers, lawyers and outside providers, The Tennessean reported.

In Iowa, many Republicans, like Pence, are seeking income tax cuts, including Governor Terry Branstad and the House Speaker, while some Democrats there want to put aside more money for education and other programs. “Our caucus is certainly willing to look at commercial property tax relief, and the earned income tax credit is something we have been trying to get for a long time,” State Senator Robert Dvorsky, who chairs the Senate Appropriations Committee, told The Des Moines Register. At least $61 million will have to go to Medicaid for this year since lawmakers underfunded the program last year and agreed to address the issue during the 2013 session

In Michigan, meanwhile, most of its surplus will offset the impact of sweeping tax changes in 2011, explains David Zin, chief economist for the Senate Fiscal Agency. Back then, Governor Rick Snyder pushed through an overhaul of the much-hated "Michigan Business Tax." That tax was a 22 percent surcharge on top of corporate income and gross receipts taxes that corporations paid. The new law replaced that business tax with a 6 percent corporate income tax, reducing taxes by $1.8 billion.

Nationwide, states are building back the reserves they depleted during the recession to help them balance budgets. Nowhere are the reserves larger than Alaska and Texas, which make up half of all states’ year-end balances. Somewhat surprisingly, both of those states are facing deficits in their general fund account, but will likely take different approaches to make up the difference.

Surpluses and Deficits 

Alaska, which has stashed away $16 billion in reserves, the most of any state, is looking at a budget deficit for the first time since 2005, pegged at $400 million. “What we’re talking about is oil,” says David Teal, director of the Alaska Legislature’s legislative finance division.  “Oil production and prices are difficult to project. It’s no surprise to have hundred-million dollar swings,” he said last month during a meeting of state lawmakers convened by the National Conference of State Legislatures in Washington, D.C.

The state’s fall forecast showed a combined $1.6 billion drop in projected revenue over this fiscal year and next. Governor Sean Parnell has said he will tap the reserves to make up the $400 million and that he will cut $1.1 billion from current spending. “Less revenue means we will spend less in 2014,” he said when he released his budget proposal last month.

At the same time, Texas has a $8.8 billion surplus and more than $8 billion in its rainy day fund, but faces a staggering $4.3 billion hole in its Medicaid budget. The state, which opens its session January 8, also owes public schools $2 billion and could be forced to spend billions more on education, depending how school funding litigation is decided.

Even with the Medicaid and education deficits, however, the turnaround in Texas is breathtaking. Two years ago, lawmakers entered their session with a $27 billion deficit over two years. Lawmakers cut some $5.3 billion in schools and tapped more than $3.2 billion from the rainy day fund to help balance the budget. A booming energy sector and a boost in sales tax receipts are behind the reversal of fortunes there.

Balances for other states are generally healthy. Alaska and Texas tend to skew the average because they have so much in their reserves while Illinois and California can distort it because they have so little.  Leaving out these four, states in the rest of the country average a 5.1 percent in reserves, which meets the level that most Wall Street analysts recommend, says Arturo Perez, NCSL’s fiscal affairs program director. Before the recession, that same figure climbed to 11.4 percent and dropped to 4.1 percent in 2009, according to NCSL. 


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