States’ Revenue Estimating
Cracks in the Crystal Ball
Revenue estimating is a vital component of the budget process. Before governors and state legislators can make strategic decisions about how much money to invest in certain programs—or whether to increase or reduce taxes—they need to know how much revenue they have to work with.
Inaccurate estimates do not have to be large to add up to a significant amount of money. In Montana, a 1 percent error translated to a $36 million revenue swing in a two-year budget. In New York, a 1 percent error translated to $527 million in general fund revenues—nearly half of what the state spends on public assistance.
Missouri and Arizona illustrate the challenges states can face when they overestimate—and underestimate—revenue.
On the eve of the 2010 legislative session, Governor Jay Nixon and the state legislature had agreed that revenue for the 2011 fiscal year would be $7.2 billion. Eight weeks later, the governor announced that the revenue estimate was revised downward by about $200 million. Lawmakers thought they had resolved the crisis by cutting $484 million from the governor’s budget before they adjourned in May. Weeks later, the revenue projection weakened again, and Governor Nixon said he would have to trim an additional $301 million. In all, the 2010 and 2011 budgets had to be slashed six times.
Missourians have been affected by nearly $2 billion in cuts over two years. College scholarships have been reduced for low- and middle-income families. School bus transportation has been eliminated on many routes. About 2,500 state workers have been laid off. Mental health, developmental disability and drug and alcohol addiction services have been diminished. Fewer hot meals and rides to doctors and grocery stores are available for seniors. The list of budget cuts goes on.
For fiscal year 2006, Arizona had an unanticipated $530 million surplus. Arizona’s phenomenal rates of growth in 2005 and 2006, coupled with the surplus, led lawmakers to cut taxes and increase spending.
The 21st Century Research Fund, an effort designed to invigorate Arizona’s energy and biotechnology initiatives, was one of the programs that received increased funding. Then, as budget surpluses turned to deficits, the legislature killed the program. The about-face led Science Foundation Arizona to sue the state. The nonprofit group had helped solicit matching funds for the state money and provided state-funded grants to startup companies and university researchers. The foundation won its case, but a county court said there was no way to force the state to pay up. In the end, the state government made good on its commitment for 2008 but not beyond that.