Today we sat down with Senior Fellow, Liz McNichol, to discuss why some states have ended their fiscal year with budgets in the black even as the state budget crisis continues.
Liz, last week the Governor of Virginia announced that the state ended the fiscal year with a surplus of about $404 million -- almost twice the previous estimate. A handful of other states also ended the year in the black. That’s a little confusing given all that we’ve been hearing about states’ major budget problems. Can you explain what’s going on?
States are required by law to aim for a balanced budget — one in which revenues meet or exceed projected spending. When a state plans its budget for the coming year, it uses an estimate of how much revenue the state will take in during that year and then sets its spending to match that estimate. But estimating future tax collections isn’t an exact science. It’s even more difficult when the economy is in crisis and revenues fall by record amounts, as they have since this recession began. So it’s no surprise when a state doesn’t collect exactly the amount of revenues it projected. Sometimes tax revenues come in a little below the estimate and sometimes above which is what happened here.
So, even though a state may have a surplus, it doesn’t mean that its revenue grew?
That’s right. Virginia ended the budget year with a surplus only because revenues were expected to decline by 2.3 percent but they actually declined by just half a percent.
And it’s important to look at the big picture: Virginia’s revenues have plummeted by about 20 percent since the start of the recession, when you account for inflation.
Are state surpluses enough to reverse state spending cuts?
Unfortunately not. Virginia’s $400 million surplus, for example, is only a fraction of the $7.5 billion the state cut to balance its budget. It’s not nearly enough money to erase cuts made in education, health care, services for seniors and people with disabilities, and other services.
In most states, revenues will continue to fall far short of what states need to maintain these kinds of services for the next few years. In fact, because of severely depressed revenues, states are closing shortfalls that total more than $140 billion this year and will face another $120 billion in shortfalls next year.
Is there any good that a modest surplus can bring to a state?
Sure. One positive result is that the next year’s deficit-closing measures can be a bit less harsh than planned. For example, Virginia will use some of its surplus to give state workers — whose salaries have been frozen for close to four years — a temporary pay increase and to slightly reduce the state’s large cut in school funding.
What’s the bottom line?
Until employment returns to pre-recession levels, state revenues won’t be healthy enough to avert the need for more spending cuts and tax increases — even if revenues didn’t perform quite as badly as predicted last year.
You can download a podcast of this conversation here or on iTunes.