State Surpluses: An Explanation

June 3, 2013

Surpluses don’t mean the states’ fiscal challenges are over

As many states end their current fiscal year (June 30th for most) with expected surpluses, state officials face important decisions about how best to spend the additional money.  Budget surpluses can arise for a number of reasons. For example, in fiscal 2013, a number of states benefited from one-time revenue gains due to the federal fiscal cliff. In addition, some forecasts were justifiably cautious due to the uncertainty in the national economy and revenue came in higher, creating an unexpected surplus.Using the entire surplus to increase funding for ongoing programs could conceivably create future budgetary problems. 

States should attempt to identify to the extent possible those revenues that are higher than what would be expected given the current state of the economy – in other words, identify the one-time only revenues.  In fiscal 2013, revenue gains for many states were likely from taxpayers selling certain investments in calendar year 2012 due to the uncertainty of the federal “fiscal cliff.” Also, state revenue forecasts may have been cautious – which can be desirable in some cases – but leads to a “surplus” because the forecast was low. Regardless of the causes of a budget surplus, there are generally enormous – and understandable – political pressures to restore previous cuts and deal with very serious issues that states face. But by taking money from one-time revenue gains to increase spending for ongoing programs, states may create a need for future budget cuts in the next few years. Avoiding further cuts in the next few years is important given the extensive challenges of the recent past and the ongoing federal sequester that is reducing funds for a number of state programs.

Some of the fiscal 2013 surpluses will inevitably go towards ongoing programs. However, states can reduce the risks of future budget cuts by putting at least some portion of one-time only money into one-time only expenditures. This could involve putting some surplus into rainy day funds or into capital infrastructure projects such as roads, parks, bridges and buildings.  States can also put one-time only money into pension funds or a one-time tax cut. 

A prudent, balanced approach to spending a surplus is good financial management. Many states are expected to take such an approach by not putting all of their extra surplus funds into just one basket – that is, the ongoing operating budget.  Memories are still fresh from the Great Recession, but it’s still important to be reminded of the challenges arising from the need to make severe budget cuts when the next tough fiscal times come.  It can be disruptive for programs, service recipients, state employees and public officials.  There will continue to be a lot of necessary, desired or expected tax and expenditure adjustments at the federal level in the near future – so it's important to continue good fiscal stewardship at the state and local government levels by following the dictum: as much as possible, one-time only money for one-time only spending.

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