Surpluses Abound in Many States, but Deficits Projected on the Horizon

An improved fiscal picture emerged for many states in 2013 with several states recently reporting year-end surpluses. Revenue growth and modified tax policies largely contributed to the rebound. Some analysts warn this trend could be short lived, however. State year-end balances are projected to fall by the close of FY14, according to a report from the National Conference of State Legislatures (NCSL), and fiscal analyses from states including Alaska, Connecticut and Illinois, point to large deficits on the horizon.

NCSL's August report pointed to strong general fund revenue growth of 5.3 percent above FY12 levels. In fact, 41 states, the District of Columbia and Puerto Rico reported year-over-year growth in FY13, and in five states, revenue grew by more than 10 percent. A much slower pace of 1.3 percent is projected for FY14, with appropriations budgeted to increase by 3.9 percent resulting in a spending and revenue mismatch.

Already, some states are forecasting deficits. A recent article in the Alaska Dispatch reports a projected deficit of more than $1 billion in the current fiscal year, primarily due to declining oil income. Official numbers are expected next month. In Illinois, the expiration of a temporary income tax hike at the end of 2014 could lead to significant deficits in years to come. The increase was enacted in 2011 to help shore up the state budget, pay down debt and stabilize the pension system. A new report from the Fiscal Futures Project of the Institute of Government and Public Affairs estimates a current structural budget gap of $4 billion, reaching $14 billion by FY25. Even if income tax rates are kept at the current level and not decreased as scheduled, the state would only raise about half of the additional revenue needed to eliminate the gap, according to the report.

For other states, including Connecticut and Pennsylvania, budget officials are reporting surpluses while simultaneously warning of long-term structural deficits. Connecticut is on track to end FY14 with an $11.2 million surplus, but the legislature's Office of Fiscal Analysis predicts a deficit exceeding $1 billion by the time the next governor takes office. Projections are based on several factors, such as increases in medical costs, teacher salaries and state employee annual raises, reports The Hartford Courant. Similarly, Pennsylvania's Independent Fiscal Office unveiled a budget outlook that projects an $11 million surplus by year-end with structural deficits reaching $2.1 billion by FY19 based on current law and policies. Revenues are expected to increase at an average annual rate of 3.1 percent while expenditures increase at an average annual rate of 4.1 percent. In addition, the demographic forecast projects stagnant growth for the working population and an increase of nearly 30 percent for the over 65 age group.

Hefty surpluses are being reported in some states. Iowa currently has nearly $1 billion in reserve accounts, plus a surplus of $600 million to $700 million, reports the Des Moines Register. Some of the funds are already committed to funding education reform and property tax programs, however. Gov. Terry Branstad will announce his plans for spending in January. Wyoming and Montana also have reported higher-than-anticipated revenue collections, and in North Dakota, officials reported an estimated ending balance of $1.6 billion at the end of the 2011-13 biennium.