By now, you've already heard the astounding WT$%# news. The state of Minnesota, after slogging through a $5.2 billion deficit last year, appears to be heading into sunnier financial territory. Legislators expect a forecast, due out on today, to confirm the $876 million government surplus announced in November.
That's quite a turnaround in a single year.
Minnesota is not the only state to enjoy such a reversal of fortune. To be sure, some, Illinois and California, for example, are still wandering in the polar tundra of budget gaps. But, according to the National Association of State Budget Officers (NASBO), 15 states are seeing higher-than-projected revenues. Among the blessed: Montana, Ohio, Pennsylvania and Virginia. Even Michigan, long a revenue basket case due to the decline in manufacturing, has found itself with $670 million extra on the books.
Total state budget shortfall in each fiscal year, in billions
The long winter of our deficits is far from over, however. A brand-new report out from the Center on Budget and Policy Priorities (CBPP), a liberal Washington think-tank, proclaims: "States' fiscal conditions are improving along with the broader economy. But states are coming out of a very deep hole."
State taxes, for example, rose by 8.3 percent in the fiscal year ending in June 2011, but even if they continued to grow at the same rate, it would take seven years for them to get back to normal.
"On the surface, states are recovering," says Robert Zahradnik, director of research for the Pew Center on the States. But, he adds, "When you dig deeper, there's still a lot of risk and uncertainty."
For starters, some states' success derives less from fiscal discipline than dumb luck. The soaring price of oil has conferred on Alaska a $3.4 billion surplus, which it can add to the $11 billion the state has already stashed in a rainy day fund. Oil also bears much of the credit for putting Texas in the black by $1.6 billion -- after a $27 billion budget shortfall last year. South Dakota, home to several large credit card companies since the 1980s when it removed caps on interest rates, is enjoying a small surplus from its bank franchise tax, as the card business gradually improves.
What's more, state revenues have not risen to anything near their pre-recession levels; in 2011 they were about $39 billion (or 7 percent) below their 2008 peak. State government watchers predict that in 2012 revenues will drag $20 billion behind -- better, but still awful.
Sluggish job market
The sluggish job market continues to be a huge drag. Some 4 million people number among the long-term unemployed. Says Zahradnik: "There's no way to project when they will return to the workforce" — and pay state taxes once more.
Most strongly affected are state sales taxes. When people are out of work — or in fear of losing their jobs — they spend less. Across the board, state sales tax revenues are projected to decrease by 0.3 percent in 2012, after steep decreases in earlier years, according to NASBO.
Another looming problem: "States are facing the withdrawal of federal stimulus funds," says Brian Sigritz, director of fiscal studies as NASBO. For the past few years, American Recovery Act money has made up about 8 percent of state budgets. Totaling $62 billion in 2010, the cash infusions fell to $58 billion last year, and will decline to $7 billion in 2012.
State governments that have said adieu to it all have had to make the stiffest budget cuts since the start of the recession, says Phil Oliff, a policy analyst with the State Fiscal Project at the CPBB. Federal policy-makers are planning to make further cuts to states and localities. Already, according to the CBPP, discretionary federal spending, which goes for law enforcement, education and health care, has been slashed by 9 percent since 2010. If across the board cuts agreed to in Congress' budget deal last summer go into effect, states will lose another 6 to 11 percent slab of money over the next 10 years.
Future expenses
At the same time, states face greater obligations. Medicaid as a portion of state expenditures has grown from about 21 percent to 23 percent. Continuing a straight-line projection of such growth, says Zahradnik, means that by 2050, state revenues will fall $10 trillion short of their projected revenues. Population increases will also force increased spending for education, with less help from the Feds.
Finally, many states have and continue to use gimmicky one-time fixes to close yawning budget gaps. California this year plans to borrow billions from its state college and university system. And our dear Minnesota, if you recall, delayed $700 million in payments to school districts and borrowed another $700 million against future revenues due from the tobacco industry.
And money from Minnesota's big surplus announced last year has been redirected -- as required by state law -- to restore the state's budget reserves and repay public schools.
For that reason, perhaps the word "surplus" should for now be framed in quotes.