Where Are We Now?
A Look at State Budgets

​

Joseph R. Crosby

Chairman and CEO
MultiState

Introduction

While the Senate Presidents’ Forum looks forward to its first in-person meeting in Boston on September 30 – October 3, 2021, the online series continued with a session focused on state budgets. Joe Crosby, Chairman and CEO of MultiState, provided a report on current state finances, a halfyear follow-up to the economic outlook offered at the January forum.

Before the discussion, senators were asked to rate their state’s current budget status as “concerning, stable, or optimistic.” The good news is that no state reported being concerned. South Dakota said its budget was flush with cash, and Louisiana, Hawaii and Maryland noted they were stable and optimistic, although Sen. Bill Ferguson (MD) raised concerns about the state’s dysfunctional labor market, and Sen. Don Harmon (IL) said, while the state’s finances are stable, he is “habitually concerned.” These state ratings were consistent with the data presented by Mr. Crosby.

State of the States’ Finances

In January, 2021, most prognosticators issued dire projections for state revenues, anticipating budget shortfalls in the billions of dollars. In contrast, Mr. Crosby’s team at MultiState made more optimistic projections, and they have been proven to be on target. As a result of post-pandemic increases in mobility and tourism, and strengthened natural resource pricing, most states have reported state revenue increases in 2021 compared to 2020. The only states with lower revenue this year are Hawaii, due to tourism interruptions, and North Dakota and Alaska, which rely on oil prices. Mr. Crosby was optimistic about their recovery as well, citing the boom in tourism and increasing severance taxes to stabilize revenues in these states..

Mr. Crosby observed that, despite the ominous predictions about revenue performance, the Senate leaders did the right things: They were patient and waited for real data before taking prudent — but not drastic—actions. So when the dire forecasts proved wrong, they had not compromised the fiscal health of their states. Going forward, Mr. Crosby observed that leaders are remaining cautious, even as finances improve. Many states have scheduled special sessions to decide how to allocate federal funds from the American Recovery Plan and unexpected new revenue.

​Senate leaders were patient and waited for real data before taking action. When dire forecasts proved wrong, they had not compromised fiscal health.—Joe Crosby

Morgan Scarboro, Manager of Tax Policy & Economist at MultiState, compared state revenues during the first three quarters of FY 2020 and FY 2021. She noted an overall increase in state tax revenue of 12.1%, without considering federal aid. While eight states saw some loss of revenue, only three (Alaska, North Dakota, and Hawaii) had losses greater than 3.5% (see map).

​How Did State Revenue Compare During the
First Quarters of FYs 20 and 21?

​

Source: MultiState Associates. Data from Census Bureau (as of June 24, 2021).

State sales tax revenues are now rebuilding, Ms. Scarboro reported, with Connecticut leading with a 39% increase, followed by California at 28%, Idaho at 16% and New York at 15%, despite the Empire State being hard hit early in the pandemic. On the other end of the spectrum is Hawaii, which is still recovering from a 12% revenue decline.

Mr. Crosby noted that 2021 has seen a 6.6% increase in real GDP, with projections suggesting an additional 3.8% in 2022. State revenue growth is accelerating in the final quarter of 2021, and individual states are reporting “astounding” revenue increases.

​Mr. Crosby urged leaders to continue being prudent, using excess funds to pay off debt and invest in pensions and infrastructure.

For most states, the combination of increased revenues and federal funds has shifted the conversation to What should the states do with their unexpected excess funds? And special sessions to discuss allocations are scheduled in several states. But Mr. Crosby ended on a note of caution, recognizing that the recovery could be undermined by supply-chain disruptions, labor and geographical mismatches (as people want to continue to work remotely), raw materials inflation, changes in stock valuations, and potential COVID resurgence, as well as geopolitical concerns. Mr. Crosby urged leaders to continue to take the prudent path, using their current excess funds to pay off debt and invest in pensions and infrastructure, and allocating one-time funds to one-time activities.

Discussion

​

Moderated by

Tom Finneran

Sen. Rodric Bray
Senate President Pro Tempore, Indiana

Early concerns about the pandemic’s impacts induced the Legislature to make 15% cuts across the board for all state services in their two year budget. However, the December 2020 forecast indicated an increase of $150 million added to the $35 billion state budget. By April, 2021, the forecast predicted that an additional $2.4 billion would swell the state’s coffers. Indiana has an automatic taxpayer refund that will likely be triggered by the June 2021 revenue numbers, Sen. Bray reported.

In allocating the excess, the Legislature declined to add more services to the government; they paid debts and invested in capital expenditures directly rather than issue bonds. They added $1 billion to funding for K-12 schools, hopeful that the funds would in part increase teacher pay, which is controlled though the school boards. With forthcoming federal funds allocated for existing projects such as a light rail system, state funds can be diverted to other projects — including $250 million for broadband investments and $500 million for regional cities grants.

Sen. Bray said he is “cautiously optimistic,” because the future is uncertain; for example, inflation could be a coming threat. Therefore, while some legislators have reacted to the excess by proposing permanent tax cuts, he advises continued caution in making changes.

Sen. Don Harmon
President of the Senate, Illinois

After three years of budget impasse and a stalled budget process that threatened to collapse the state’s social services and bankrupt its colleges, the Legislature was able to overcome the governor’s veto and pass a “prudent and responsible” budget. For the first time in more than 20 years, Standard & Poor’s and Moody’s, upgraded the state’s credit rating, and Fitch changed its outlook for Illinois from “negative” to “positive.”. In 2017, the state had $17 billion in unpaid debts. Today, that deficit has been trimmed to $3.5 billion, and debts are being paid on time.

A major challenge for the state is the century-old pensions system. It carries a Constitutional guarantee that the pension funding cannot be diminished. In the 1990s, legislators created a 50-year mortgage schedule to fund the program, but deferred its start for 15 years. Now, for every year until 2045, 25% of the state’s general revenue spending must be allocated to the pension system. Meanwhile, the federal funds coming to the state will be set aside for two years. The takeaway message from the Illinois experience is “Honor your commitments and pay your debts,” Sen. Harmon said.

Sen. Page Cortez
President of the Senate, Louisiana

In 2005, settlements from Hurricane Katrina damages brought two to three years of excess income from insurance payouts and federal funds. As a result, the state’s finances looked great and the income tax was reduced, leading to a $800 million decrease in state revenue. In 2016, this revenue loss was addressed by the addition of a 1 cent sales tax, which then was reduced to half a cent and will be terminated in 2025.

Fortunately, the state’s revenue did not crash during the pandemic, and the state’s American Rescue Plan (ARP) funds were well managed, with investments in infrastructure improvements, such as updating aging water and sewer systems; in shoring up the unemployment insurance trust fund; in teachers’ pay; and in higher education. Additionally, the Legislature determined that one-time funds should be allocated to one-time investments. Sen. Cortez said the Legislature would proceed with caution; nonetheless, currently, state revenues are stable and he is optimistic.

Sen. Chuck Winder
Senate President Pro Tempore, Idaho

Idaho is one of the fastest growing states in the US, as people flee urban areas and COVID exposure to settle in more rural locations and telecommute. This growth also has led to job creation. In 2020, projections said the state’s revenue could decrease by 15%; in fact, revenues increased by 16%. The increase allowed the state to reduce personal and corporate tax rates by ~0.5%. and provide tax rebates out of state funds. In the short term, the state’s budget has a surplus of $900 million, with ongoing surpluses predicted for the next three years.

The surge in population is accompanied by a growth in infrastructure needs, and one-time federal funds have been allocated to one-time projects, such as water and sewer infrastructure. In addition, $1.6 billion in state funds is allocated for highway infrastructure, and the state anticipates that additional federal funding will be available for bridge and highway construction.

​One-time federal funds have been allocated
to one-time projects.—Sen. Chuck Winder

Sen. Ron Kouchi
President of the Senate, Hawaii

Hawaii and Nevada have the largest service economies in the US, so the pandemic was devastating to the Aloha State’s revenue. The negative revenue situation meant that the state could not take ameliorating actions such as forgiving taxes on unemployment earnings, or providing social services, or addressing homelessness. In addition, Hawaii is unique in that the state government is responsible for all public education; although local governments received federal funding for education, those local governments did not have the responsibility for school budgets.

But the lure of Hawaii has brought many people to live in the state who have the ability to work remotely. This has driven up housing values and depleted the rental inventory, leaving few options for affordable housing. The median price of a home now is $1 million, and new building is constrained by the huge increases in the cost of building materials, further exacerbated by shipping costs.

The day before this session, Hawaii reopened for tourism, with no quarantine required for fully vaccinated visitors, and increased capacity indoors and outdoors. A record number of tourists have arrived.

Revenues are expected to be up next year, and good stock market returns are helping to fund the pension program. However, while developing the state budget, the Legislature saw 28 vetoes by the Governor and was able to override six of them. “This shows that democracy is working,” Sen. Kouchi said.

Sen. Bill Ferguson
President of the Senate, Maryland

The state’s income tax revenue has increased by 12% compared to 2019; the sales tax has increased thanks to online sales; lottery earnings are up; and man-hours are up 35% at the Port of Baltimore. However, with all of that good news, there are still concerns, Sen. Ferguson said. While the port is busy, car lots have only 10% of their normal inventory. Additionally, there are 305,000 people on unemployment, despite applications being sent for jobs that need to be filled. Perhaps there is a mismatch between skills and the needs of employers, but this is a big red flag, Sen. Ferguson said. We don’t yet know the specific causes of these anomalies or what the implications will be.

Sen. Ty Masterson
President of the Senate, Kansas

Despite having a divided government, with a Democrat governor and a

Republican-dominated legislature, Sen. Masterson said there is a good rapport and working relationship between them. Still, the Governor vetoed 15 items on the budget and the Legislature overrode 11 of them.

The state had braced itself for a downturn in revenue but, in fact, experienced an increase. “When you have excess money, you have to say NO to many,” Sen. Masterson said. He noted interest in using the excess to pay off debt and said the Legislature is cautious about adding programs in case one-time funds dry up. Additional concerns are the shortage of labor and the increased costs of building supplies.

​When you have excess money, you have to say NO to many.—Sen. Ty Masterson

Conclusion

The Forum members expressed cautious optimism about the state of the states’ revenues. Many were in agreement that one-time funds should be allocated to one-time projects to avoid incurring new debt. Most of the states are using unanticipated revenue to pay down debt, fund pensions, contribute to education, or finance infrastructure projects.

​

If you are a member of Senate Presidents’ Forum and would like a copy of Joe Crosby’s slides from his July 9 presentation, please contact us.

Speaker Biography

​

Joseph R. Crosby

Chairman and CEO
MultiState

Joe Crosby is the Chairman and CEO of MultiState, a state and local government relations company. He is involved in all aspects of the firm’s efforts to help clients resolve the challenges they face in the state and local government arena, with a concentration on providing strategic counsel, identifying and deploying political assets, and advancing tax policy objectives.

Joe Crosby’s full bio

​​ Download PDF of article

​ The Forum Welcomes
New Senate Participants​Sen. Dru Mamo Kanuha
Senate Majority Leader
(Hawaii) 

​What Really Happened to State Revenues During COVID-19?Read Morgan Scarboro’s revenue report at MultiState here.