The State of the State Budgets: Revenues & Deficits

State of the States’ Balances

Ms. Eckl presented the most optimistic analyses of the states’ budgets in recent years. She noted that most states have balanced budgets, but she indicated that a few are still dealing with shortfalls. State balances, though declining, remain strong overall, and most states expect to meet their short-term revenue targets. Two-thirds of the states have balances of less than 5%, while 8 states have balances greater than 20%.

 State Year-End Balances FY 2006 to FY 2016 (projected)

Getting to a balanced budget was evidently a struggle for many states this year. Ms. Eckl reported that, while 41 states have enacted a 2016 budget, 12 states required special or extended sessions to resolve their budgets, and 6 states had late budgets. Of those, Massachusetts, North Carolina, New Hampshire, and Wisconsin all had some type of continuing resolution. And 2 states were still without budgets at the time of the Forum’s January meeting.

The struggle wasn’t over once the legislature passed the budget. The Massachusetts legislature, for example, okayed a budget on-time, but the governor did not sign it until after July 1. Connecticut passed a budget, but legislators were called back into special session after businesses threatened to leave over corporate tax increases. Iowa and Minnesota budget impasses concerned whether and how to spend surplus revenues. The Maine legislature overrode the governor’s veto of the budget on June 30, 2015.

Participants described the current state of their budgets, the fiscal challenges they face in 2016, and strategies being adopted to meet targets.

Sen. John Cullerton (IL) reported that the Illinois legislature passed a budget in May 2015; however, the Governor vetoed all of it except K-12 education spending. Court orders and consent decrees allowed the legislature to spend 90% of the budget, but, as of January 11, 2016, higher education had not been funded. Sen. Cullerton pointed out that Illinois revenues are $33 billion, while spending is at $38 billion.

State Tax Collections

State tax collections are faltering, Ms. Eckl reported, noting that Black Friday spending fell 10% compared with last year.  Online shopping is diverting states’ sales taxes, as many states do not get sales tax on Internet sales.

Corporate income taxes are levied at 5% in most states (24% in New Hampshire), but they are not sufficient to make up for lost sales-tax revenue.

Severance and Energy Tax Collections

At least 36 states impose some sort of severance tax, and 31 states specifically levy taxes on the extraction of oil and gas. In 2010, more than $11 billion was generated in the US from severance taxes alone. Between 10.5% and 74.3% of total state tax revenue came from severance taxes in at least 6 states—Alaska, Montana, New Mexico, North Dakota, Oklahoma, and Wyoming. However, severance-tax collections have fallen in oil-producing states as the price of oil has plummeted and extraction slowed.

Sen. Kevin Meyer (AK) said falling oil revenues left Alaska facing a $3.5-billion deficit last year, which was met with funds from savings. This year, they face another $3.5 billion deficit, and the savings fund is down to $9 billion.  “During the last 10 years, as the price of oil went up, so did our budgets,” Sen. Meyer indicated. “Oil revenue went into a permanent fund, and a dividend was given to Alaskans. Now we’ll have to reduce spending, so that dividends will have to go. And we may even need to impose a sales tax on alcohol and marijuana.”

Sen. Rich Wardner (ND) reported that, at the height of North Dakato’s oil boom, the state netted about $30 million per month in sales tax. The excess was retained in higher ending balances and Rainy Day Funds, which, he said, will allow North Dakota to make it through the period of depressed oil prices. “Oil will go back up, and we’ll be fine,“ Sen. Wardner predicted. However, an ongoing concern is that the sales tax collected when a well is drilled is $100,000, while a completed oil well provides $300,000 in sales tax. Today, there are many drilled but incomplete wells, reducing the sales-tax revenue.

Sen. Brian Bingman (OK) quipped, “As the gas industry goes, so goes Oklahoma.”  State budgets were based on expectations of oil being priced at $100 per barrel, while oil has plunged to approximately $30 per barrel.  “Our expenses stay the same, but we’re facing a revenue shortfall that may reach $1 billion in 2017,” Sen. Bingman said. “We will have to make serious cuts to get our budget balanced.”

Sen. Troy Fraser (TX) presented a more optimistic view. While Texas is the largest oil- and gas-producing state, oil and gas account for only 15% of the economy, while manufacturing and technology have taken the lead. “We’re not as dependent on oil as we were 10 years ago,” Sen. Fraser said. Texas has $10 billion in Rainy Day funds and enjoyed a $3 billion surplus in 2015.  “We don’t anticipate a deficit, but a smaller surplus in 2016.” In Texas, once a well is drilled, it has to be finished or lease holders lose their lease. This incentive to get wells completed helps sustain the revenue stream.

Sen. John Alario (LA) commented that state collections are missing both sales-tax and income-tax targets and are projected to be down by $700 million by June 2016. A special session of the legislature is planned for February 2016 to address the deficit. “We’ve granted tax credits and rebates in the past, but tax credits are not a viable long-range plan.  Repealing the corporate income tax would be a more effective measure than tax credits,” Sen. Alario observed.

Sen. Martin Looney (CT) reported that Connecticut depends for revenue on a progressive personal income tax, where people who earn less than $40,000 per year pay no tax. While unemployment is down and jobs are up, revenues are down because the jobs are service jobs that do not pay well. New initiatives have been put in place and a 2-year budget was passed in 2015. However, more cuts will be needed in 2017, Sen. Looney predicted.

Sen. Kevin de León (CA) noted that California enjoys a big surplus and holds $7.9 billion in its Rainy Day Fund. California law requires a balanced budget, which compelled deep cuts during the recession. Subsequently, major drivers of the turnaround came from strategic investments and intentional policies to diversify the economy by focusing on trade, technology that included clean energy, and tourism. In 15 months, California added 455,000 jobs in these sectors. While California is an oil state, it has embraced plans to reduce its carbon footprint and carbon consumption. It has fostered investments in renewable energy technologies by requiring that all new energy projects include 50% from renewable sources. “Clean energy is not only about the environment; it is also about growth in jobs and the economy,” Sen. de León concluded.

Sen. Ronald Kouchi (HI) described Hawaii’s turnaround from a $1.2-million deficit in March 2011 to an $800-million surplus by 2015.  The 2011 deficit was met by borrowing from Rainy Day and Hurricane Funds, and a 10% spending cap was imposed to ensure the state stays in the black. A continued cautious, conservative fiscal policy has been adopted with surplus going into the state’s Pension Fund. Hawaii’s bond rating is good; the construction and tourism industries are picking up and forecasts look positive and solid, he reported. However, Hawaii is dependent on tourism and terrorism can stop this over night. Therefore, the Aloha state is keeping a surplus as insurance against this risk.

Sen. Peter Courtney (OR) noted that unexpected expenses occurred during this past bad fire season, but Oregon still has a positive balance sheet. He noted that the staff person managing the budget is the key to not over-spending. Ms. Eckl agreed that the quality of key people in staff positions is critical to managing the budget.

Sen. Wayne Niederhauser (UT) advised that the first step toward a good budget is a conservative, reliable forecast. Utah’s forecasts have been conservative and the state expects that 2015 will yield a $360 million revenue increase over 2014. With Utah being one of the fastest-growing states, substantial infrastructure needs could add costs to the budget. However, projects such as a $1-billion prison relocation project are paid for with one-time funds to avoid going into debt. Sen. Niederhauser said it is essential to balance saving versus making investments in jobs and growth. “We want to see our surplus active in the economy, paying down debt or making one-time investments rather than sitting in savings,” he concluded.

Sen. Phil Berger (NC) reported that North Carolina has implemented tax reforms, and this has raised concerns that decreased taxes could significantly depress revenues and miss targets. However, the state ended the year with a $500-million positive balance. “Our fiscal research people use conservative projections that are not overly optimistic,” he indicated.

Sen. Mike Miller (MD) reminded the Forum that his state hosts many federal entities and, when government shuts down, this directly impacts state revenues.  Today, the focus is on becoming “small-business-friendly,” by providing support to small-business people. Sen. Miller reported that Maryland is recovering well from the recession and currently has a surplus.

Sen. Keith Faber (OH) told the Forum that Ohio’s economy has experienced a turnaround with solid employment, a healthy Rainy Day Fund, and sustained tax revenues, despite a cut in income tax of 6.3% and reductions in small-business taxes.  Sales-tax revenues increased sufficiently to compensate for the small reduction in personal income tax revenue, he said. Higher-education institutions froze fees and tuition and decreased the cost of a degree by 5%, with further reductions anticipated up to 12%. “We’ve made good progress and stabilized the economy,” Sen. Faber said. “However, if the national economy slows again, things will tighten up.”

Sen. Tonya Schuitmaker (MI) made an optimistic report, noting that unemployment in Michigan is at the lowest level in 15 years. Detroit has emerged from bankruptcy, and she added that the state’s bond rating is good and its Rainy Day Fund is robust. Sen. Schuitmaker noted that the legislature had passed a balanced budget early. The state raised the gas tax to fund roads and infrastructure and was able to provide backing for $650 million in public-school funding for Detroit. However, the news from Michigan wasn’t all good. Sen. Schuitmaker reported on the Flint, Michigan, water-supply crisis, where a change in water supply led to poisonings, with the result  that all the water pipes in the city must be replaced.

Sen. Sandy Pappas (MN) reported that Minnesota’s $1.2-billion positive ending balance served to heighten the differences in priorities among budget stakeholders. The Republican House wanted tax cuts, the Democratic Senate championed infrastructure investments, and the Democratic Governor advocated allocating the surplus to education. While those arm-wrestling matches are yet to be resolved, the state’s biggest issue is a workforce shortage, Sen. Pappas said. At the same time, half of the state’s miners are being laid off, and unemployment among African Americans is high.

Sen. Debby Barrett (MT) was cautious in describing her state, “We are still okay and paying our bills, but we’re not sure how long that will last.” Her concern comes from the fact that Montana is 49th in per capita income in the US, and people must work 2 or 3 jobs to make ends meet.  A positive trend is increasing tourism, but Montana has no sales tax so they miss revenue from tourist spending. While the technology sector is starting up in the state, agriculture remains the mainstay of the state’s economy, and that sector is struggling, Sen. Barrett reported.

Sen. John Cullerton (IL), Sen. Tom Alexander (SC), and Sen. John Alario (LA) discuss budget strategies during a break between sessions. A key to the Forum’s effectiveness is open discussion that transcends  partisanship and enables senators to share practical solutions to common state challenges.

Top Fiscal Issues 2016

Ms. Eckl asked the Forum participants to describe the top fiscal issues they face in 2016.

Sen. Jonathan Dismang (AR) said top issues were the lack of certainty about what federal funding the state can expect and how to compensate for a shortfall in our fuel tax, which is not meeting targets. “We need more roads and a highway plan, but we don’t know how to fund it,” he said.

Sen. Teresa Paiva Weed (RI) agreed that funding infrastructure projects and education are the biggest challenges. Rhode Island’s bridges are crumbling, she noted, but the Infrastructure Fund relies on gas tax revenue, which is significantly down. The Senate passed a bill approving highway tolls and received approval for federal funding, but the Governor has yet to endorse the bill. “We all agree that we need better roads. More than 65% of the damage to roads is caused by class 7 and 8 vehicles, but the truckers do not want to pay tolls, and diesel is cheaper in Massachusetts so they go there to buy fuel.”

Sen. Brandt Hershman (IN) said Indiana’s 4.4% unemployment rate is the lowest since 2001, and revenues are close to forecast. Against this positive background, transportation issues barely reach the top 10 for most people. The legislature, however, recognizes that infrastructure is an important challenge because Indiana has more interstate highway miles than any other state. The state collects highway revenues for local governments, gaining income in good times and subsidizing local government in bad times. To meet these requirements, the state holds a $2 billion reserve, including $500 million in local revenues.

Sen. Stan Rosenberg (MA) told the Forum that paying for essential repairs to Boston’s subway system is a major challenge. Boston’s “T,” the oldest subway system in the world, requires a minimum of $7 billion to maintain it. Massachusetts Governor Charlie Baker has appointed a Fiscal Management Control Board to seek solutions to this challenge.

Conclusion

Ms. Eckl concluded her session by commenting that, overall, the states show cautious optimism about their fiscal health. However, there are concerns that revenue growth rates will not keep pace with spending pressures as states try to recover programs that were cancelled during the big downturn. In addition, another downturn in the national economy would most definitely hurt most states.

Speaker Biography

Corina Eckl

Corina Eckl is Director of State Services for the National Conference of State Legislatures (NCSL), managing the conference’s core programs, which include fiscal affairs, legislative management, and leaders’ services.

Prior to her current position, Ms. Eckl served as director of the NCSL’s Fiscal Affairs Program. She has written extensively on state-budget and tax issues and regularly provides information on state-budget conditions and other fiscal matters to legislatures, trade associations, and members of the national print and television media. Ms. Eckl has been quoted in The Wall Street Journal, The New York Times, Financial Times, USA Today, and The Christian Science Monitor, among others, and has appeared on CBS, CNBC, FOX, ABC, CNN, and the BBC. She has been interviewed numerous times for National Public Radio.

Ms. Eckl serves as a consultant on NCSL’s evaluations of legislative organization and staff operations and is the NCSL liaison to the Hawaii Legislature. She also has represented the NCSL on assignments to Algeria, France, Germany, South Africa, Indonesia, Nigeria, and Saudi Arabia. An NCSL staff member since 1984, Ms. Eckl holds a Master’s Degree in Public Administration from the University of Colorado in Boulder.

Other Winter 2016 Forum Highlights articles:

Corina Eckl

Director

State Services

National Conference of State Legislatures

State balances, though declining, remain strong overall, and most states expect to meet their short-term revenue targets. Two-thirds of the states have balances of less than 5%, while 8 states have balances greater than 20%.

Sen. John Cullerton

Sen. Kevin Meyer

Sen. Rich Wardner

Sen. Brian Bingman

Sen. Troy Fraser

Sen. John Alario

Sen. Martin Looney

Sen. Kevin de León

Sen. Ronald Kouchi

Sen. Peter Courtney

Sen. Wayne Niederhauser

Sen. Phil Berger

Sen. Mike Miller

Sen. Keith Faber

Sen. Sandy Pappas

Sen. Debby Barrett

Sen. Jonathan Dismang

Sen. Teresa Paiva Weed

Sen. Stan Rosenberg

Corina Eckl

Senate Presidents’ Forum

Phone: 914.693.1818

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