Back in the Black — But Not Out of the Woods

As states tally up spending and revenues for fiscal year 2010, which ended June 30 in most states, some (such as Virginia and Connecticut) are finding that they ended their year with their budgets in the black.  Here’s what those modest “surpluses” mean — and what they don’t.

• End-of-year surpluses are normal. They generally occur when revenues come in higher than the state estimated when enacting (or revising) its budget.  States are required by law to aim for a balanced budget — one in which revenues meet or exceed projected spending.  But estimating future tax collections is inexact in the best of times.  It’s even more difficult when the economy is in crisis and revenues fall by record amounts, as they have since this recession began.  So it’s no surprise when a state doesn’t collect exactly the amount of revenues it projected.

• The reported surpluses aren’t nearly large enough to reverse state spending cuts. Virginia’s $220 million surplus, for example, is a fraction of the $7.5 billion the state cut to balance its last budget.  In most states, revenues will continue to fall far short of what states need to maintain public services in fiscal year 2011 and for a couple of years beyond.  As a result, states are closing shortfalls that we project will total more than $140 billion in 2011 and will face another $120 billion in shortfalls for 2012.

• A surplus doesn’t even mean the state’s revenues grew in 2010. Virginia ran a surplus in 2010 because revenues declined by 0.6 percent rather than the expected 2.3 percent.  The state’s general fund revenues have dropped around 20 percent, in inflation-adjusted terms, since the start of the recession.  Similarly, in Connecticut, sales tax collections were above expectations for a couple of months but will still come in 5 percent below last year’s already low level.  Nationally, state revenues remain well below where they were two years ago.

• A surplus means that the next year’s deficit-closing measures can be a bit less harsh than planned. For example, Connecticut may be able to balance its 2011 budget with a little less borrowing than it had expected.  Virginia will use some of its surplus to give state workers — whose salaries have been frozen for close to four years — a temporary pay increase and to offset a bit of the large reduction in school funding.

Until employment returns to pre-recession levels, state revenues won’t be healthy enough to avert the need for more spending cuts and tax increases — even if revenues didn’t perform quite as badly as predicted last year.