Why States Should Never Count on Surpluses

By: Lowell
Published On: 4/8/2007 6:46:53 AM

The article in today's New York Times, entitled "Housing Slump Pinches States in Pocketbook," is a great argument for why states should never spend surpluses before they're hatched.  Even then, they might want to save for a rainy day, not build up debt, because just as revenues can go up in a booming economy or a booming housing market, they can also go down.  As the Times reports:

State tax revenues around the country are growing far more slowly this year and in some cases falling below projections, a result of the housing market slowdown that has curbed voracious spending on real estate, building materials, furniture and other items.

Everyone should keep this in mind when politicians start talking about spending current or even projected FUTURE surpluses on all kinds of great things.  The problem is, those surpluses can disappear or even turn into deficits, causing serious problems. 

A great example is right here in Virginia, where Gov. Gilmore drove the state into the fiscal ditch with his "no car tax" mantra.  Before long, Virginia's AAA bond rating was in jeopardy, forcing Gov. Mark Warner to take heroic measures in order to fix the problem.  Then, this year, we had Republicans (sensing a pattern here?) once again proposing that Virginia squander its surplus on one-time money for transportation, as opposed to a long-term, dedicated source of sustainable and predictable revenues. 

Unfortunately, Democrats and moderate Republicans were not able to stop this nonsense.  In fact, the final transportation deal actually increased, from 50% to two-thirds, the share of dedicated future surpluses allocated to transportation.  And what happens, exactly, when those surpluses fail to materialize?  Got me.  But all I can say is that I don't have any faith that if conservative Republicans - the same people who brought us ideas like "trickle down" and "no car tax" - take over the Senate next year, the situation will be any better.  Either we're going to end up without the money to fund transportation investments, or the legislature will be forced to seriously raid other areas of the budget to pay for them.  Alternatively, they could raise revenues by increasing the gas tax, for example, but I'm not holding my breath on that one.  The bottom line is that depending on future surpluses that may never materialize is not a good idea, no matter how you look at it - and no matter which party proposes doing so.


Comments



Dependence on Surpluses is GOP Stupidity (elevandoski - 4/8/2007 12:35:57 PM)
Excellent point, Lowell.  Thank goodness the Governor amended the transportation bill as he did.  He at least made lemonade out of the lemons the GOP jammed down our throats.

The original GOP plan sliced $172 million each year from our General Fund by way of recordation revenues, which they then depended on to pay off the debt service levied on us by their $2.5 billion bond.  This is otherwise revenue adding to the General Fund which as we know in times of a housing boom nicely funds the GF to the point of helping it generate surpluses.  Albeit a housing slump decreases recordation revenue having an affect on any fund be it the General Fund or the Transportation Trust fund, but impacting the GF as the GOP proposed in our capacities to pay back $2.5 billion of debt.  Didn't even the mention of that idea raise the hackle on any of the Dunn and Bradstreet types?  Is it responsible government to depend on something as fluctuating as our housing markets to repay our debt?

Instead, Kaine amended HB3202 whereby debt service became dependent instead on an increase in car insurance premiums.  Surely a steady, long-term consistent revenue source, this doesn't raise the ire of the folks that watchdog our bond ratings. 

Both Kaine's and the GOP's plans called for a one-time dip of General Fund monies in FY08 to the tune of $500 million.  Perfectly fine as all agree and all know now that we have today existent a surplus.  But what of surpluses in the future?  Here again we have agreement between Kaine's and the GOP's original plan.  Fifty percent of non-recurring GF surplus was dedicated to transportation.  I'm gathering with the words "non-recurring" that the GF already depends on surpluses.  Thus isn't there a domino effect onto transportation funding should economically Virginia not continue on such a rosy path as we do now?

Once again, we are reminded how this GOP plan sucks and how bad it is that Governor Kaine was forced into making lemonade from that lemon.  Remember it was Democrats repeating over and over how we needed a new, reliable and dedicated funding source for  transportation.  The only portions of the amended HB3202 that do that are the items (insurance premiums, abusive driver fees, heavy truck fees, registration fees) that Kaine and the GOP had both almost identically built into their respective transportation plans. Those items only generate so much $ money.  The rest of the statewide transportation funding comes from a portion of recordation taxes and bond revenue. 

I know from experience that stuff in at least Northern Virginia isn't selling.  It took over 11 months and shaving off $170,000 from the sales price to sell my house in Loudoun.  Loudoun saw its assessments this year decrease.  They've already entered a housing slump.  Stuff isn't selling, which depresses home sale prices which eventually has an affect on assessments and tax rates.  In Hampton Roads today's we are experiencing soaring tax assessments and local government is being pressured to lower tax rates.  God only knows what happens around here next year.  I'm not in any way a financial expert, but it doesn't take an expert to look at this amended HB3202 and not realize we are heading down a slippery slope with so little of our transportation dollars dependent on new, reliable and long-term sources of revenue and depending even one iota on future budget surpluses. 

In other words, when and how can we institute a gas tax?  And let's also review and reflect on the disaster that Governor Gilmore left us with, shall we? 



Questions (tx2vadem - 4/8/2007 1:29:53 PM)
There is always uncertainty when it comes to predicting future events.  The fact remains that in finance, you must make an effort to do so.  I would note that Governor Kaine's own assessment of future revenue is that we will continue to experience increased collections.  Also, if you don't budget for a change in collections, you are assuming that economic activity is static.  Are you proposing that we consider collection growth to be flat when the General Assembly formulates a two year budget?

Second, I don't know where you are coming from on the General Assembly's transportation plan and Governor Kaine's amendments to it.  If we look at Governor Kaine's amendments' budgetary impact and compare that to the impact statement of the General Assembly's bill as passed.  The GA was only going to use 1/2 of the potential general fund surpluses, Governor Kaine proposes using 2/3.  As far as dedicated sources go, what did Kaine and moderates in the Senate do?  It would seem that the Senate altered the general General Fund appropriation of $250 million to an apportionment of Recordation Taxes.  Governor Kaine appears to have changed that apportionment from the Recordation Taxes to Insurance Premiums Taxes.  I would note that this doesn't make much difference as the GA can redirect that money any time they feel like it.  And if you look at the substance of the transactions, they are still taking money out of the General Fund; but just labeling it differently.

As a tiny aside, I don't think you need to put a padlock on your wallet IF Republicans retain control of both houses.  Because if revenues are a problem, they will just opt to cut spending.



Answers (Lowell - 4/8/2007 2:32:33 PM)
1. I'm fiscally conservative in the sense that always think we should be VERY cautious spending projected "surpluses."  That's just asking for trouble.  No, I'm not saying that we have to rigidly assume flat revenues over any given period, but we also shouldn't assume that everything will be peaches and cream forever and base our plans on the famed "Rosy Scenario."

2. Good point, I think that Gov. Kaine and his allies made some excellent changes to the transportation package, but the reliance on future surpluses is not one of them.  I am going to change the diary to reflect this fact.  Thanks.



One more thing... (Lowell - 4/8/2007 3:34:33 PM)
...see Eileen Levandoski's article on this subject:

Both Kaine's and the GOP's plans called for a one-time dip of General Fund monies in FY08 to the tune of $500 million. Perfectly fine as all agree and all know now that we have today existent a surplus. But what of surpluses in the future? Here again we have agreement between Kaine's and the GOP's original plan. Fifty percent of non-recurring GF surplus was dedicated to transportation. I'm gathering with the words "non-recurring" that the GF already depends on surpluses. Thus isn't there a domino effect onto transportation funding should economically Virginia not continue on such a rosy path as we do now?

Once again, we are reminded how this GOP plan sucks and how bad it is that Governor Kaine was forced into making lemonade from that lemon. Remember it was Democrats repeating over and over how we needed a new, reliable and dedicated funding source for transportation. The only portions of the amended HB3202 that do that are the items (insurance premiums, abusive driver fees, heavy truck fees, registration fees) that Kaine and the GOP had both almost identically built into their respective transportation plans. Those items only generate so much $ money. The rest of the statewide transportation funding comes from a portion of recordation taxes and bond revenue.

Thoughts on this?



Thoughts on Eileen's post (tx2vadem - 4/8/2007 5:31:45 PM)
First, just a small correction, the Insurance Premiums Tax is not a new source of revenue.  It's simply an allocation of those collected revenues to the Transportation Fund.

My thought on Governor Kaine's amendments is that we should stop cheerleading for him.  He didn't do anything substantial; and he certainly didn't make lemonade from lemons.  Republicans boxed him into a corner and rather than sticking to a principle, he opted for political expediency.  I understand the political calculus that probably went into his decision and I don't fault him for it: 1. He has a limited time in office and he wants to create a legacy on this issue; 2. This was the best that Republicans could do and this was a limited time offer; and 3. It is uncertain whether Democrats could win both houses in this year's election allowing him the option to make his legacy.  I just don't think it is praise worthy.

On the surpluses, neither the GA nor Governor Kaine counted that money as a part of the total transportation revenues in the bill.  It is a line there; but without a discrete value, it is meaningless.  It is basically surprise money.  So, the question here would be how conservative are the state's revenue forecasts?  I don't know the answer to that question, but it would give us some insight into the probability of future surpluses.  Even still since you can't reasonably quantify that money, it is again just: "Surprise, we have some extra money we didn't budget for! Awesome!"  So, your point about reliance on them being folly is right, but I don't think either plan relies on them.  Even if no surplus materializes, the bill will still achieve its project revenue target (assuming they're right on their collections projection).

On the bill itself, I think you already pointed out WaPo's article that said all of this money will go to maintenance.  If you look at Governor Kaine's financial impact, all of the new revenue goes to maintenance.  The only thing funding new transportation indicatives is the $3 billion in bonds.  This bill won't solve the transportation problem, and I think voters are going to be upset when they don't see any new initiatives coming out of this to reduce traffic congestion.  I think the Governor should have said that: "This was a good start at repairing and maintaining Virginia's existing infrastructure and that's why I signed it.  But Republicans were and are not interested in solving traffic congestion."

Finally, part of the problem for me is that I haven't seen what the total need is.  If you have a source for that information, please share.  When I look at VDOT's projects though, it costs billions to do major improvements.  So, I would think that there is some comprehensive plan that states: "Here all the projects and here is what they will cost.  Here is how much money we have and here is how much we need." 



I've heard it exists (elevandoski - 4/8/2007 5:45:26 PM)
I have heard that such a comprehensive plan does exist that says exactly that... "Here's the projects and here's what they will cost".  But more importantly, however, which makes this whole HB3202 all the worse, is there is NOTHING, repeat NOTHING, that says "Here's how this plan specifically gets traffic moving."


And with that I say... (tx2vadem - 4/8/2007 5:54:47 PM)
AMEN!


That's because it's NOT going to get (Lowell - 4/8/2007 6:01:55 PM)
traffic moving, except in a few isolated cases, because this plan falls WAYYYY short of the amount of money needed to make a serious dent.  Basically, this thing is a bandaid.  Tim Kaine improved it in some ways, but as far as I'm concerned, it was a monstrosity and remains a monstrosity.


It isn't about how money is raised. (elevandoski - 4/8/2007 6:13:03 PM)
It's about how money is going to be spent. And it fails miserable.  For instance, we need to fund the folks that get traffic accidents off our highways ASAP.  This plan doesn't fund that.  We need to fund all the technology that better times traffic lights whereby during peak times on Independence Blvd. and/or Virginia Beach Blvd. more than just 5 cars get through the intersection.  This plan doesn't fund that.  This plan doesn't fund incentives to employers to offer flex-time or telecommuting.  This plan is nothing but a political ploy put up the desperate GOP.


Be Cautious On Spending (norman swingvoter - 4/8/2007 7:50:20 PM)
There are times to be confident and times to be cautious.  We have 2 wars going on of unknown duration.  The costs are escalating.  bush-cheney have provided absolutely NO fiscal discipline on the republican congress for years.  At some point congress will probably start transferring costs to the states so having a financial cushion will be great in my opinion.


Including the Virginia National Guard. (Lowell - 4/8/2007 7:58:49 PM)
...which is hurting right now, according to a recent article in the Richmond Times-Dispatch.  The following comments are interesting:

Sen. Jim Webb, D-Va., "is highly concerned with reports like these coming out of the Virginia National Guard and other branches of the armed services," said Webb spokeswoman Jessica Smith. "It's obviously a top priority with us."

Webb and Sen. Chuck Hagel, R-Neb., have pushed for a budget amendment adding money to help the Army National Guard and Reserve with equipment, training, operations and maintenance.

Sen. John W. Warner, R-Va., "believes it is essential that the Guard be fully equipped for both its state and federal missions," said the senator's spokesman, John Ullyot.

Warner has been working with Newman to see that the Pentagon addresses the state Guard's concerns, Ullyot said.