April 23, 2014

States Should Use Surpluses to Improve Their Long-Term Fiscal Health

State lawmakers across the country are debating how to spend large surpluses after the economic recovery helped produce higher-than-expected tax collections for the second year in a row.

State legislatures and governors have welcomed this change after years of enacting painful spending cuts to balance their budgets. But they are waging battles both within and between their political parties about how to spend the extra money.

In a year when up to three dozen governors could run for re-election, as well as countless more state legislators who could be on the ballot, many of the proposals have unfortunately focused on short-term measures.

State officials should consider how to use at least part of their surpluses to improve the long-term health of their budgets instead of just haggling over whether to use the surpluses to finance short-term tax cuts or spending increases. A recent Concord blog post highlighted a report by the State Budget Crisis Task Force that said states have done little to address the long-term structural problems in their budgets -- including rapidly rising health care and pension costs that have begun to crowd out funding for other priorities. The Government Accountability Office determined in a report released last April that states need to “make substantial changes to avoid growing fiscal imbalances in the future.”

Some states are trying to undo some of this damage by making needed investments in education and infrastructure. But they should use at least part of their surpluses to address long-term fiscal problems by improving, for example, the finances of their pension and rainy day funds. Rainy day funds help states balance their budgets during times of revenue shortfalls, emergencies and economic downturns.

So far only Alaska has released a detailed proposal to improve its long-term fiscal health, calling for a transfer of $3 billion into its pension fund, according to a recent New York Times story. Several other states have discussed the dire conditions of their pension systems but have not yet enacted meaningful reforms. California, Hawaii, Colorado and Michigan are considering investing a part of their surpluses into their rainy day funds.

Many state legislatures struggle to build sustainable long-term fiscal policies. A recent study by the Center on Budget and Policy Priorities found that an overwhelming majority of states need to improve how they conduct their multi-year fiscal planning.

The study recommended that states take better advantage of tools to help build fiscal plans that account for the next decade instead of just the next year. These tools include multi-year budgets, regular reviews and reauthorizations of tax expenditures, and independent offices to prepare credible estimates of spending and tax policies, as the Congressional Budget Office does for the federal government.

Poor fiscal planning in the past has allowed health care and pension costs to grow into structural problems that states must resolve. After years of neglecting the long term, state officials have an opportunity to think and plan ahead. They should make the most of that opportunity, and voters should ensure they do not squander it.