States with Budget Surpluses May Not Really Be In the Black

The end of the fiscal year on June 30 has led to pleasant surprises or harsh realities for state officials.

Though not all of the final numbers are available yet, most states are claiming to have a budget surplus. Some have credited spending cuts, while others owe their success to increased revenues due to the recovering economy.

But those state leaders who might brag about their budget surplus may also be in for a rude awakening. The raw balance sheet numbers do not tell the whole story when it comes to state budgets. Government accounting little resembles the way you might balance your own checkbook. State governments use budget gimmicks to make ends meet.

Almost every state-49 of 50-has a balanced budget amendment. In theory, this means that every dollar spent will have a corresponding dollar coming in as revenue. In fact, this is rarely the case. State officials have found ways to make budget numbers appear balanced, but these methods will spell disaster for the future.

One of the most fiscally dangerous gimmicks by state officials is when they do not make required contributions to pay off debt or state employee pensions. Such is the case in New Jersey where Governor Chris Christie has decided to shortchange the pension payment this year, much like his predecessors had done, leaving New Jersey with a $171.6 billion pension gap, when calculated based on fair market valuation of those assets. Legislators in Maryland and California have used similar tactics that ignore the state’s debt.

States have also found that borrowing money to cover the current year’s deficit is a good way to balance their books. Out of control borrowing forced Maryland Governor Martin O’Malley to use general fund revenues to pay off what the state owed to service its mounting debt.

State officials can also shift funds from one budget item in order to bolster the revenue to the general fund. For example, in 2013, State Budget Solutions noted that Louisiana Governor Bobby Jindal used this tactic when taking money out of retirement funds and construction budgets in order to plug revenue gaps. Texas eliminated one form of fund shifting from last year’s budget by limiting the legislature’s ability to reach into user fees to balance the general fund revenue figures.

One of the most popular forms of fund shifting involves states taking money from the tobacco settlement funds. Rather than use that money for its intended purposes-to alleviate the public health costs of tobacco use-state officials use it to prop up other projects that would otherwise lack financial support.

Some states have dug a hole so deep that meeting the balanced budget numbers has become a priority over actually funding essential government services. In order to push spending figures down, states will wait until the next fiscal year to make payments of promised funds to schools or other programs. California has delayed payments to its school systems for well over a decade, and is only now catching up. Illinois has seriously hurt the non-profit organizations that work with state agencies, by refusing to pay its bills on time. To their credit, legislators in Minnesota have now prioritized education spending so that past delayed payments are no longer hanging over the heads of local school districts.

While surpluses are better than deficits, state legislatures may be viewing the bottom line through rose-colored glasses.

State Budget Solutions will periodically update these fiscal year 2014 numbers as they become available. Stay tuned for an update to our budget gimmicks report.

Hannah Oh and Elia Peterson contributed to this report.