POLICY BRIEF : Alaska, Arkansas, Montana, North Dakota
States See Budget Surpluses
Despite the recent recession and the budget woes troubling legislators in statehouses across the nation, four states-Alaska, Arkansas, Montana, and North Dakota-are heading into the next fiscal year with budget surpluses. These surpluses reflect a positive balance of each state's General Fund only, but, for the most part (Arkansas' $330 million in Federal Unemployment Loans notwithstanding), these four states are financially healthy in a broader sense. What sets them apart? The most notable commonality is tax revenue: Alaska, Montana, and North Dakota benefited from tax revenue related to their rich endowments of natural resources while Arkansas saw increases in sales and corporate income tax receipts.
It is important to realize, however, that a Balanced General Fund does not a healthy state balance sheet make. Some states balance their General Fund by raiding other funds appropriated for specific items such as education and infrastructure while others carry huge pension and other retirement liabilities. Setting aside fortuitous revenues and off-balance sheet issues, these states have some effective budgeting practices that others could learn from.
Alaska's budget surplus appears due largely to higher-than-expected revenue from oil taxes. The price of oil rose in 2009, increasing tax receipts for the state[i]. To Governor Parnell's credit, he has proposed using the surplus to pay back education funds that were previously raided to balance the budget. Moreover, he has proposed using some of the surplus to offer tax incentives for oil companies to drill additional wells, potentially increasing revenue in the long run[ii]. The governor wants to tie up most of the surplus in various state savings accounts, partially to keep the legislature from spending the entire windfall. $1.1 billion of the $2.2 billion surplus would go into an account that is used to "forward fund" education. This move is supported by legislators who tapped that fund in previous years when faced with low oil prices. Parnell would also like to deposit $403 million into the constitutional budget reserve, which was also drawn down in previous low-revenue years. Alaska's positive balance extends beyond just the General Fund; the state holds more than $10 billion in various reserve funds in addition to the Alaska Permanent Fund which has a market value of about $30 billion. The governor proposed at least one major expenditure as a result of the surplus; Parnell wants to spend $100 million on major maintenance projects across the states. Many of these projects have been deferred over the years and implementing them could help save the state money in the long term by improving energy efficiency and driving down heating costs in the cold Northern state[iii]. Expenditures of Federal Funds to Alaska were just less than 60% the size of the state's General Fund expenditures in 2009.
General Fund Expenditures (FY 2009) $5,899 million (41% of total spending)[iv]
Federal Funds Expenditures (FY 2009) $3,434 million (58% vs. General Fund)[v]
Total State Expenditures (FY 2009) $14,315 million[vi]
Unfunded Pension Liabilities $3,522,661,000[vii]
Unfunded OPEB Liabilities $4,032,052,000[viii]
Unemployment Trust Fund Loans $0[ix]
Arkansas had higher-than-expected corporate income and retail sales tax receipts last year. Despite this, the state tapped its rainy day funds as well as some funds that had been allocated to education in order to balance the General Fund. The governor claims that the state's approach is "budget conservatively and spend cautiously." The governor has much more control over the budget in Arkansas than in most other states. Legislative committees have less authority to shape the final budget, giving the governor more power to cut wasteful spending. In an interview, the governor states that Arkansas uses "priority-based budgeting," but it is a little unclear exactly what he means by this[x]. He did institute many mid-year cuts and some borrowing from the rainy day fund created after the previous year's surplus. However, Arkansas borrowed more than $300 million from federal government for unemployment insurance
General Fund Expenditures (FY 2009) $4,400 million (24% of total spending)
Federal Funds Expenditures (FY 2009) $5,516 million (125% vs. General Fund)
Total State Expenditures (FY 2009) $18,403 million
Unfunded Pension Liabilities $2,752,546,000
Unfunded OPEB Liabilities $1,822,241,000
Unemployment Trust Fund Loans $330,853,383
According to Governor Schweitzer's statements, he runs government like he would run a ranch[xi]. The key to Montana's budget success lies in the fact that they chose to save excess revenues during boom years. Refusing to spend 100% of revenues during periods of economic prosperity helped restrict the growth of government. The biggest problem currently facing states is that they have too many liabilities; government welfare programs instituted during times of growth become even more taxing in recessions because there is greater demand for them. Montana avoided a budget short fall in part due to their willingness to restrain spending, even in the good times. Further evidence of this can be found in the fact that the governor continues to push for spending cuts in order to prevent the state's current surplus from turning into a deficit down the road. Montana implemented a program called the Montana Accountability Partnership, which allowed citizens to submit their ideas on how the state could save money[xii]. The most publicized product of this program is the recent $4 million the state saved by auctioning off 200 state-owned vehicles that will not be replaced. Other fat-trimming programs implemented under Governor Schweitzer include 35% travel reductions, carpools for state employees, $800,000 biennium savings by extending the state's computer replacement cycle to five years, $3.4 million renegotiating lease rates for commercial space rented by the state, $17,000 in savings from the Governor and Lt. Governor taking salary decreases, $6 million in savings from cancelled building projects, $18 million in savings from cancelling a new unemployment insurance computer system, and $4.5 million in savings from cancelling renovations of an unused building on the Montana State hospital campus[xiii]. Over the last decade, Montana's economy has grown by 65% while the number of state workers has only increased by 2.3%[xiv]. All three bond rating agencies recently affirmed Montana's double ‘A' bond ratings and their ‘stable' outlook. [xv]
General Fund Expenditures (FY 2009) $1,753 million (38% of total spending)
Federal Funds Expenditures (FY 2009) $1,827 million (104% vs. General Fund)
Total State Expenditures (FY 2009) $4,533 million
Unfunded Pension Liabilities $1,549,503,000
Unfunded OPEB Liabilities $631,918,000
Unemployment Trust Fund Loans $0
North Dakota's budget success is largely a function of the state's demographics and economy[xvi]. For one thing, the state's small population creates less of an impetus for massive and expensive government programs. Likely more significant is the fact that North Dakota's economy was fairly resistant to the national recession. Most tax revenue in the state comes from the sale of commodities, including coal, oil, and agricultural goods. The prices for these goods held strong throughout the recession, and thus North Dakota was less impacted than other states. Moreover, North Dakota didn't experience much of a housing boom in the 2000s, so it is not struggling with widespread foreclosures, unlike other states. The state has made efforts to create a business-friendly environment, which has also helped their overall economic health.
General Fund Expenditures (FY 2009) $1,254 million (31% of total spending)
Federal Funds Expenditures (FY 2009) $1,405 million (112% vs. General Fund)
Total State Spending (FY 2009) $4,050 million
Unfunded Pension Liabilities $546,500,000
Unfunded OPEB Liabilities $81,276,000
Unemployment Trust Fund Loans $0
General and Federal Funds expenditures and total state spending were taken from the book of the states. Pension and OPEB UAAL and Unemployment Trust Fund Loans are from State Budget Solutions' "States Hide Trillions in Debt."
[i] Tim Bradner, "Parnell says state will see $2.2 billion budget surplus," Juneau Empire (Juneau, Alaska), Feb. 8, 2010. http://www.juneauempire.com/stories/020810/sta_560138583.shtml.
[ii] Stephen Fehr, "Weekly Wrap: In gloomy times, Alaska bounces back," Stateline.org, Feb. 12, 2010, http://www.stateline.org/live/details/story?contentId=460025.
[iii] Tim Bradner, ibid.
[iv] Table 7.6, "Total State Expenditures: Capital Inclusive, By Region," The Book of the States 2010, 400-401.
[vii] Bryan Leonard, "States Hide Trillions in Debt," State Budget Solutions, Aug. 2, 2010, https://spreadsheets.google.com/ccc?key=0AiW-8JkWk5qGdFhKNlFQOG5UbVFmUk05SE5MaDBvUGc&hl=en&authkey=CLfim9AN#gid=0.
[x] "Mike Beebe, Governor, Arkansas," CBS Moneywatch, Aug. 4, 2010, http://findarticles.com/p/news-articles/finance-wire/mi_8120/is_20100804/mike-beebe-governor-arkansas/ai_n54699172/?tag=content;col1.
[xi] Brian Scwheitzer, "State of Montana sets fiscal responsibility model for nation," The Billings Gazette, Sept. 7, 2010, http://billingsgazette.com/news/opinion/guest/article_9f8065e6-ba2f-11df-9897-001cc4c002e0.html.
[xvi] Joshua Zumburn, "What's North Dakota's Secret?" Forbes, Jun. 30, 2009, http://www.forbes.com/2009/06/30/north-dakota-hoeven-business-energy-economy.html.