Guest Column

Steve Haner


 

Reality Check

Pick your own state budget surplus figure: $677 million, $324 million or $0. All three can be valid depending on what you are trying to prove -- or obfuscate.  


 

Gov. Mark R. Warner was back before the legislative money committees on August 23, discussing the financial reports from the fiscal year that ended June 30, 2004. This is always an important meeting, but it took on added interest because the Governor, who only recently signed several tax increases, was about to announce a surplus. 

          

As usual, the man who held the microphone and brought a printed text controlled the spin. The Governor announced a “revenue surplus” of $324 million. By that definition, the surplus is the amount of revenue collected in excess of the official revenue forecasts. The fact that the official forecast was conservative is not news to my readers, of course (see "Our Cup Runneth Over," September 8, 2003). Such a forecast should be conservative.

          

The media blindly accepted and reported the Governor's surplus figure, and even Republicans upset by the taxes increases did not dispute it. But there was another number buried in the reports distributed to the committee, and arguably it reflects the real surplus: $677 million.

          

That is what accountants call the “unreserved balance” at the end of the fiscal year. It includes both the excess revenue and the unspent cash from around the state ledger. The money already locked in the rainy day fund, and any money needed to cover outstanding bills, is then backed out. The remainder is arguably the real surplus. It is the amount of General Fund money the state started the year with or collected during the year and didn't spend.

          

You can and should examine the numbers for yourself by looking at the comptroller’s preliminary report for 2004.

 

This report is a great financial snapshot of Virginia. Another thing you can read is how state spending has changed over the past four years. You can see the dramatic increases in education (up 41 percent) and human services (up 25 percent) that took place even before this year’s tax increases, which fund even more dramatic increases in both. Those two categories and the car tax refunds used up 95 percent of the revenue growth. But that is another column.

          

A surplus of $677 million is bit more headline-

grabbing than a surplus of $324 million. It is a better number to use if you want to argue that the tax increases were unnecessary. If the state hadn’t made an unscheduled transfer of $87 million to the rainy day fund late in the fiscal year, it would have been $764 million – three quarters of a billion dollars. So far no one seems to have picked up on it.

 

General Fund Tax Revenue

Actual Dollars (In $000's)

Year

Total 

Revenues

Unreserved 

Balance

% of Total

1996 7,281,744 321,198 4.4
1997               8,130,917                 644,840 7.9
1998 8,782,431 970,516 11.1
1999 9,716,193 983,041 10.1
2000 10,813,644 1,109,843 10.3
2001 11,149,890 200,953 1.8
2002 10,737,472 70,004 0.7
2003 10,987,756 243,997 2.2
2004 11,947,222 677,089 5.7
Source: Comptroller's GF Preliminary (Unaudited) Annual Reports

 

When you look at the same measure over recent years (see chart), it is clear that we have returned to a normal annual outcome. In fact, in the recent fat years we ended with far larger unreserved balances, both in dollars and as a percentage of tax collections. And in the recent thin years the unreserved balance got dangerously low and was clearly one of the reasons Wall Street was worried about our credit.

 

But we’re not done: There is a third, even more political definition of surplus, and by that definition, the surplus was zero. This refers to the money left over after the unreserved balance is earmarked in various ways. The comptroller calls it the undesignated fund balance. 

 

In some cases, the legislature itself has passed bills to gobble up the reserves (such as the Water Quality Improvement Fund and the “rainy day” Revenue Reserve Fund.) In other cases, the legislature has given the Governor authority to spend the money before it comes back to town.

 

One way or another, $677 million became zero dollars between July 1 and August 23. About 20 percent of it was anticipated earlier this year and was built into this year’s revenue assumptions. More than a third of it, $252 million, will further swell the rainy day fund. Another $40 million covers the revenue lost because the tax increases begin September 1 instead of August 1. Another $136 million is returned to the agencies or rolled over to finish ongoing capital programs. You can see the whole list in the comptroller’s preliminary statement.

 

So, from one point of view, all that money is already gone.

 

Two observations: The Governor felt comfortable designating all the money for some purpose because he is totally comfortable the revenue estimates for FY 2005 will hold. They are, after all, based on growth estimates applied to the pre-surplus base. So, he could leave the next General Assembly session with no unspent balances on the table without risk of a shortfall.

It is also clear that the General Assembly, despite the rhetoric of some members, doesn’t want glaring surpluses either. That is why it has passed bills that are in effect blank check appropriations to quickly spend future unreserved balances. For its own institutional reasons, the Assembly enjoys the cloak of poverty, as well.

 

-- September 7, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stephen D. Haner is vice president for public policy with the Virginia Chamber of Commerce. You can can e-mail him here: s.haner@vachamber.com