By Todd Haggerty
We’ve heard it in state of the state addresses and in various media stories that many states are projecting budget surpluses. While it is true that state fiscal conditions continue to improve (see NCSL’s "State Budget Update: Fall 2013" for more information), the term “budget surplus” needs a bit of clarification.
Some of the confusion comes from state balanced budget requirements, which can lead some to think that state spending is equal to available revenues. In practice though, state governments usually plan to end the year with a positive closing balance or carry cash reserves from one fiscal period into the next to protect themselves against erroneous revenue estimates, downturns in collections or unanticipated spending. In fact, some states provisions that prohibit appropriating all of the expected general revenue for the coming budget period.
An additional issue with the term “budget surplus” is the use or allocation of a surplus. In theory, a budget surplus provides lawmakers with additional flexibility to provide supplemental funding for programs, address infrastructure needs or reduce debt, for example. In many cases though, any balances above what was originally budgeted are often immediately spoken for. In some states this is because of constitutional or statutory requirements for deposits into rainy day funds that are triggered when state revenues or economic growth exceeds specified levels. Additionally, excess funds may also be rolled into the upcoming fiscal year to bring that budget into balance.
So, while the discussion of state budget surpluses is certainly welcome news for states, don’t put on your party hat just yet.
Todd Haggerty is a policy specialist in NCSL's Fiscal Affairs program.