Fiscal Matters: Missouri’s surplus an opportunity to restore funding for vital services

The recent improvement in Missouri’s financial picture has led to substantial discussion regarding the use of an expected revenue surplus. Should this surplus become a reality at the end of this fiscal year (June 30, 2007), there will be many ways the state can put this welcome revenue gain to good use, bringing much-needed relief to core services that have yet to recover from the post 9/11 recession.

Before using the surplus, it is important to review how Missouri came to be in this fortunate position. On June 30, state fiscal year (fy) 2006 ended with net general revenue (gr) collections increasing by 9.2 percent and exceeding the consensus revenue estimate by about $292 million. Because fy 2006 collections were well ahead of forecast, it is probable that the current fy 2007 will be revised upward by a significant amount. Improved revenues, combined with spending reductions, will allow the state to complete fy 2007 with a substantial ending balance or surplus.
How much will the state’s surplus be?

Estimating state revenues — along with factors that can affect spending — has always been fraught with uncertainty. Through November, net gr collections were up 5.1 percent for fy 2007 and are roughly $25 million ahead the forecast level for this period. Although these results are certainly respectable, net collections over the last two months have been sluggish. For the two-month period ending Nov. 30, net gr collections increased only 2.8 percent relative to those months last year. While an increase in the fy 2007 revenue estimate remains in order, the magnitude of the increase is uncertain. Assuming that net gr grows 4.5 to 5 percent and that there are no major spending changes relative to the legislatively approved budget, the fy 2007 ending balance would be in the $600-$650 million range. This leaves $500-$550 million available for budget enhancements, assuming that prudent budgeting requires an “ending balance” of at least $100 million.

Can the state count on this money?

As is generally the case with state budget estimates, the answer to whether Missouri will end the year with a surplus is a qualified “maybe.” As noted above, state revenue collections tapered off a bit over the last two months. Nonetheless, the economic outlook is generally favorable. The u.s. Index of Leading Economic Indicators rose in September and October and now stands at 138.3. In addition, the continued decline in gasoline prices has left consumers with extra disposable income.

On the spending side, the situation is not without risk. The next u.s. Congress is likely to consider changes to the Medicaid program that could result in states assuming a greater share of the cost. Closer to home, the state of Missouri has lost a lawsuit to at&t Corp., which likely will result in the refund of substantial amounts of sales tax collected in recent years. The timing and magnitude of this refund are not yet known.
The final relevant caveat is that the $500 million surplus should be regarded largely as a one-time circumstance. Assuming that this money comes to fruition, it would be largely the result of revenues exceeding forecast, as opposed to a permanent positive variance between “normal” spending and revenue growth.

How should the state spend this money?

The state budget has suffered enormously in recent years and there are numerous areas for which enhanced funding would be both appropriate and most welcome. Examples include:

• A pay increase for Missouri state employees, who remain the lowest-paid in the nation.

• Increased state aid to public colleges and universities, which in fiscal year 2007 is below the level attained as far back as fiscal year 2001.

• Increased state spending for k-12 education, which is about $600 million below what many education experts regard as adequate.

• Restoring health insurance to the nearly 123,000 low-income Missourians who lost Medicaid coverage during fy 2006.

The expected surplus, although not enough to adequately fund core services, provides an opportunity to begin addressing the shortfalls. Investments in health care and education, in particular, will contribute to the common good of all Missourians and ultimately strengthen the state’s fiscal stability for years to come.