State Surpluses Leave Governors Exercising Restraint

Monday, 24 Feb 2014 06:44 AM

 

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U.S. governors, many flush with surpluses following years of austerity, say they won’t make the mistake of overspending as they face re-election in less than nine months.

After emerging from an era of cuts, firings and tax increases that sparked clashes in state capitals, Democrat and Republican leaders said at a conference in Washington they’re reluctant to make commitments that may hit them with deficits again if the economy stalls.

“The recession has brought on kind of a permanent sobriety about state budgeting,” North Dakota Governor Jack Dalrymple, a Republican, said in an interview as the National Governors Association met over the weekend. “Your revenues can turn down unexpectedly and very rapidly, and I think states in general are going to be more cautious fiscally.”

States have gained from the growing economy and rising stock market, easing crises that arose after the 18-month recession that began in 2007. Yet even as debate shifts to what to do with the extra money before voters go to the polls in November in 36 states, governors elected four years ago during a shift toward austerity say they’re exercising restraint.

Colorado’s John Hickenlooper, a Democrat, said he’s seeking to increase spending on education while bolstering reserves in case of natural disasters or a slide in tax collections. Iowa Governor Terry Branstad, who used some of a surplus to lower property taxes, said he’s resisted fellow Republicans calling for deeper cuts. Connecticut’s Dannel Malloy, a Democrat, wants to direct his $500 million surplus toward savings and pensions and use it to cut taxes.

Scarce Debt

Malloy said his views reflect trepidation among governors that the economic recovery will continue.

“We’re all waiting to see what normal really is,” Malloy said in an interview.

The caution has aided investors in the $3.7 trillion municipal-bond market. With officials hesitant to run up new debt for public works, the market has shrunk by $86 billion since the end of 2010, according to Federal Reserve figures. Muni debt has rallied 2.9 percent since year-end, according to the Bank of America Merrill Lynch U.S. Municipal Securities Index, compared with a 2.1 percent gain for dollar-denominated corporate bonds.

Fat Bankrolls

The temptation to spend may be growing.

Across the nation, state tax collections during the first half of 2013 jumped about 9 percent from a year earlier, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. The increases left many anticipating surpluses as they assemble spending plans for the next fiscal year.

The recovery is aiding the economy. State and local government spending has provided a boost to growth since the second quarter last year, according to the U.S. Commerce Department.

Even so, that spending has still failed to keep pace with costs, which have left expenditures below their prerecession peak, adjusted for inflation. And governments still aren’t hiring: There are 161,000 fewer state workers than in Aug. 2008, according to Labor Department data.

Iowa’s Branstad said he has had to balance competing demands. “We have it both ways,” he said. “We have Democrats who’d like to spend more and Republicans who’d like to cut more taxes.”

Political Promises

Pennsylvania’s Tom Corbett, faced with a deficit of more than $1 billion, said he’s keeping his 2010 campaign pledge to eliminate it without raising taxes. He’s even proposing additional tax cuts to spur economic activity, he said. While Democrats say his approach contributed to the deficit, Corbett said raising taxes would drive away businesses and discourage hiring.

“They want us to spend more and spend more and spend more,” Corbett said. “There’s only one place to get that, and that is in taxes. We’ve built a foundation for us to grow much faster here in the near future.”

Not all states have left their troubles behind. In Illinois, Democratic Governor Pat Quinn would face a new round of budget pressure if he allows a tax increase to expire at the end of this year, as it is set to.

Maryland Governor Martin O’Malley, a Democrat who can’t run for re-election because of term limits, said the state’s finances have been hindered partly by the federal government, which was shut down last year amid a standoff in Congress.

O’Malley has proposed curbing the pace of spending to close a shortfall in his budget. Over the past several years, he said, such steps have left the state with the smallest government since the 1970s on a per-capita basis.

“We’ve made a lot of tough decisions to balance this ship,” said O’Malley.


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