Managing Fiscal Slack: You Have a Surplus ... Now What?

• Author: Picur, Ronald D.

With the economy booming and state and local revenues swelling, many governments are facing the enviable dilemma of managing a budget surplus. This article addresses some options for reducing a surplus that can alleviate political pressure and protect jurisdictions from the possibility of a less-robust future.

The unprecedented economic expansion of the 1990s has created a new challenge for budget directors and governmental CFOs--how do you deal with budgetary slack? We have read about our new economy and we have seen investors leave the steps of Wall Street and the Dow Jones Industrials for the point-and-click network of the Internet and the NASDAQ.

Burgeoning governmental coffers, fueled by an economy whose last recessionary period ended in 1992, have been the beneficiaries of increasing income, sales, and property taxes. Our nation has earned more, spent more, and experienced rising property values, particularly in urban areas as "empty nesters" have rediscovered the virtues of the city versus suburban lifestyle.

Conversely, the expenditure side of the budget has benefited from relatively modest wage demands fostered by low levels of inflation. Moreover, the Federal Reserve Board appears committed to curtailing inflationary trends before they can gain any momentum.

The results of these economic conditions have been manifest in operating surpluses and notable fund balances for state and local governments across the country. For example, the National Association of State Budget Officers (NASBO) reports that fiscal year 2000 will represent the seventh consecutive year that general fund balances (on average) will exceed 5 percent of annual expenditures. Those fund balances have ranged between 5.1 percent to 9.2 percent during that period of time (see The Fiscal Survey of States: December 1999).

For many governments the picture has become even brighter due to the recent tobacco industry lawsuit settlement. The Master Settlement Agreement (MSA) will result in a $206 billion windfall for the 46 signatory states (the remaining four states settled independently with tobacco companies). The tobacco settlement means that an unanticipated budgetary windfall will soon start appearing to bolster the coffers of state and local governments even more. Better yet, those settlement dollars represent an annuity since they will be received over as long as a 40-year period.

A New Challenge

The new challenge presented by this rosy picture is how do we deal with fiscal slack? Most public finance professionals were trained and have grown up in a much different era--an era characterized as one of fiscal stress. They know how to cut budgets and seek more bang for the taxpayers' buck. As budget analysts, they learned how to ferret out budgetary slack and reduce the size of government, or at least control the rate of growth.

Government finance officers are experienced in such techniques as revenue enhancements, increased user fees, hiring freezes, early retirements, reductions in force, across-the-board cuts, outsourcing, refinancing debt, selling delinquent taxes or other receivables, and a myriad of other budget-balancing approaches. They have read about all these and other fiscal tools in the Government Finance Review and heard first-hand stories at GFOA's annual conference. But now what?

This article outlines a structured approach to deal with fiscal slack and allocate those new tax dollars in a planned and logical fashion, before the elected officials spend it. The underlying thesis of financial planning is consistent with basic principles set forth by the National Advisory Council on State and Local Budgeting (NACSLB) in its Recommended Budget Practices. For example, the NACSLB calls for developing policies for use of one-time revenues, stabilization funds, long--range financial planning, evaluating revenue and expenditure options, and so forth.

Start with Fiscal Principles

To avoid some politicians' approach of wanting to get out in front of an issue--also characterized as the "fire, ready, aim school of public administration"--one should start with a foundation of sound fiscal principles. That foundation will provide both direction to and justification for the allocations of new dollars that are flowing into the revenue-side of the budget.

The list below is not intended to be all-inclusive. Rather, it serves to illustrate the point of starting with fiscal principles before making dollar allocations (as specific examples will be suggested later). Other principles may well be...