Connecting state and local government leaders

A Type of Revenue That Can Be Both Alluring and Packed With Pitfalls

New Jersey state capitol building in Trenton.

New Jersey state capitol building in Trenton. Shutterstock

 

Connecting state and local government leaders

New research looks at "non-recurring" state budget collections.

When it comes to managing state revenues that won't flow reliably year after year, New Jersey's past practices provide a cautionary tale.

Between 2002 and 2006, lawmakers there used over $16 billion in "non-recurring" revenue and "cost deferrals" to fill budget gaps. There's no universal definition of what non-recurring revenue is. But, in general, the term refers to money that a state gets in one fiscal cycle and cannot expect to consistently collect in the future.

New Jersey lawmakers in the early 2000s were able to squeeze such revenues from questionable sources like delayed pension contributions, "securitized" tobacco settlements, and money diverted from an unemployment insurance account.

Moody's whacked the state with two credit downgrades between 2002 and 2006, partly in response to its use of such gimmicks to paper over structural budget problems. The state's credit rating had been in sterling triple A territory in the early 1990s.

"New Jersey, in only 20 years, has gone from being a financial powerhouse, characterized by strong job growth and consistent budget surpluses, to having one of the largest structural deficits of any state in the country," then-Gov. Jon Corzine's budget plan said in 2006.

"One-time approaches to budgeting mask a simple, critical fact: the State’s rate of spending far exceeds its ongoing revenue, which is the core of New Jersey’s structural imbalance," it added.

Steve Bailey, who manages state budget policy research for The Pew Charitable Trusts, said Thursday that, "New Jersey is still struggling with one of the lowest credit ratings and a significant structural imbalance."

Bailey brought up New Jersey's unfortunate fiscal saga during a conference call as he discussed a new report from Pew about identifying and managing non-recurring state revenues.

The report notes that many states ended last year "flush with unexpected cash."

A factor that contributed to this uptick in state revenues is that taxpayers in some states submitted early tax payments prior to a new cap going into effect on the federal tax deductions households can claim for state and local tax expenses.

Other examples of non-recurring revenue can include transfers from "rainy day" reserve funds, leftover budget surpluses carried over from a prior fiscal year, large legal settlements, or surges in specific types of tax collections.

"It's a tempting source of money to use," Bailey said.

And for states under pressure from costs like public employee pensions and Medicaid, these one-time boosts in revenues can be an alluring source of cash for lawmakers to direct toward their priorities.

But Bailey warns that this can be a risky practice.

"The temporary nature of non-recurring revenue means states should spend with caution," he said. Putting non-recurring income toward ongoing costs can lead to budget deficits when the money dries up.

Bailey explained that many state budget offices and forecasters already have a solid grasp on what revenues might be recurring or non-recurring, but where there could be room for improvement is connecting this information to budget decisions.

Laying the groundwork for this, he said, involves first isolating non-recurring revenues within a budget.

Another step could be extending budget projections further into future years in an effort to see whether revenues used to cover certain spending are sustainable. Washington state law, for instance, requires the legislature there to adopt a budget plan that is projected to balance over a four-year timeframe.

The Pew report recommends that states expand how they define non-recurring revenues to take into account that regularly collected revenue streams (as opposed to obvious non-recurring revenues like legal settlements, or fund transfers) can have one-time spikes.

"Evidence shows these spikes are becoming more common as revenues increase in volatility," Bailey said.

Tennessee has taken this sort of approach with its corporate franchise and excise taxes, which are known to be volatile and can have large year-to-year swings. State lawmakers passed a bill in 2015 that calls for Tennessee's Department of Revenue to describe the portion of these taxes that is recurring and non-recurring, the Pew report points out.

The report also suggests that states create guidance to ensure non-recurring revenue is used on one-time spending.

"When states place unsustainable revenue growth towards ongoing programs or revenue reductions, they set their budgets up to fail," Bailey said. "When that revenue drops off, the state is left with the same spending commitments, but not enough money to cover it."

The fallout can result in program cuts, tax increases, or a rise in debt.

A full copy of the Pew report on non-recurring revenues can be found here.

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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