How One State Used Its Giant Budget Surplus

For many state governments, the Covid era delivered an unexpected surge in budget revenue and Idaho, one of the nation's fastest growing states, was no exception.

When state lawmakers convened in Boise for their legislative session in January, they and Gov. Brad Little, a Republican, faced decisions about what to do with a $1.9 billion budget surplus as they planned for the 2023 fiscal year beginning on July 1. It was a sizable amount considering that the state was anticipating $4.2 billion in total general fund spending in the current budget cycle.

"You're talking just under half of your entire general fund expenditures had accumulated as a surplus," Alex Adams, the state's budget director, said during an event held this week by the Volcker Alliance and the Penn Institute for Urban Research.

On top of that, the federal government under the American Rescue Plan Act had directed $1.1 billion in direct pandemic aid to the state.

Adams said that Little, who took office in 2019 and who is running for reelection this year, has a budgeting principle that helped guide how state leaders hashed out spending and tax policy this year.

"It's not what you do in the bad times that gets you," Adams said, explaining the governor's fiscal philosophy. "It's what you do in the good times that will set you up for success or failure in the future."

For this year, that approach led to enacting a range of policies that included beefing up savings, making capital investments, paying down debt and enacting short-term and ongoing tax cuts.

Reflection of Broader Trends

Idaho is not in a unique position with its finances. The National Association of State Budget Officers said in its semi-annual fiscal survey of states issued last week that 49 states had reported fiscal 2022 general fund collections exceeding original forecasts.

NASBO also found that governors' fiscal 2023 budgets called for a 4.2% increase in general fund spending, following fiscal 2022, when estimated spending growth is around 13.6%—the highest annual increase in more than 40 years. The survey shows that rainy day fund balances have been rising as well.

And so far this year 27 states, including Idaho, have passed significant tax cuts, according to an analysis published earlier this week by the Tax Policy Center's Richard Auxier.

In other words, revenue is strong, spending and saving is up, and state lawmakers have been lowering taxes.

Notably, Idaho has had the fastest-growing population in percentage terms among states, due largely to people moving there from other parts of the country. In the yearlong period ending on July 1, 2021, the state added 53,151 residents, with its population rising to around 1.9 million, Census Bureau estimates show. Of the new arrivals, the vast majority came from other states.

During the pandemic, the state generally remained more open than some of its neighbors, drawing travelers who dined out or spent time visiting the state's abundant and scenic public lands.

Adams also noted that residents used stimulus payments from the federal government to purchase big ticket goods like kayaks and bicycles and that the state taxes unemployment benefits, which were expanded in response to Covid-19.

Planning to Avoid a Fiscal Cliff

The factors that helped fuel the state's rise in revenues, similar to the federal aid, are likely one-time influxes and will not extend into future years. With this in mind, Adams explained that the governor and lawmakers attempted to tie the one-time funds to one-time expenses, while also taking steps to prepare the state for the next recession.

One broad concern these days is that states will set themselves on course for a "fiscal cliff" by using extra revenue that is fleeting to start up new permanent programs or add to payrolls, resulting in costs that will outlast these strong fiscal years and become unaffordable going forward. There are similar concerns that excessive tax cuts could hamstring future budgets, forcing difficult service reductions.

Inflation, rising interest rates and stock market declines are stirring fears that a recession could soon arrive.

Against this backdrop, Idaho made rainy day fund deposits to bring its reserve account to the maximum level allowed under state law—equivalent to about 21% of general fund revenue. This balance, Adams noted, is in line with figures in a Moody's Investors Service analysis setting rainy day fund targets for states to weather a major recession.

The state also planned for an ending budget balance this year of about 4% of expected revenues. This promises to offer leeway if revenues come in lower than anticipated, likely leaving the state with extra cash to help avoid unplanned budget cuts.

"It gives you the flexibility to make the best choices for the state," Adams said.

Meanwhile, the state paid off a chunk of bond debt. ("One less thing that we have to deal with should a recession hit," according to Adams.) And it pumped about $250 million towards an estimated deferred maintenance backlog for state facilities of $900 million. ("A huge down payment," Adams said.)

Lawmakers also approved a tax cut package. This included a one-time income tax rebate program, proving residents with a rebate equal to whichever amount is greater: 12% of income taxes paid for 2020, or $75 per taxpayer and each of their dependents.

So far, the state has issued about 600,000 rebate payments, Adams said, returning $191 million to Idahoans. There was an option for residents to donate their money to state programs, like schools or roads, but only two have done so, according to Adams, for a total of $243.

The state also adopted an ongoing income tax reduction, dropping the top rate to 6% from 6.5%, and is consolidating some lower brackets. Adams said that in planning for this cut officials looked at five-year financial forecasts, modeling both optimistic and pessimistic scenarios.

He said the long-term cut was designed to withstand the pessimistic outlook without requiring the state to retrench spending on certain programs or tap its rainy day account. "Arguably that's a conservative way of budgeting," Adams said. "We wanted to make sure that the total package of what we brought forward would endure."