Hard Times Waning as Recovery May Bring Bonuses to South Dakota

When South Dakota (STOSD1) Governor Dennis Daugaard proposed his $4 billion budget last month, the Republican included something unthinkable in most capitols in recent years: across-the-board bonuses for state workers.

As some governors continue to wage war on public employee unions and four states including New York and California wrestle with mid-year deficits, cost-cutting followed by higher-than- expected revenue has officials in South Dakota and other states looking to spend the first surplus dollars in years.

Fifteen report revenue exceeding projections for the current fiscal year, according to the National Association of State Budget Officers. After four consecutive years in which states closed cumulative budget gaps of $500 billion, most are heading into the new year and the start of legislative sessions with stable or growing revenue, according to the National Conference of State Legislatures.

“States have battled fiscal hardship for three or four years in a row,” Arturo Perez, a fiscal analyst for the group, said in a telephone interview from his Denver office. “This is the first year in recent memory, since the recession began, in which states will not necessarily be consumed with having to balance their budgets or figure out what spending programs have to be reduced or what revenue measures have to be considered.”

Tax revenue in the third quarter last year increased for 48 states from the same period a year earlier and fell in only two, Wisconsin and Delaware, according to data compiled by Bloomberg. Connecticut yesterday projected an $83.7 million year-end surplus for fiscal 2012, an increase of $4.6 million from last month, after raising taxes last year. Michigan will finish the fiscal year with a $735 million surplus, David Zin, the Senate Fiscal Agency’s chief economist, said yesterday.

Bonds Outperform

The improving state fiscal outlook is one reason why municipal bonds outperformed every major asset class in 2011. Munis earned more than stocks, Treasuries and commodities last year as state and local governments cut spending while tax revenue rose for eight straight quarters through September, the longest string of gains since 2008, the U.S. Census Bureau said Dec. 20.

While revenue is coming in higher than the conservative estimates made in many states, it still hasn’t recovered to levels before the 18-month recession that ended in June 2009. Concerns also remain about the global economy and possible federal funding cuts. Costs for Medicaid and other programs that grow during downturns remain high.

“States are going to continue to have to make tough choices,” said Brian Sigritz, director of state fiscal studies for the Washington-based budget officers association, in a telephone interview. “Even though we will see some spending increases, it will still be a tough fiscal environment for states going forward.”

Spending Cuts

Elizabeth McNichol, a senior fellow with the Washington- based Center on Budget and Policy Priorities, said officials relied heavily on spending cuts, rather than revenue increases, in most states during the downturn. She said it will take years of growth for education, health care and other programs to fully recover.

“They are coming out of a really deep hole,” McNichol said in a telephone interview. “The growth we are seeing is too small to get states to pre-recession levels or to fully restore the cuts, given how severe they have been in the last couple of years.”

In South Dakota, Daugaard is facing criticism from within his own party that reductions made last year, including 10 percent cuts for most state agencies, were too steep -- leading to the surplus. His office estimates that tax collections for the current year will surpass expectations by $62 million, Daugaard said in an interview last month during the Western Governors Association meeting.

Additional Pay

Daugaard has proposed giving all state employees an additional payment in April equal to 5 percent of their salary and then raising pay by 3 percent in the fiscal year beginning July 1. While that won’t make up for the last three years in which state wages were frozen, “it does compensate the employees for their patience during these years where inflation has eroded their purchasing power,” Daugaard said.

South Dakota’s economy has been boosted by higher prices for corn, soybeans and other commodities. Corn futures have risen more than 30 percent since Sept. 30, 2010, while soybeans are up more than 9 percent in that period.

$89 Million

In Colorado (STOCO1), Governor John Hickenlooper announced Dec. 20 that he wants to restore $89 million in planned cuts to public schools after the forecast for fourth-quarter tax revenue jumped $231 million. The governor plans to submit an amended budget request for the current and next fiscal years that will also add $110 million to the State Education Fund, restore $30 million in proposed cuts to higher-education financial aid programs, increase grants to local communities by $8 million and add $8 million to a tax rebate for needy seniors, according to a press release from his office.

“We are able to recommend all of this because the economy has shown welcome improvement,” Hickenlooper, a Democrat, said in the statement.

In Arizona (STOAZ1), where state officials froze Medicaid enrollment and made cuts aimed at saving hundreds of millions of dollars per year, the governor’s office is now projecting a $600 million surplus in the fiscal year that ends June 30 and $700 million next year, spokesman Matthew Benson said.

Wish-List

On Republican Governor Jan Brewer’s wish-list for the extra cash: repurchasing the capitol buildings sold last year as part of a sale-leaseback agreement that netted more than $700 million for the cash-strapped state. Brewer said she’d like to pay off some of that debt and put aside money for when a voter-approved temporary sales-tax increase expires in 2013.

“With the surplus dollars, of course, there is a lot of need out there and people want it to be placed in lots of different areas,” Brewer said in an interview at the Western Governors Association meeting. “However, I am very concerned about our debt.”

Brewer, who will present her spending plan for the next fiscal year to lawmakers in mid-January, has also announced plans to seek $7 million in additional tourism funding for a national advertising campaign. The state’s reputation and convention business suffered after the governor signed a controversial immigration law in 2010.

Restoring Spending

Virginia (STOVA1) Governor Bob McDonnell, a Republican, has asked lawmakers to amend the current year’s budget to spend some of the nearly $545 million surplus from the fiscal year that ended June 30. The governor has proposed putting about $93 million of the excess toward transportation projects while setting aside $133 million into a rainy-day fund and $30 million to offset possible federal funding cuts, spokesman Jeff Caldwell said.

“The surplus was coming in just as the budget battle in Washington was taking place,” Caldwell said in a telephone interview. “There is so much uncertainty there.”

In South Dakota, the governor’s budget plan includes increased support for education and Medicaid reimbursements, which were cut in the current fiscal year, Daugaard said.

“Those places that we cut, we are returning,” he said. “It is certainly not putting it back to where they were, but it is starting in that direction.”

To contact the reporter on this story: Amanda J. Crawford in Phoenix at acrawford24@bloomberg.net

To contact the editor responsible for this story: Jeffrey Taylor at Jtaylor48@bloomberg.net

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