Empire state of mind

From New York to California, revenues of American states are surging – but only a few are using the windfall to eke out a stronger economic position.

While the US as a whole continues its painstakingly slow trudge towards economic recovery, last month’s State of the State speeches showed US governors have thrown off the shackles and are sprinting towards November elections with surpluses not seen since the US recession.

State reserves hit a total of $US67 billion nationally, according to a report last month from the National Association of State Budget Officers. That is impeccable timing for almost three-dozen state governors who are up for re-election.

The upswing in state revenues started in late 2012 as the economy continued to strengthen, providing workers with more income to be taxed on.

While that was happening funds held in shares blossomed as the stock market took off. Add to that a boost in property and sales tax revenues and the states now find themselves in a position they could not have dreamed of back in 2008. However, much of the strength has come about from people shifting income for tax purposes, meaning the gains are more about timing than growth.

Despite this governors have been acting like Santa Claus at Christmas, promising constituents everything from shiny new tax cuts to full-day kindergarten for all students. But while revenues are improving, politicians are likely to find that there is not enough to pay for everything they want to do.

Their State of the State speeches outlined what each governor has earmarked for that extra cash and looking at those promises it is hard to identify which are the red states and which are the blue ones.

Some Democrats, like New York Governor Andrew Cuomo, have put tax cuts high on the priority list, while his more conservative counterparts, like Kansas Governor Sam Brownback and New Mexico Governor Susana Martinez, feel that the windfall should go towards full-day kindergarten and increased teacher salaries respectively.

Nearly all treated the increased revenue as a magic pudding to be thrown around.

Few heeded the warning of the states’ chief financial officers, the National Association of State Budget Officers, which acted as something of a wet blanket for newly-flush state coffers.

“State budgets are expected to continue their trend of moderate improvement in fiscal 2014,” the group said. “However, the growth in revenue collections is expected to substantially slow in fiscal 2014, and the national economic recovery remains relatively weak. The unemployment rate is high in many states, and economic expansion is slow.

“Although state finances improved in fiscal 2013, new spending initiatives will be mitigated by constrained revenue growth, prior budget cutbacks and uncertainty surrounding the federal budget in fiscal 2014.” he said.

California Democrat Jerry Brown and Alaskan Republican Sean Parnell were the two main exceptions and prioritised long-term financial stability for their residents over short-term political opportunism.

Governor Brown, the man once dubbed “Governor Moonbeam” for his lofty liberal ideals and lifestyle, showed himself to be counterintuitively thinking more long-term as he gets older.

The 75-year-old governor unveiled a budget package that focused on paying down the state’s sizable debt and created a $US1.6 billion ‘rainy day fund’.

Brown said he would instantly write a cheque to repay $US11 billion of California’s $US25 billion debt burden.

He has managed to turn around the $US27 billion deficit handed to him by former ‘Governorator’ Arnold Schwarzenegger to announce a surplus of $4.2 billion for next year.

Brown’s budget did not tackle California’s unfunded pension costs and other liabilities, which top $US354 billion, but he says it is top of his list for the year ahead after he has a chance to consult with stakeholder groups.

And it wasn’t just this columnist who was impressed with his sound economic plan. About 75 per cent of Californians dug it too, with 60 per cent of likely voters saying they will support the governor at the next election – up from 49 per cent just over a month ago.

Alaskan Governor Sean Parnell said he would transfer $US3 billion of the state’s $US16 billion in reserves towards its $12 billion in unfunded pension liabilities.

“Next year, this shift will allow us to reduce our annual payment to $US500 million, instead of more than $US750 million - that's a savings of more than 50 per cent in the first year,” he said in his State of the State address. “Our plan will dramatically drop future operating budgets and put us on a more sustainable financial path.”

America’s unfunded pension liabilities can’t be underestimated. They have already caused the country’s largest ever bankruptcy filing, with the city of Detroit currently locked in court battles to get out of paying its workers the pensions they are entitled to.

The states that address those liabilities, pay down debt and establish ‘rainy-day’ funds now will be ones that are covered the next time economic headwinds hit US shores.

Mathew Murphy is a Walkley Award winning journalist based in New York.