States Debate Ways to Spend Surpluses

The federal government says it has $70 billion in loose cash burning a hole in its budget, and nothing special to spend it on. Republicans want to cut taxes. Democrats want to shore up Social Security. But nobody has suggested just slipping a nice rebate check into everybody’s mailbox. Which is what they did in Connecticut.

Like most states, many cities and even some school systems, Connecticut tallied its tax revenues this year and found more money than it needed to run things--which can be a huge headache for governments more used to just scraping by.

“It’s just been kind of confounding,” said Bob Harris, director of the office of fiscal analysis. “It’s become an issue of, ‘OK, what are we going to do with it?’ ”

Although the federal budget surplus, like the deficit that preceded it, seems abstract and more a conjectural topic of ideological debate than an actual checkbook item, experts say state surpluses are real dough. The states have amassed an enormous $34 billion in reserve, according to the National Conference of State Legislatures.

Unlike Congress, which recently adjourned and left most of its $70 billion just sitting there, some states are attacking their surpluses like terriers with T-bones.

“With the states, this is mostly money in play,” said Donald Boyd, director of the Rockefeller Institute of Government’s Center for the Study of States. “This is unusual, what’s been going on. It’s big.”

Connecticut, stuck with a $600-million surplus, put as much as it legally could keep in its emergency reserves, gave some to local communities, set aside $80 million for the Year 2000 computer bug and paid off some long-term debts. And, for the first time, it wrote $125 million in checks--from $75 to $150--to taxpayers themselves.

“I got a ton of those checks,” said Todd Nelson, who runs a Hartford check-cashing store.

Surpluses Can Become Issues in Campaigns

Because of legal limits on spending--returning money to taxpayers is considered spending--Gov. John Rowland had to invoke an obscure emergency clause that gave him special powers. And flush government is pretty extraordinary.

Some surpluses have become volatile issues in campaigns nationwide, with candidates wrangling over whether to spend them, save them or give them back. Most incumbents are happy to take credit for what was largely an economic phenomenon triggered by the fact that more people made more money and, as a result, paid more taxes than most governments counted on.

In New York, rivals wonder why Gov. George Pataki keeps up an old state habit of borrowing so much money--the state’s long-term debt is $35 billion, the biggest in the nation--to pay for government, while a $1-billion annual budget surplus just sits there, drawing interest, especially from interest groups. Pataki says he’s borrowing more wisely than his predecessors.

In Colorado, a law requires the government to give any surplus back to the voters. Now that there is a surplus, the Legislature wants to spend some of it, and will ask voters for permission on Tuesday.

In several races, the size of the surplus is in dispute. In Hawaii, Democratic Gov. Ben Cayetano sees a $300-million surplus. His opponent, Maui Mayor Linda Lingle, sees a $500-million deficit.

Maryland Gov. Parris Glendening, after finding out about a $211-million surplus two weeks ago, promised to cut income taxes by 5% next year. Republican opponent Ellen Sauerbrey, already pushing a 24% reduction, says Glendening is getting desperate.

North Carolina’s Legislature didn’t wrap up its 1999 budget--three months into its fiscal year--until Friday, mainly because of haggling over how to package tax breaks made possible by a $1.5-billion surplus.

Voters in Washington state are being asked today to patch the roads with $2.4 billion in surplus cash, although many groups want the money to go to education.

In California, the $4.4-billion surplus has given both major gubernatorial candidates the leeway to promise tax cuts--although the state stands to be more susceptible than others to the plunging economies in Asia and Latin America.

Such is the price of living in what experts say is the golden age of flush government, an era that just may be approaching its twilight, but one that nevertheless has created breathtaking anomalies. New York City, seemingly always broke, has a $2-billion surplus, the mother of all Wall Street bonuses. The Massachusetts city of Quincy, with $3.5 million in found money, is buying band uniforms for both high schools. Irvine, Calif., up $10 million, is giving city employees a 4% Christmas bonus.

About the only people without a surplus are the people responsible for the surpluses, the taxpayers themselves, who are making good money and spending freely, overflowing tax coffers. (Indeed, Americans have largely stopped saving--last month, spending 0.2% more income than they earned, the worst rate since the Great Depression.)

What to do with that money? “The argument for keeping money in the bank is that states, just like anybody else, need to plan for the future,” Boyd said. “The reason for not keeping too much is, well, it’s taxpayers’ money.”

This year, about 13 states, including California, cut taxes by at least 2%, said Judy Zelio of the National Conference of State Legislatures. But most states haven’t done anything yet. Many are scared.

Officials Point to ‘Whoopee Effect’

The bond rating agencies that decide whether a state is a good investment or not insist that states keep 3% to 5% of the general fund on hand as accessible cash. During the recession of the early 1990s, states averaged 1.1%.

“A number of leaders recall the dilemma of having a recession grip their states, they remember furloughing state employees and raising taxes,” said Arturo Perez, who tracks budgets for the National Conference of State Legislatures.

Right now, states have reserves averaging 8.7% of their budgets (California’s is 7.5%). This is the best since 1980. Although many states are spending something, most are sitting on the bulk of their windfalls.

Which isn’t easy. “We’ve got a whoopee effect there, where people say: ‘Whoopee, we’ve got a lot of money to spend,’ ” Montana Democratic state Rep. Ray Peck said after the state uncovered a $106-million surplus.

Yet others say the money is there, so let’s fix something. During a debate between two candidates for Texas tax collector, one estimated that the other had managed to spend $5.7 billion of the state’s two-year surplus of $6.3 billion--plus promise to trim taxes--during one 30-second span.

Such reserves can be fleeting. States, in fact, are predicting that their current $34 billion will shrink next year.

California Leads Surplus Pack

California has the biggest surplus and is one of 13 members of the billionaire’s club. In terms of percentage of the budget, however, it lags far behind the double-digits of the Great Lakes states. Experts are awed by Minnesota, the Swiss watch of state governments. It has the cash equivalent of 21.5% of its budget--$2.2 billion, enough to float a $200,000 yacht on each of its 10,000 lakes.

Minnesota gave back 20% of property taxes last year and, in a move almost unheard of, gave renters a 3.6% rebate on their rent. It is among a half-dozen states giving rebates this year, the most ever, said Mandy Rafool of the National Conference of State Legislatures.

“There’s so much money out there it’s becoming a political liability,” Rafool said.

The Connecticut rebate was fraught with gamesmanship. Republicans wanted to return the money in October, stuffing voters’ pockets right before they cast ballots.

Democrats resisted, so the checks went out last summer--along with a letter with the names of leaders from both parties.

“It seems like everyone was trying to take credit for it,” Harris chuckled.

Times researchers Tere Peterson in Denver and John Beckham in Chicago contributed to this story.