California Governor Jerry Brown wants to give local governments $1 billion of surplus state funds so the localities can reduce their property taxes.
The Texas legislature is taking another tack to get rid of some of its several billion dollars of surplus. Texas is boosting school aid, highway spending and expanding health and welfare programs by several billion dollars.
Last Friday, D.C. Mayor Walter Washington proposed a property tax relief package because the District's revenues are outpacing its expenditures this year while Maryland plans to reduce taxes and increase spending to reduce an anticipated $115 million surplus.
Many state governments are taking actions similar to those in Texas, California, Washington and Maryland as the heary budget deficits of 1974 and 1975 have turned into the budget surpluses of 1977 and 1978. Few states are as well off as Texas and California but, according to a survey by the National Association of State Budget Officers and the National Governors' Association, more than half will have surpluses in excess of $20 million, and only one, Delaware, expects a deficit this year.
According to the Commerce Department, operating budgets of state and local governments that were in deficit by $6.2 billion in 1975 ran a surplus of $13.3 billion last year. When pension funds are included - pension fund contributions have exceeded payouts to retirees for the last several years - there was a total surplus of $28.8 billion in 1977.
Charles L. Schultze, chairman of the President's Council of Economic Advisers, said that state and local receipts are exceeding expenditures at an annual rate in excess of $30 billion.
Schultze said the states' budget surplusses must be offset by a deficit in the federal budget to keep the economy growing (the federal government will be in deficit by $62 billion this year and $61 billion next year), probably the most novel defense an administration has yet found for a federal deficit. Schultze said that, while the surplus is not likely to grow, it will shrink only slowly and continue to exert a drag on overall economic growth.
State and local government officials are worred that the administration and the public at large will look at that $30 billion surplus and conclude that states and cities are in good fiscal shape. Their concern intensifies because the Carter administration is about a month away from putting the fininshing touches on its urban program.
"The fact is, this surplus does not tell you anything about the fiscal condition of local governments," according to Melvin Mister, assistant executives director of the U.S. Conference of Mayors.
"It's absolutely useless when it comes to judging the status of state and local government," according Philip Dearbon of the D.C. Municipal Research Bureau.
In part, Mister said, the aggregate surplus is caused by big budget surpluses in few states, not an across-the-board surplus among states and localities. Most of the surplus in the cities is the "result of rather serious cutbacks in services and increases in tax rates by cities designed to maintain fiscal integrity," Mister lamented.
Dearborn also noted a large influx of federal monies into states and, especially, municipalities in the last year as part of the stimulus program. Many cities have used these funds not to fight recession but to maintain services and have incorporated them as part of their general operating revenues, according to a recent study by the Treasury Department.
Furthermore, notes Robert Reischauer, an economist with the Congressional Budget Office, about half the surplus is in pension funds, representing monies that are not available to state and local governments to spend on day-to-day operating expenses anyway.
These funds are taking in a "whole lot more than they are laying out," he noted, as state and local governemnts try to build up reserves to cover benefits in future years. "Even so, these surpluses do not mean the pension funds are anywhere near fully funded," Reischauer said. As employment growth levels in state and local governments, the funds will slide back into deficit.
Leaving aside the pension fund contributions, state and local government surpluses are running at an annual rate of about $17 billion. "From the middle of 1976 to now, the general funds of state and local governments have shifted from deficits to surpluses that in the aggregate are very, very large," according to Reischauer.
It reflects several developments. Conservatives state and local officials are generally require to balance their budgets. They cannot plan to run a deficit like the federal government, and if they do, they must pay off their debts as soon as possible.
Finding themselves ill-equipped to project their revenues and scared by heavy inflation and recession, many state and local governments cut back their spending dramatically in 1974 and 1975. Most of those spending cuts took a while to become effective and hit mid-stride in 1976, just as the economy was coming out of its slump.
For the first time in decades, municipal employment declined between 1975 and 1976. It grew last year, in large part because of the federal anti-recession package that created large employment programs at the local level.
Surprisingly, few accurate stastics are kept on the financial condition of state and local government, something policy makers discovered during the crisis in New York three years ago. A new operation at the Treasury Department is trying to remedy that situation.
Most analysts, however, believe that state budgets are in better shape than municipal and county budgets, although no one claims to be able to translate the $30 billion surplus calculated by those who compile the gross national product for the Commerce Department into day-to-day bugets of states andcities.
States tend to rely more on income taxes and sales taxes for their revenues, noted one administration economist. When the economy recovers and incomes rise, the tax take rises even faster because most income taxes are progressive.
When incomes rise, retail sales rise as well and the revenues from sales taxes rise in tandem.
Local governments, on the other hand, tend to rely more on property taxes, which are much less sensitive to changes in the overall economy than are income and sales taxes.
Several states are running mammoth surpluses. California will run a $1.2 billion surplus in the fiscal year which ends June 30, according to State Finance Director Roy Bell. Last year's $1 billion surplus and the $700 million surplus the year before mean California will have a $2.9 billion surplus accumulated by the end of next June, Bell said.
"There's something called an embarrassement of riches," he allowed.
The governor is proposing $1 billion of property tax relief and the legislature is considering new energy conservation programs, and housing and community health efforts to use up the surplus.
Municipalities often would prefer an injection of state money permitting them to restore services that have been cut to states substituting state revenues for locally generated property taxes.
Texas may be even more embarrassingly rich than California. Not only has a recovering economy boosted the state's sales tax revenue (Texas has no personal income tax), but rising gas and oil prices have boosted income from energy taxes, according to Bob Bain, an aide to governor Dolph Briscoe. According to a just-completed survey by the National Conference of State Legislatures, Texas plans to spend nearly $3 billion to offset its accumulated surplus.
But if many states are in good shape - the governors' conference did a survey that finds an aggregate $6 billion surplus in states that legislatures are trying to reduce through spending cuts of tax cuts - municipal governments are not nearly so prosperous. As the [WORD ILLEGIBLE] Treasury state noted, the huge surplus that the state and local government sector is accumulation "masks the financial difficulty when state-local governments are experiencing."
Even though the District of Columbia - which is a state, county and city so far as services go - can provide some tax relief next year, D.C. budget director Comer Coppie said that, at current levels of taxes and service, there will be a $171.4 million gap between revenues and expenditures in 1980 that will widen to $300 million in 1983.
As in most other localities, the current budget surplus in Washington is due to personnel cuts over the last few years and an unexpectedly strong recovery of the economy at large that boosted sales and income taxes.
Perharps the most embrassing state wealth is not in California or Texas - which are the richest - vut in New York State, where New York City remains as distressed an urban area as there is in the United States.
But not the state. A combination of service cuts and revenue increases has given the state about a $1 billion surplus. And while Governor Hugh I. Carey has proposed to give $20 million more to the city, he has proposed to cut taxes by $750 million - although $300 million of that are temporary business taxes that would expire and not be renewed anyway.
Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, points to the state's coffers as one place Nre York City should truth for help before turning to the federal government. If the city does not get assistance after the June 30 expiration of a special seasonal financing arrangement with the federal government, the city will likely go bankrupt.
But 1978 is an election year for Governor Carey, as well as for a lot of other governor's and mayors. And that is another element that state, local and federal analysts may not have included in their analysis of the state and local budget surplus.
As one urban economist noted, "There almost always seems to be a surplus in an election year."