States’ New Problem: What to Do With Excess Cash

For the first time since the recession began in 2008, several states find they are breaking even or running small budget surpluses, allowing them to build cash reserves.

That also presents Republicans and Democrats with the enviable problem of whether to save the money for a rainy day, cut taxes, or spend the cash to stimulate the local economy, reports The Wall Street Journal.

States are expected to collectively increase cash reserves by $3.4 billion to $41.4 billion in the fiscal year that for most ends June 30, which would be the equivalent of about 9 percent of state revenue, the paper said. That compares to 2010, when the funds accounted for just 5.2 percent of states’ revenue.

Several Republican governors argue that states need to raise reserves ahead of cuts in federal aid and rising healthcare costs. “Let’s be prepared for the fact that there is going to be a lot of federal money going away,” Tennessee Gov. Bill Haslam told the Journal, adding “It’s all the more reason to be responsible.”

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But some state legislators interpret responsibility as filling the gaps created by sequestration and other cuts. Michigan State Rep. Brandon Dillon, a Democrat, told the Journal he believes that before the state starts putting hundreds of millions of dollars in a rainy-day fund, “we should first be meeting the basic commitments.”

The debate is especially intense in that state: Unemployment in Michigan is near 9 percent, well above the national average of 7.7 percent, according to the newspaper. Gov. Rick Snyder, a first-term Republican, wants to add $75 million to the projected cash reserves of $505 million, well above the $2.2 million that was in the fund when he took office in January 2011.

Snyder’s budget chief, John Nixon, told the Journal that the money is critical not just to acquire a triple-A bond rating but also to avoid being in crisis mode. “As revenues decline and go up and down you’ve got to have those reserves or you’re in crisis management,” he said.

Other GOP members in the state, however, say the funds should be used to reduce taxes to lift the economy. Rep. Tom McMillin said he believes the rainy-day fund has become too big, telling the Journal, “I think the citizens know what’s best to do with extra money than the government.”