Reality Check: We’re Overspending

Bad revenue collections and updated projections highlight a big problem in the state budget: We are spending more than we are collecting. The problem is much worse than a recent shortfall—spending has been exceeding revenue for several years, and the gap will widen.

In February, as part of the proposed budget, the Budget Office forecast General Fund revenues would come in $232 million above the original estimates for the year. But February and March numbers came in well short of expectations. Following April, the state is still $67 million above estimates for the year, but short (and unlikely to hit) the number included in the proposed budget. Lower than expected sales taxes drove recent shortfalls—evidence that the federal payroll tax increase in January is hurting the state, as people have less take- home pay to spend.

Adding further worry, the Independent Fiscal Office (IFO) released projections for next year which are about $320 million less than than the amount forecast in February.

This shouldn’t cause panic, but those who hoped for more money to spend will be disappointed. But what is often overlooked is that the state is spending more than revenue this year and in the proposed budget. With the new numbers those gaps are much larger, and in fact, that level of spending would be impossible, as the state would exhaust its fund reserve (see table below).

The recent shortfall is part of a long-term fiscal crisis. Spending has been exceeding revenue for several years, and the gap will widen in the future. In December, the IFO released analysis show spending was likely to grow significantly faster than revenue over the next few years.

The two main drivers of this crisis: Medicaid spending and pension costs. In other words, we need real reform to slow unsustainable Medicaid spending, rather than expanding the beleaguered program. It also means we must tackle pension reform to prepare for the tsunami that will hit taxpayers over the coming years.

The recent bad economic news puts pressure on lawmakers to balance next year’s budget by June 30, but the more important challenge is putting our fiscal house in order.