Arkansas ended fiscal year 2024, which runs from July through June, with a budget surplus of $698.4 million, according to the monthly general revenue report released today by the state Department of Finance and Administration.
A budget surplus will always generate a good headline for all involved, but keep in mind that key state agencies have been underfunded for years, and the surplus ultimately represents a policy choice to forego available revenues in the name of austerity.
There are two mechanisms by which the state winds up with a surplus: 1) The state Legislature can choose to intentionally spend less than the forecasted revenues available or 2) The actual revenues come in higher than the forecast predicted by DFA. Often it’s a combination of both.
If it’s the Legislature’s choice (typically via the governor’s proposed budget), it amounts to a relative spending cut baked into the budget from the beginning. The forecast issue is much less easy for lawmakers to control, but critics have argued that Arkansas has systematically been too conservative in its forecasts dating back for years over multiple governors, meaning state officials are essentially artificially creating outsize surpluses. In any event, as DFA acknowledges, the massive surpluses in recent years have in part been fueled by federal stimulus money pouring into the state in the wake of the pandemic (this year ranks as the fourth-highest surplus the state has ever seen). A strong national economy in recent years under the Biden administration has also helped.
A one-time surplus, despite what you may have heard, does not and cannot pay for ongoing tax rate cuts. Instead, at the end of the fiscal year, all surplus funds are parked in a fund called the General Revenue Allotment Reserve Fund until the Legislature takes action to appropriate the money.
In recent years, the Legislature has created a series of reserve funds (or made new use of an existing fund) to deal with surplus money and has focused on backup emergency funding and larger capital projects. Each fund has a different process by which the executive branch seeks legislative approval to access them. In the meantime, the funds are interest-accruing.
Last year, the state finished with a whopping $1.16 billion surplus (the second-highest ever), and the year before that it was a record $1.63 billion. Nearly all of that surplus money from recent years has gotten parked in three funds: The Catastrophic Reserve Fund, which can only be accessed due to a shortfall in revenue collection in order to fill funding gaps as needed; Restricted Reserve Funds, which include designated set-aside funds, typically for large, one-time capital projects; and a Reserve Set Aside Fund, similar to the Catastrophic Reserve but designated for specific state services.
During the recent special session, the Legislature put $290 million into the Reserve Set Aside Fund. The rest will be dealt with during next year’s regular legislative session. According to the Sen. Jonathan Dismang (R-Beebe), the chair of the Joint Budget Committee, the remaining amount –roughly $410 million — will likely eventually be appropriated to one-time, large-scale capital projects.
One slightly unusual feature in this month’s general revenue report: June revenues were $13.8 million below the forecast or 1.8%. I believe that this is the first time in several years that the revenues in the monthly report have come in below forecast (I asked DFA to confirm that and will update if I hear back).
“Moving into fiscal year 2025, we expect revenues to continue to moderate due to the effects of recent tax cuts and unwinding of federal stimulus programs,” DFA Secretary Jim Hudson said. As Hudson does in just about any pronouncement these days, he also applauded the governor’s leadership on the economy.