Eleven months into the state fiscal year, Arkansas’s projected year-end surplus is $712.2 million, the Department of Finance and Administration announced today.
That comes after the department did a revised forecast on May 15. Thanks to rosier-than-expected tax collection figures, net available revenue above forecast jumped from $250.8 million in April’s report all the way up to $708.1 million in the May 15 revision. Adding in another $4.1 million above forecast in May yields a surplus of $712.2 million, one month before the fiscal year ends June 30. It will be up to the Legislature to decide what to do with the surplus (more details below).
Politicians like to boast about surpluses, but it’s worth looking at these figures in the context of the state’s overall budget picture.
The “surplus” is created when revenues come in higher than the forecast. But critics have argued that Arkansas is systematically too conservative in its forecasts, meaning state officials are essentially artificially creating outsize surpluses. Indeed, the state has exceeded its forecast for each monthly general revenue report dating back at least several years. Last year, the state finished with a whopping $1.16 billion surplus, and the year before that it was a record $1.63 billion.
If you’re wondering how the state manages to keep lowballing its revenue estimates so drastically — or why the surplus estimate suddenly jumped by more than $450 million in the latest revision — the process remains relatively opaque. Here’s an overview from department spokesman Scott Hardin:
DFA is required to submit a General Revenue Forecast at least twice a year. The first change to the forecast this year was in early February. The tax cuts from the 2023 special session were incorporated, lowering our expectations for the fiscal year end surplus to $240 million. However, state revenue collection continued to surpass expectations through the Spring, even with all tax cuts considered. As a result, we increased our projection for the year end surplus from $240 million to $708 million in May.
Each forecast is developed using the most current Economic Data. We were careful in our forecasting as we exited the period in which Covid-related stimulus funding was provided to the state. Again, revenue collection surpassed all expectations throughout that period.
These massive state surpluses are coming while the budgets for many key state agencies and services are failing to keep up with inflation. Underestimating the revenue that will come in is one means to shrink the budget, giving room for tax cuts in the future.
This has been a longstanding complaint of progressives in the state like Arkansas Advocates for Children and Families. In an interview during the legislative fiscal session in April, Pete Gess, AACF’s economic policy director, made the point starkly:
What are our goals? What are we trying to do to serve the citizens of Arkansas? We don’t really have a surplus, we have underfunded programs.
If I was talking to a group of citizens, I would ask: Are you happy with education? Are you happy with childcare opportunities? Are you happy with state highways? Are you happy with the way things are being managed or the services you get out of DHS? I think a lot of us would say there’s room for growth there. There’s room to better serve all citizens.
The issue is thrown into sharper relief when you consider the extreme austerity budget for next fiscal year proposed by Gov. Sarah Huckabee Sanders and approved by the Legislature during the fiscal session.
The budget for next fiscal year increases spending by roughly $109 million, or 1.76% — a much stingier approach than recent years, when the budget has typically grown by around 3% per year. And most of that $109 million increase is going towards one thing: Funding for school vouchers parents can use to send their kids to private schools under LEARNS, the governor’s education overhaul that the Legislature passed last year. Outside of the LEARNS funding, the state budget is only increasing by roughly 0.7% compared to this year.
Unlike her father, former Gov. Mike Huckabee, who signed the ARKids health insurance program into law as one of his signature achievements, Sanders is proving to be a doctrinaire right-winger. She’s willing to aggressively slash spending for those most in need. Conservatives might take issue with that statement — yes, the governor’s fiscal year 2025 budget is still a bit larger than 2024 — but if funding doesn’t keep up with inflation, you wind up with a de facto cut. An agency might have to cut staff positions, for example, if competitive salaries are rising but the funding pool used to pay those salaries is flat.
Here are some examples of agencies and services getting squeezed with year-over-year funding increases close to zero: child care and early education (0.5%), the School for the Blind (0.1%), the School for the Deaf (0.4%), educational television (0.04%), the State Library via the General Education Fund (0.03 percent), Youth Services (0.01%), Developmental Disabilities Services (0.16%) and Behavioral Health Services (0.06%).
This is just a sampling; have a look for yourself.
Higher education was likewise slammed. Total funding for four-year colleges was worse than flat: It is going down by 0.29%, a $1,849,365 cut without even factoring in inflation.
Total funding for two-year colleges was slashed by $848,319, a 0.72% cut compared to last year. Seven two-year colleges were hit with cuts of 2% or more.
Instead of fully funding these programs, Sanders and her allies in the Legislature are shoveling tens of millions of dollars toward vouchers, which in practice amount to a hefty bump for the bank accounts of private school families, many of them wealthy. That’s on top of the multiple rounds of tax cuts over the last few years, likewise a windfall mostly for the rich.
Yet another slate of tax cuts is likely coming later this month in a special session, as the Legislature plans to once again cut the top rates for individuals.
Sanders’ austerity regime looks even harsher when you consider that the state has racked up billions of dollars in surpluses in the last few years.
What will happen to the more than $700 million in surplus money accrued this fiscal year? That’s up to the Legislature. They could take action during the upcoming special session, but Sen. Jonathan Dismang (R-Searcy), chairman of the Joint Budget Committee, said he expects all or most of that funding won’t be designated until the regular legislative session in 2025. Dismang provided the following explanation of how the process works.
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.
A decade or so ago, surplus money often wound up in various discretionary slush funds — General Improvement Fund allotments for legislators and a “rainy day fund” for the governor. That system created yet another incentive for lawmakers and state officials to skew the budget process toward creating surpluses, as that gave them more money they could directly control outside of the normal lawmaking and appropriation process. The GIF money in particular led to a number of corruption scandals; even when there was no outright corruption, it tended to result in very small-bore projects that let individual legislators shower goodies on local constituents.
In place of the GIF and rainy day funds, Dismang said, the Legislature has created a series of reserve funds (or made new use of an existing fund) intended to be more transparent and more 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.
Currently, three funds contain the bulk of money from recent surpluses, said Hardin, the Finance and Administration spokesman.
The Catastrophic Reserve Fund has a balance of $1.5 billion, which can only be accessed due to a shortfall in revenue collection in order to fill funding gaps as needed. It’s unlikely that the state will devote much more to that fund, Dismang said, as it should be enough to help state government manage even a historically severe economic downturn.
There’s another $2 billion in the Restricted Reserve Funds, which includes set-aside funds, typically for large, one-time capital projects. The Legislature designates specific amounts for various designated spending projects, though these can be changed. Here are the current individual balances for each spending category. As this money gets spent, it may take some of the sting out of flat funding by helping agencies to fund needed capital projects, Dismang noted.
Another $710 million is currently in a Reserve Set Aside Fund, similar to the Catastrophic Reserve but designated for specific state services.
There are still more options for the Legislature, including a discretionary fund for the governor, though this now requires approval from the Legislative Council. The Legislature could also simply elect to spend the money directly and immediately on anything it chooses.
What about tax cuts? As a rhetorical move, it seems quite likely Republican lawmakers will crow that yet another big surplus proves there’s “room” for yet another big tax cut. As a practical matter, it doesn’t quite work that way. A given surplus is one-time money, whereas a tax cut is an ongoing change to the budget.
Ultimately the “pay for” on a tax cut is reductions in future spending. That’s the choice. It is possible for the Legislature to put surplus money into a “tax relief fund,” but that would only allow for a one-time tax measure, such as a one-year-only tax credit.
Dismang said that he expects that by the next regular session, the governor and the Legislature will come to a consensus about a major spending need or needs, most likely in the form of a large capital project or projects.
More tax cuts, meanwhile, are right around the corner. While we’ll hear plenty of chatter about the surplus in the context of the tax cuts, as an accounting matter, I doubt that the surplus funds will go directly toward any sort of tax break. But there is a connection between the two: The state keeps accumulating surpluses because it keeps lowballing its revenue estimates, which leads to stingier year-over-year budgets. And those smaller budgets lead to de facto cuts to the programs and services most important to citizens across the state. That’s the real way Gov. Sanders is paying for tax cuts for the well-off.