SC's fiscal situation
could be a lot worse
S.C. Statehouse Report
AUG. 25, 2002 -- The political finger-pointing and blame-laying
over why the state was about $150 million short on last year's budget
has started, but it really shouldn't be going on. Instead, leaders
should focus on constructive ways to improve how the state budgets
its money. Fortunately, many are.
South Carolina, like all states, relies on budget forecasts prepared
months ahead of events to predict how much revenue the state will
generate. Budget forecasters, like weather forecasters, are by their
very nature wrong much of the time. Their revenue estimates generally
are higher or lower than receipts that actually flow to the state.
Just think about how hard it would be today accurately to predict,
within $100, how much annual revenue you will receive in 18 months.
It's not easy. You could get a raise. You could lose your job.
In South Carolina's flush economic times of the late 1990s, budget
estimates were lower than realized, which meant the state generated
huge surpluses. In large part, these past surpluses are the source
of our current budget problems.
What happened in the late 1990s was the state got used to having
big surpluses. Lawmakers started assuming there would be a surplus
every year. Then they budgeted a lot of the one-time surpluses for
programs that would need money every year -- things like base student
education costs, scholarship programs and Medicaid health costs.
To put it in budget lingo, the state institutionalized surpluses
by creating revenue annualizations -- spending one-time money for
recurring expenses. This year when there was no surplus, the state
still had to pay for those recurring programs.
The situation is analogous to the fellow who gets a $300 bonus
this month and uses it to buy a nice boat, says economist Harry
Miley, a former head of the state Board of Economic Advisors. Next
month, the guy won't have the bonus, but he'll still have the payment
for the boat.
Most folks would get rid of the boat and keep other spending in
line. South Carolina, however, has kept its boat and tried to make
up the difference by cutting other spending.
House Ways & Means Committee Chairman Bobby Harrell said the
General Assembly is grappling successfully with the annualization
problem. Over the last two years, lawmakers have cut annualizations
in half -- from about $500 million a year to $269 million a year.
The goal, Harrell says, is to get to zero.
State Chamber of Commerce President Hunter Howard, another former
BEA member, said one of the best things the state could do to improve
how it budgets money is to reduce the amount of one-year money used
for recurring needs.
"We've proposed a five-year exit strategy to get out of the
annualization business," he said.
Lawmakers also may want to consider putting more money in rainy
day funds that can be tapped during the year if shortages occur,
Miley said. Currently, South Carolina sets aside 5 percent of its
budget in two reserve funds. Those funds greatly lessened this year's
shortfall -- but more money set aside would create a more stable
budgeting environment in the future.
Howard added South Carolina also should update the models it uses
to forecast revenues because that would improve revenue estimates.
While the state could do several things to make forecasting and
budgeting better, Miley, Harrell and Howard agreed South Carolina's
budget practices are better than neighboring states like North Carolina,
which had to raise taxes to cover shortfalls.
"As bad as we think it is, we've been able at least to manage
it with the resources we've had," Howard said. "It could
be a lot worse."
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