As California emerges from the COVID-19 pandemic, the state's coffers are literally overflowing—and now federal taxpayers are about to kick-in another $27 billion.
Gov. Gavin Newsom (D) announced last week that California expects to have a $75 billion budget surplus at the end of the state's current fiscal year. That would be a staggering total—an amount larger than the entire state budgets of 45 other states—even in the best of times. Coming on the heels of a year that saw state and local governments begging Congress for a bailout, however, it should also raise some serious questions about whether the $350 billion in aid included in the American Rescue Plan is really necessary.
States are going to get that aid whether they need it or not. And California's not the only state that's not exactly in dire straits right now.
In New Jersey, the state treasury anticipates finishing the fiscal year with a $6.8 billion surplus. According to NJ.com, an independent fiscal agency projects that the total will be even higher. Not only does the state not need the federal aid that's coming its way, but state officials are now fretting about having to pay back a $4 billion emergency loan taken out last year in anticipation of a pandemic-related fiscal crisis.
Arizona is sitting on a surplus in excess of $1 billion. "We have so many resources available, it's unprecedented," House Majority Leader Ben Toma (R–Peoria) told the Chamber Business News.
Texas was anticipating a budget deficit of about $1 billion as recently as January. Now, the state expects a $725 million surplus. "Texas remains well-positioned to recover from the COVID outbreak and return to its norm of economic growth in excess of the national rate—if we haven't already," Glenn Hegar, the state's comptroller, told lawmakers at a hearing earlier this month, The Texas Tribune reports.
Everywhere you look, last year's doom-and-gloom predictions of state and city fiscal catastrophes don't seem to be panning out. The Urban Institute, a centrist think tank, estimates that state tax collections in March of this year were 10 percent higher than a year ago, even after federal pandemic aid is excluded from the calculations. Data from the Bureau of Economic Analysis shows that state and local tax collections for the second quarter of 2021 are running 7 percent ahead of the total for the first quarter of 2020—the last full quarter before the pandemic struck.
This is not a crisis.
That is what makes the disconnect between what's happening at the state and federal levels so stunning. On the exact same day that Newsom announced California's massive budget surplus, the U.S. Treasury Department finalized its plan for disbursing the first round of American Recovery Act aid to states. California will get $27 billion; Texas will get more than $15 billion; New Jersey will get more than $6 billion; and Arizona will get more than $4 billion.
Those totals don't include the $130 billion that's earmarked for local governments, the $123 billion set aside for public schools, or the $31 billion reserved for public transit agencies.
"All told, state and local governments are likely to be well over $1 trillion better off as a result of COVID relief legislation," concludes the Committee for a Responsible Federal Budget (CRFB), which had been warning for months that Congress' bailout for state and local governments was likely to be overly generous.
Governments at every level are about to find themselves flush with more cash than they might know what to do with—but they won't be allowed to return that money to taxpayers, thanks to a provision in the American Recovery Act that forbids states from using federal aid to cut taxes or fund tax credit programs. That's a recipe for overspending and growing the size of government, as some states are likely to take the extra federal aid and plow it into new programs that will have to be funded with state tax dollars in future years.
"State and local governments must avoid using these temporary funds to support permanent policy changes that lead to larger future imbalances," the CRFB warns.
In other words, state and local officials need to have a better sense of fiscal restraint than their federal peers. Don't cross your fingers.