When the 2021–23 operating budget was enacted, it left an unrestricted ending balance for funds subject to the outlook (NGFO) of $83 million in 2023–25. With ever improving revenue forecasts and new, lower spending assumptions, we estimate that the unrestricted NGFO ending balance is now $8.649 billion. Additionally, the budget stabilization account (BSA, or the rainy day fund) ending balance is estimated to be $1.207 billion in 2023–25 and the new shadow reserve account holds $1 billion.

Heading into session, the surplus as a percentage of revenues is the highest it has been going back at least 20 years. Our estimated surplus of $8.649 billion for 2023–25 is 13.5% of revenues. The next highest surplus was 5.5% in Nov. 2005.

There are several ways the state could use its surplus while maintaining budget sustainability. In doing so, legislators should follow these general principles:

• Restore reserves so that the state is ready for the next downturn.
• Do not use one-time funds for ongoing projects. (For example, the state could fund culvert fixes.)
• Focus on sustainably funding programs and projects that are already planned. (For example, the state could improve funding of state retirement systems, dedicate sales tax collections from vehicle purchases to transportation accounts, or better plan for the cost of the state’s new child care program.)
• Consider whether the current level of taxation is higher than necessary to support state spending. (For example, the state could reduce unemployment insurance taxes, add a property tax homestead exemption, reduce the sales tax, or repeal the capital gains tax.)

There will be many claims on the surplus during the legislative session, but caution is warranted. Although revenues are expected to continue to increase, lawmakers should not create spending bow waves that can’t be sustained in the future.

Read the report here.