January 8, 2000
Web posted at: 10:54 p.m. EST (0354 GMT)

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By Correspondent Frank Buckley

NEW YORK (CNN) -- Fiscal year 2000 is only three months old, and already 29 states are reporting revenue surpluses equal to 5 percent or more of their overall spending.

Experts credit the booming economy. As more people work and personal income rises, revenue from state income taxes and sales taxes also increases. The state then collects more money than it spends, increasing the amount of funds in state coffers.

The situation puts state governments in a pleasant predicament: how to spend the extra cash. New York Republican Gov. George Pataki says states should be careful not to spend too much of the surplus and should put some of it away for lean times.

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"The risk of the good times is that you build in spending programs that when the economy does slow down, you can't sustain without raising taxes," Pataki said.

Policy-makers have a lot of competing choices on how to spend their extra state money, including health care and education. Education funding has had the most significant spending increase, according to the National Association of State Budget Officers.

Another option is to give the surplus back to the taxpayers in the form of a tax cut. Residents of 13 states and the District of Columbia are expected to see tax cuts as a result of healthy state budgets.

Pataki and others point to history as an example of what not to do. Although many states entered the early 1990s with surpluses from the 1980s, the money didn't last long once an economic slowdown set in.

"Those surpluses were virtually eliminated in about 18 months," said Ray Scheppach of the National Governors Association. "So this is one of the reasons the governors are sort of concerned and really want to run surpluses of 5 to 6 percent," he said.

Despite the surpluses, however, state coffers still may not be safe. One study of state budget reserves showed the vast majority of states did not have enough money to weather a recession without increasing taxes or decreasing spending.

"I think states haven't done enough to shore up their rainy day funds," said Liz McNichol of the Center on Budget and Policy Priorities. "They should be cautious and should be using some of these funds to increase rainy day funds."

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