Predicting Another Surplus
I've written several times here in the last two weeks about Tennessee achieving a small revenue surplus in the just-ended 2002-03 fiscal year. What about the new fiscal year we're now in? How much revenue growth is expected?

Article II, Section 24, of the Tennessee Constitution says this: "In no year shall the rate of growth of appropriations from state tax revenues exceed the estimated rate of growth of the state's economy as determined by law. No appropriation in excess of this limitation shall be made unless the General Assembly shall, by law containing no other subject matter, set forth the dollar amount and the rate by which the limit will be exceeded."

The Sunduist administration used that loophole to exceed the spending cap 3 times, by a total of $1.09 billion – and that's just the cost in the first year, as each time the spending cap is breached, it often lays down a new, higher baseline of spending on which subsequent fiscal year budgets are based.

The state Department of Finance & Administration considers inflation-adjusted personal income to be "the broadest and most timely measure of overall economic activity in the state," as it states in Gov. Phil Bredesen's first budget document. And that budget predicts inflation-adjusted personal income to grow 4.3 percent in the 2003-04 fiscal year, "reflecting steady improvement in economic conditions as the economy moves through 2004."

But what if the economy grows faster? Bredesen's F&A department has already been wrong before. It didn't anticipate the fiscal year 2002-03 revenue surplus, for example. In a letter to new Gov. Phil Bredesen, dated March 10, Finance commissioner Dave Goetz said:

Based on mid-year review of tax collections and economic reports made to the State Funding Board, we have reduced the current-year estimate of taxes collected by the Department of Revenue by $64.5 million in the general fund.

In other words, Goetz said the department predicted a $64.5 million shortfall. Thanks to an economy growing faster than expected, there was no shortfall.

The letter also said that F&A predicts tax revenue growth of only $150 million or 3.1 percent, in the current fiscal year.

The first monthly revenue report for the current fiscal year will come out by mid-September, reflecting August tax collections. I suspect it will surprise on the positive side and start Tennessee's new fiscal year out on the road to another revenue surplus.