The fiscal year is four months old, and monthly reports on revenue collections now offer a better glimpse of the state’s future financial position. Our take? The long, multiyear slide in state revenues appears to have ended, but no clear future trend is yet apparent.
The revenue streams that most folks in state government pay attention to are called “unrestricted revenue.” This includes money collected from business taxes, the meals-and-rooms tax, liquor sales, and the interest and dividends tax among others. We’ll focus on these in our analysis.
Through the four months ending October 2011, unrestricted revenues totaled $498 million. That’s $0.5 million more than revenue receipts for the same four-month period ending last year – in other words, essentially flat. Is this good news or bad news? Most legislators would agree that an increase in revenues over the previous year – no matter how small -- is a good thing in this economic climate. In fact, this is the first time in more than three years that year-to-date revenues have not fallen compared to the same period in the previous year. So, unless there is another significant economic downturn around the corner, we have reason to think that revenues have bottomed out.
But what about the future? Unfortunately, the patterns one might use to forecast revenue trends have been erratic. Revenues for the month of September 2011 were up 7.8 percent compared to September 2010. But in October 2011, revenues were down by 6.5 percent compared to October 2010.
The Center has developed a short term revenue forecasting model, which projects revenue through the end of the year, based on actual experience, and compares that estimate to the Legislature’s budget forecast. (You’ll find an explanation of that model here.) The short term methodology is simple, using year-to-date performance to estimate revenues for the year.
For example, year to date through October 2011, Meals and Rooms tax receipts were 0.1 percent behind collections over the same four-month period one year prior. Applying that difference to the annual Meals and Rooms revenue for FY2011 ($235.2 million) yields $235 million as the Center’s short-term estimate for FY2012. Projected revenues from the Legislature are $229.2 million for FY2012, a difference of about $6 million.
Applying that approach to every revenue source in the current fiscal year, the Center’s short-term forecasting model now shows total FY2012 revenues coming in $20 million above the forecasts in the state budget, based on year-to-date revenue though October 2011. (See chart below.)
While that might sound like good news, current state revenue trends have certainly deviated from the historic pattern, mostly as a result of the Great Recession. So making long-term predictions is incredibly difficult at this point.