This week the state saw good news on the revenue front with the House Fiscal Agency reporting that FY2011 revenues were $285 million above target ($140 million General Fund and $145 million School Aid Fund), and the Senate Fiscal Agency estimating revenues are $431 million above target ($158 million General Fund and $273 million School Aid Fund). 

 The magnitude of these numbers is raising hope in some quarters that some of the state’s recent budget cuts can be restored.  However, when thinking about using any potential increase in revenues, it is important to consider both the uncertainty surrounding the current estimates, and the interaction of the FY2011 revenue estimates with the revenue estimates for FY2012.

Although September was the last month of FY2011, there is still significant uncertainty in what the final 2011 numbers will be, illustrated in part by the substantial differences in the House and Senate Fiscal Agency estimates.  Most state revenues received in October, and a substantial portion of November collections will be accrued back to FY2011.  It is possible that some, or the entire projected surplus will evaporate either due to October and November revenues being below target, expenditures coming in above target, or due to the effects of other book-closing adjustments.

It is also important to consider the implications for FY2012 revenues.  The good news is that the FY2011 revenue estimates suggest good news for FY2012 as well.  Revenue estimates for FY2011 are above target suggesting that FY2012 revenues will be growing off a larger base.  If the FY2012 growth rates remain unchanged from the May Consensus estimates, revenues would come in above target by the same amount as FY2011.  Based on this logic, the $285 million that the House Fiscal Agency estimates FY2011 is above target suggests that possibility that FY2012 could be up a similar amount, so that combined FY2011 and FY2012 revenues could be up by an amount closer to $500 million (or $800 million if the Senate Fiscal Agency numbers are more accurate).

Unfortunately, recent economic news suggests that this may prove to be too optimistic.  The University of Michigan recently cut its jobs forecast for FY2012 in half, suggesting that the FY2012 revenue growth rates might have to be lowered as well.  It is also possible that expenditure estimates for FY2012 may have to be revised upwards if the economic forecast is lowered.

It is also important to consider whether any new state resources are ongoing or one time.  In general, any year-end surplus for FY2011 should be considered one time, while any increase in the FY2012 revenue estimates should be considered ongoing.  (Unless there is some one-time factor increasing the FY2012 estimates). 

One-time resources should either be saved or used for a one-time purpose such as debt retirement.  Ongoing revenues can be directed to ongoing expenditures or tax relief. 

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