End of multi-billion Missouri fiscal surplus is near, budget director says

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Missouri budget director Dan Haug speaks during the 2024 legislative session to the House Budget Committee. (Rudi Keller/Missouri Independent)
The historically high surplus Missouri has enjoyed for the past six years will be nearly depleted at the end of the coming fiscal year, state budget director Dan Haug warned lawmakers during a committee hearing last week.
For several years, the state has budgeted billions more from the general revenue fund than current taxes were generating. The extra money has come from a surplus accumulated from double-digit growth in tax collections during 2021 and 2022 and substituting federal COVID-19 relief funds for general revenue, generating savings.
When Gov. Mike Kehoe unveiled his budget plan in January, the unobligated general revenue balance at the end of the coming fiscal year was projected to be $1.4 billion. Five months later, that estimate has been slashed in half.
Now, Haug said, the unobligated reserve will be $600 million to $700 million.
'The times are going to be getting tougher as we go forward, and so I think we would like to try to limit general revenue spending so that we are able to craft responsible budgets,' Haug said last week to the Senate Appropriations Committee.
Lawmakers are meeting in special session to consider Kehoe's plan to set aside nearly $1.5 billion in future tax revenue to finance new or renovated stadiums for the Kansas City Royals and Chiefs. To win passage in the Missouri Senate, Kehoe agreed to add $125 million in general revenue to a spending bill.
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That addition would reduce Haug's projection for the June 30, 2026 balance to $500 million to $600 million, the lowest since June 2020.
Haug declined to respond to questions from The Independent explaining what changed to lower the projected balance. The top leaders of the House Budget Committee, which will hold a hearing Tuesday on the special session spending bill, said they had not heard the latest forecast and will ask Haug to explain it.
'I'll need to ask him about that and have him walk me through what that projection is,' said Budget Committee Chairman Dirk Deaton, a Republican from Noel. 'There is a real, legitimate concern around long-term fiscal sustainability, and we've got to be mindful of that.'
State Rep. Betsy Fogle of Springfield, the ranking Democrat on the committee, said she's getting pressure from members who want to add spending that failed when a construction spending bill was spiked before a final House vote.
'In order to make decisions about the economic future of Missouri, we need to have all the facts in front of us,' Fogle said.
Senate Appropriations Committee Chairman Lincoln Hough, a Republican from Springfield, said he disagrees with Haug's estimate, which he said is too low.
'They're taking a more pessimistic approach to their calculation than is warranted,' Hough said.
The peak for reserve cash was nearly $8 billion at the end of fiscal 2023, including funds that could be spent like general revenue. For comparison, the lowest recent end-of-year balance was $5.1 million on hand at the end of fiscal 2017.
With the avalanche of cash, the state embarked on several major projects unthinkable just a few years earlier. General revenue made up half of the $2.8 billion allocated for widening Interstate 70. Another $600 million was set aside to fund a major expansion of the Capitol Building.
There were new general-revenue funded buildings on every public college campus, a new state health lab and a new $300 million mental hospital in Kansas City.
The state employee pension system received $500 million to help its long-term outlook and state workers are enjoying pay raises totaling 21% over the past three years, with another raise of up to 10% coming for long-term workers.
Lawmakers have also taken advantage of the surplus to fund local priorities. The trend began in 2022 with a few dozen items, and accelerated in each of the last three years with about 275 new earmarks added in 2023 and another 280 in 2024.
Former Gov. Mike Parson used a line-item veto to cut many of the items added by lawmakers, but most remained in place.
The budget on Kehoe's desk includes 250 new earmarked items, using $417.7 million in general revenue.
During the regular session, before the new, lowered surplus projection, Deaton warned that this may be the last year for dipping into the surplus for local needs.
'We're still in a good position, but certainly those opportunities are diminishing,' he said. 'And if it's not next year, it'll be the year after that.'
When Kehoe took over in January, the outlook was that the general revenue surplus would be $2.5 billion when the fiscal year ends on June 30, with another $1.4 billion in other funds that can be spent like general revenue.
The budget before Kehoe uses $1.1 billion of those other funds.
The special session spending bill began with $50 million in general revenue. Kehoe agreed to add $125 million, for two items: $100 million for St. Louis tornado recovery and $25 million for a new research reactor at the University of Missouri.
The funds for tornado recovery and the reactor were items demanded by Senate Democratic lawmakers as the price for supporting — or at least not filibustering — the stadium bill.
Democrats in the House, who provided the decisive votes in favor of the stadium financing plan during the regular session, will meet to decide if they will also ask for favors, Fogle said.
The earmarked items in the spiked construction bill is a place to start, she said.
'There were vitally important investments in that bill,' Fogle said.
There may be little room for negotiation, she noted.
'There's some truth to the fact that there's an assumption that the House is going to pass the bill, the stadium bill specifically, considering we already have,' Fogle said.
The Republican majority will not seek additions to the spending bill, Deaton said.
'I've certainly had members talk to me and basically inquire as if there would be an opportunity, or if there was the possibility of things to be added, as you would expect,' Deaton said. 'I certainly won't be dropping any kind of a House committee substitute or adding anything.'
Haug's warning of a disappearing surplus came despite positive trends in state tax collections, a growing total balance in the general revenue fund and a budget before Kehoe that spent $119 million less in general revenue than the governor requested in January.
After running below the previous year for 11 months, revenues have turned sharply positive. If the year-to-date growth rate reported Friday continued to the end of the month, the state would collect about $300 million more than was forecast in December for the full fiscal year.
And with modest growth projected for the coming year, the higher-than-expected revenue would carry over into a reset of the basic assumption for tax collections.
The negative factors that will lower tax collections include a tax cut approved by lawmakers, expected to reduce revenue by about $250 million in the coming year, and federal tax changes, currently expected to cost the treasury at least $170 million.
The federal budget bill being considered by the U.S. Senate also has the potential to impose large new costs on the state, up to $400 million annually to continue the SNAP food benefits program and unknown amounts due to changes in federal support for Medicaid.
The state will be limited in its ability to launch new programs in the future, Haug said last week.
'We feel like we need to sort of get back to basics on general revenue spending,' he said.
Future budgets will be tight because the state will need to pay those new costs and continue the programs it has already begun with surplus funds, Deaton said.
'It's one thing to be able to do it this year, but can you do it next year?' Deaton said. 'Can you do it the year after that, obviously, is the big open question. We will see what tax revenues do or don't do, but we're definitely on somewhat of a perilous path.'
Hough, however, said he sees no reason to hold money just to maintain a large balance.
'I try to take what would be a more realistic approach,' Hough said. 'Everybody always talks about taxation as theft. Well, if we're going to steal your money, we ought to invest it in your communities on the things that matter to you and support you.'
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