An Idea for Handling State Revenue Windfalls

Feb 17, 2020

By John Turcotte

North Carolina’s  John Turcotte is the nation’s longest-standing legislative program evaluation director. Prior to his work in North Carolina, he held similar positions in Florida and Mississippi

I headed the legislature’s program evaluation office when Mississippi legalized casino gaming.  The state set casino revenue rates low enough to encourage casino startups in Gulf Coast and Mississippi River counties.  Revenue surged as tourists poured in from New Orleans, Little Rock, Memphis, Mobile, Birmingham and as far away as Georgia and Texas. Gaming regulators had to shut down one casino temporarily because it ran out of secure storage space for the cash.

In 1990 while the casino legislation was being conceptualized, I proposed an idea that the chairs of the finance committees summarily rejected:  Why not hold the gaming money in a new constitutional trust fund and then spend only from interest earned for non-recurring purposes? This would keep the money from losing its identity in the recurring base budget and when the gambling boom busts as experts predicted, the shortfall would have to be offset by budget cuts or (Oh the horror!) tax increases.

One finance chair said that only long-dead wise patricians that once ran the state could have done as I suggested.  The other feared that public schools, agencies and the media would protest my fool idea and blame him. Being a younger back-talking pop off in 1990, I countered that a trust could be worth a billion within ten years, reveal where all the gaming money went, and still earn enough interest annually to satiate the pent-up agency needs.  I failed miserably as both men stood up to see me out politely.


So with glorious hindsight and now safely in North Carolina, I ran the numbers on my fool idea.  Using actual figures from 1993 through 2019, Mississippi received and spent $7.2 billion in state gaming revenue.  Annual revenue peaked in 2008 at $343 million and since have averaged $267 million.

Had Mississippi instead established the trust and invested it in the same way as the Mississippi retirement system, the gaming trust would have been $1.9 billion after ten years and now hold $18.7 billion.

However, a more politic scenario would have been to place gaming receipts in trust until 1998 and then begin spending the greater of actual interest or, to smooth out earning swings, the moving average of 5-year annual interest.  Annual spending would have peaked at $753 million in 2011 and then averaged $429 million annually. Cumulative1992-2019 gaming spending would have been $232 million greater than actual and the trust now worth $4.3 billion.

All governments receive windfalls from one-time tax audit collections, legal settlements, and unusually high budget surpluses.  And more states are opening new revenue streams by legalizing all forms of gambling and marijuana consumption. Most spend the money as it comes in but earmark it for education or other good causes.  States should instead follow Norway’s example and establish constitutional trust funds for windfalls and spend only the interest. Norway wisely placed all North Sea oil money into a “sovereign wealth fund” currently worth over one trillion dollars.