ARKANSAS (KNWA/FOX24) — Leaders in the Natural State say Arkansas’ economy is strong right now, but there are a lot of things on the horizon to watch.

“The economy in Arkansas is holding up well,” said Scott Hardin with the Arkansas Department of Finance. “We see no sign of slowing down.”

Hardin said we’ve seen Arkansas’ surplus increase steadily over the past few years.

“If you look back at fiscal year 2021, we had a surplus of $945 million. At the time, that was the largest surplus the state has ever seen,” he said. “Fast forward to fiscal year 2022, that number increased to $1.6 billion, setting another record.”

Arkansas’ fiscal year runs from July 1 through June 30. Hardin said the state is entering the last few months of the 2023 fiscal year, which also coincides with tax filing season.

“Most people [file their taxes] in the last couple of months, in March or April, so we’re entering months where it gets pretty volatile. But, we think we know what to expect,” he said.

He said the Department of Finance expects a $598 million surplus in its revenue forecast for fiscal year 2023.

“Currently, we are running about $200 million, $250 million above that,” he said. “Whether we reach $1 billion in total surplus funds will be determined over the next four months.”

But what is a surplus?

“A surplus just means that your revenue is greater than your expenses, so anybody can have a surplus,” said economist Jeff Cooperstein, who is also a researcher and professor at the University of Arkansas Walton College of Business.

And where does this money come from?

“The revenue collected by the state from income taxes, from both personal and corporate, and also from sales taxes,” he said.

Cooperstein said Arkansas has a history of fiscal conservatism and surpluses.

“Gov. Huckabee had surpluses, Gov. Beebe had surpluses, Gov. Hutchinson had surpluses,” he said.

It’s up to the legislature to decide what happens to that money.

“The legislature could, in this session, say, ‘Hey, we want to take $300 million of that surplus and dedicated to this issue or that issue,'” said Hardin. “They could take it right off the top and do that or we could see it dedicated to the reserve fund.”

Arkansas has two different reserve funds. One is the Catastrophic Reserve Fund. Hardin said its purpose is to fill funding gaps in the case of a revenue shortfall. If a revenue shortfall exists, the state’s chief fiscal officer, which is the secretary of the Department of Finance and Administration, can transfer funds to cover the shortfall if approved by a vote of two-thirds of the Arkansas Legislative Council or two-thirds of the Joint Budget Committee.

The second is the General Revenue Allotment Reserve Fund. Hardin said this fund is more accessible. The requirement to access this fund states, “The General Revenue Allotment Reserve fund shall be used for such purposes as may be authorized by law.” The legislature has the discretion on this fund as long as the use is allowed by the law.

Hardin said Arkansas’ current balance in the Catastrophic Reserve Fund is $1.63 billion. The current balance for the General Revenue Allotment Reserve Fund is $1.34 billion.

Oftentimes, the topic of tax cuts comes up when there is such a large surplus. Cooperstein said a lot needs to be taken into account when talking about cutting taxes.

“You can cut taxes, and you don’t have to cut programs at this time. But, is that going to be true in the future?” he said. “Are there programs that you would like to fund that would benefit Arkansans, that you’d be able to do so if you didn’t cut the taxes? And, what kind of benefit would that give to Arkansans, and does that benefit outweigh the benefits of lower tax?”

Misty Orpin is the Executive Director of the nonpartisan, nonprofit Common Ground Arkansas, which watches elected leaders and the actions they take during the legislative session in order to help people better engage with our government.

She expects a lot of the surplus to be spent on the recently passed Arkansas LEARNS education reform package, specifically the school choice voucher program.

“It’s estimated to cost around $300 million in year one, and $350 million in year two, but that’s with really heavy caps on the number of people that can participate in that program,” she said.

Her big concern is where the funding comes from when school choice opens to everyone in year three.

“The next year, 100% of the kids can use it if they want to, and they don’t know what that cost is going to be and it’s going to be significant,” she said.

Gov. Sarah Huckabee Sanders is also calling for prison reform next. During her campaign, she issued “A Plan for a Safer, Stronger Arkansas.” It includes increasing prison capacity, ensuring that violent, repeat offenders are not let back out, and increasing mental health programming in prison.

“That’s hugely expensive when you’re talking about lengthening people’s sentences and building more beds,” she said. “More beds isn’t just a capital cost. That also requires people that you’re going to have guard the prisoners, it also includes meals for the prisoners, health care for the prisoners, like more beds means more prisoners and more prisoners are long term costs.”

The clock is ticking in the legislative session for Sanders to present a budget and for the legislature to pass one.

“We should be around three-quarters away through the session and we haven’t even seen a budget,” she said. “I haven’t even heard a lot of people talking about what the governor’s budget is going to be, so that’s actually something that’s kind of unusual as well.”

Orpin also said there are a lot of tax and fiscal-related bills that have been filed but haven’t even been able to be heard yet by the house and senate revenue and tax committees. She said these committees need more information about the budget before they can hear and make decisions on any of these bills.

Governors present a budget to the legislature of what they want to see happen, but it’s up to legislators to put their own budget together and get it passed.

Former Gov. Asa Hutchinson presented his version of the budget in November as one of his final acts while in office. He presented a balanced budget that increased funding for foster care, education, and the Department of Corrections.

Once a budget is passed, it will be up to the Department of Finance to oversee the budget and work closely with each department in executing it.

With a lot still to come in the next few months to tell us more about the future of Arkansas’ economy, Hardin said we are in a good place thanks to the people of the state.

“Every month we release a revenue report that shows what’s happening. We see strong sales tax collection, and we look at it in specific categories. So we see it from restaurants, it’s strong collection, their vehicle sales, it’s strong there, and that’s where you see across the state people are spending money and that hasn’t stopped since the pandemic started,” he said.

The legislature has been out this week for spring break and is expected to reconvene on Monday.