An Ever-Elusive Goal: Raising the Budget Reserve Requirement
Walker’s Budget Again Delays Planned Increase in the Reserve Requirement
For as long as I can remember, Wisconsin lawmakers have agreed that the state should increase the very small reserve that budget writers are required to set aside each year. I’ve lost track of how many times the legislature has enacted legislation to increase the reserve that would be required in the future – only to see that change delayed as the date drew nearer. It’s a quest that feels a bit like pursuing the far horizon.
I thought Scott Walker might be the governor who would finally take this fiscally prudent step because he campaigned on fiscal responsibility, and the time to increase the reserve is when the state is emerging from an economic downturn. However Governor Walker’s last budget bill postponed the planned increase to 2% of General Fund spending – moving that change from fiscal year 2013-14 to FY 2015-16. And although the issue has escaped notice this year, Walker is again proposing to delay the increase, so it wouldn’t be required until the 2017-19 biennium.
Wisconsin’s current reserve requirement is $65 million, which is less than 0.5% of General Fund appropriations. That is less than a tenth of what is generally recommended. A fall 2012 publication called the Fiscal Survey of the States by the National Association of State Budget Officers (NASBO) summarizes the thinking about budget reserves or balances:
“Though budget experts’ views vary, an informal rule-of-thumb used to be that balances should be built to a level that equals at least five percent of total expenditures to provide a relatively adequate fiscal cushion. However, in the wake of the recent financial crises, there have been calls by some organizations and academics to increase the standard size above five percent, in some cases much higher than five percent.”
From fiscal year 1987 through FY 2000, Wisconsin’s minimum requirement was 1.0%, and then briefly inched up to 1.2%. However, after Governor Doyle inherited a huge structural deficit, the required set aside was slashed to $35 million, and it has been set at $65 million since FY 2006 — with statutory promises of a future increase.
Most other states are more fiscally prudent. Although Wisconsin finished fiscal year 2012 with a 2.5% balance – well above what we often have – the Fiscal Survey of the States reports that the average balance nationally was 7.6%. Only 11 states had a lower balance (in percentage terms) than Wisconsin. Although Wisconsin has finally set aside a little money in a rainy day fund, we still fall far short of what most states set aside in some form of reserve.
Since our state is expected to finish the current fiscal year with a $485 million balance ($420 million above the reserve requirement), this is a great time to increase the reserve, yet the Walker budget once again delays the planned increase. That decision is doubly disappointing because it not only squanders an opportunity to finally begin building the reserve, but it also leads to commitments for tax cuts and spending that are projected to create a structural deficit in future years.
Many legislators in both parties have expressed interest in reducing Wisconsin’s structural deficit. I hope they will seriously consider using some of the current balance to increase the statutory reserve requirement in the next budget, rather than continually delaying that long overdue change.