Assembly Votes Tuesday on Putting Detailed Fiscal Policy into the State Constitution

Monday, February 20, 2012 at 9:58 PM by
Proposed Constitutional Amendment Would Tie the Hands of Future Legislators
Assembly Joint Resolution 100 is a proposed amendment to the state Constitution that would make Wisconsin the first state to constitutionally require the use of Generally Accepted Accounting Practices (GAAP) for determining if the budget is balanced.  It would prevent lawmakers from passing a budget that causes or increases a deficit (based on GAAP calculations), and it would require the state to set aside at least the first 10 percent of revenue growth each year to reduce the state’s $3 billion GAAP deficit. 

Almost all of the sponsors of AJR 100 are Republicans, with the exceptions of Rep. Molepske and Rep. Ziegelbauer (who is an Independent).  However, a Senate Democrat, Julie Lassa, is circulating a bill to require the state to use GAAP accounting.  Her proposal would actually require the current GAAP deficit to be paid down at a faster pace than AJR 100, but Senator Lassa wouldn’t make the changes constitutional requirements.  Thus, the debate over the issue is likely to boil down to the question of whether this sort of fiscal policy belongs in the Wisconsin Constitution or in the statutes.

AJR 100 was introduced on February 1 and appears to be on a fast track for approval by the Assembly tomorrow (Feb. 21).  If it’s approved there, it will then go to state Senate, for consideration during the last few weeks of the session.  Like other constitutional amendments, it also has to be approved by the Legislature in the following biennial session and then in a statewide referendum (sometime in 2013 or 2014).   

In my opinion, gradually paying down the state’s GAAP deficit isn’t a bad idea, but putting such a requirement into the Wisconsin Constitution would be very problematic.  It would tie policymakers’ hands at times when fiscal flexibility is necessary.  The following is a summary of our concerns about the proposal constitutional amendment:
  • Unless or until the state establishes a substantial Rainy Day Fund, the proposed constitutional amendment is likely to result in deep cuts or tax increases during recessions, when the need for public assistance is greater and when either benefit cuts or tax increases will tend to exacerbate the economic downturn.
  • As an example, if this constitutional requirement had been in place in 2011, it appears the state would have had to cut substantially more than it did in the 2011-13 budget bill, or would have needed to increase taxes.
  • During an economic downturn, when economic stimulus is needed, legislators would be precluded from using an increase in Transportation Fund bonding to increase spending and jobs for transportation system improvements.
  • GAAP is an imperfect way to avoid budget-balancing gimmicks and structural deficits because it doesn’t consider things like unfunded pension benefits for retirees.  As a result, putting it into the Constitution could have the unintended consequence of inducing legislators to use other sorts of short-sighted measures for balancing the budget. (Requiring GAAP by statute has the same problem, but the shortcomings of GAAP could be addressed without the cumbersome process of amending the state constitution.)   
One of the arguments that is used to support the proposed amendment is that Wisconsin has one of the larger GAAP deficits.  Although that is true, an important reason for that is that the current GAAP standards for government accounting (known as GASB) do not account for unfunded pension benefits for future retirees.  According to a report issued last spring by the Pew Center on the States, Wisconsin is one of only two states that has fully funded its retirement system (as of 2009).  If the current GAAP standards took those future obligations into account, Wisconsin would compare much more favorably to other states. 

We welcome efforts by legislators to make budget decisions more transparent, and requiring the use of GAAP during the budget process could help with that.  But that can be accomplished without making Wisconsin the guinea pig for putting this inflexible fiscal policy into the constitution.  

Jon Peacock
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