Budget Bill Turns Large Surplus into a $505 Million Hole in 2015-17 Biennium
Several Budget Maneuvers Mask the Size of the State’s Future Budget Challenges
Wisconsin is expected to begin the 2013-15 budget period with a solid General Fund surplus, estimated to be about $670 million; however, new figures from the Legislative Fiscal Bureau (LFB) indicate that the biennial budget recommended by the Joint Finance Committee would leave the state with a potential deficit of $505 million in the following biennium. And that calculation doesn’t include several budget maneuvers that make the state’s deferred fiscal challenges more difficult than the LFB analysis suggests.
The effect of what the LFB often refers to as a “structural imbalance” is that state policymakers will need to use the first $505 million of revenue growth in the 2015-17 budget simply to provide flat funding for existing programs, before addressing any spending needs relating to inflation, increased numbers of people served, or filling gaps in services. In short, the budget hole helps illustrate that the magnitude of the proposed income tax cuts undermines the state’s future by making it much harder to invest in public services, such as neighborhood schools, which are critical to the state’s economic growth.
Although the LFB memo indicates that the state has regularly faced larger deficits over the last decade or two, that doesn’t provide much comfort – considering that the state has also had to make many very difficult budget cuts and enact tax increases during that period.
Two years ago, when Governor Walker pushed through deep budget cuts, he argued that those tough choices were needed to get the state’s fiscal situation back into the black and put an end to structural deficits. Regardless of whether you like the strategies the Governor used to get the state out of the red, there’s no denying that the large cuts in spending had the effect that state policymakers weren’t facing a structural deficit as they tackled the state’s 2013-15 budget.
The proposed budget contains several measures that affect the projected structural deficit in 2015-17 – superficially making the state’s fiscal challenges appear smaller. As I noted in a March blog post, one maneuver that holds down the structural deficit is that the state once again postpones the implementation of a statutory requirement to increase the minimum reserve that state budget writers are required to set aside as cushion, in the event of unanticipated revenue reductions or spending increases.
The current requirement for setting aside a minimum of $65 million was supposed to increase to 2% of General Fund spending in 2017. That would require setting aside more than $300 million in the 2017-19 budget – an increase of at least $240 million compared to the current minimum reserve. However, for the second straight budget Governor Walker proposed postponing that long overdue progress toward responsible fiscal policy. Delaying that increase until the 2019-21 budget seems to be motivated by a desire to avoid a $240 million addition to the Fiscal Bureau’s structural deficit calculation.
The apparent structural deficit was also reduced by what was little more than an accounting maneuver contained in the omnibus motion unveiled and approved in the wee hours of last Wednesday morning. One of the elements of that motion moves mass transit aid back into the Transportation Fund (instead of shifting it into the General Fund budget), yet the bill finances it with a one-time transfer of $106.5 million from General Purpose Revenue (GPR) in 2014-15.
According to the new LFB memo, those changes mean that the 2015-17 biennial budget will need to increase segregated transportation spending for transit by $216 million (relative to the SEG funding base level), and the LFB has reduced the projected General Fund structural deficit in 2015-17 by that same amount. Of course, in the next session there will be tremendous pressure to again use General Fund dollars. In short, the last minute change relating to financing of transit aid might have had other motives, but it served as a way of masking the size of the structural deficit – which without those accounting changes would have been $216 million higher.
I think a similar but smaller problem is created by the changes to the UW System budget, which rely on reserve funds instead of the increased GPR support that the Governor had initially proposed. I presume that at some point in the not-too-distant future it won’t be feasible to keep tapping reserves for those purposes, and the UW system will then have holes to close in its budget. I’m sure the LFB is correct that this short-term solution to the UW System budget doesn’t technically count toward the 2015-17 structural deficit, but at some future date it will add to the fiscal challenges faced by state budget writers.
The structural deficit that the state will face in the 2015-17 isn’t nearly as bad as some others created by state policymakers and/or unanticipated slowdowns in revenue. However, the combination of that budget hole and promises some lawmakers have made to keep cutting taxes could result in very austere times ahead for education and other important state investments.