Extremely Narrow Budget Margin Underscores Need to Increase Budget Cushion

Monday, July 27, 2015 at 10:25 AM by

Wisconsin had a razor-thin budget balance at the close of the fiscal year that ended in June, barely meeting the constitutional requirement for a balanced budget. Even this very narrow margin was possible only because Wisconsin had already taken several steps to reduce spending in that year, including pushing costs off into the future. The very small budget balance underscores the need for lawmakers to budget in a way that leaves a larger budget cushion and hedges against changing economic conditions or unexpected costs.

At the end of fiscal year 2015, the state had just $254,000 in its main fund, new documents show. The state plans to spend nearly $16 billion this year from that account in support of important state priorities like K-12 schools, the University of Wisconsin System, and access to health care. That means the state had a budget cushion of less than 0.002% at the end of the fiscal year. Put another way, the amount left in the state’s main account at the end of the year would only be enough to fund the equivalent of about 10 minutes of state government functions.

Budget-cushion

The fact that the state wound up with a positive balance at all, even a tiny one, was only possible because policymakers took special measures, including delaying a $108 million debt payment that was set to come due in May 2015. Delaying that payment reduced costs in fiscal year 2015 but increased interest costs in the long run.

When Wisconsin lawmakers budget, they are required to do so in a way that leaves a projected balance of at least $65 million in the state’s main account. While $65 million may sound like a lot of money, it is actually a very small budget cushion – less than ½ of 1% of annual tax revenues. That turned out not to be a big enough budget cushion for the 2013-15 budget period that ended in June, when tax revenues came in lower than originally projected. It didn’t help that lawmakers passed several tax cuts, further reducing tax revenue.

Requiring lawmakers to budget in a way that leaves a larger projected balance in the state’s main fund would help the state avoid close calls like the one that occurred at the close of the last fiscal year. Many years ago, lawmakers passed a law that would require them to leave an amount in the fund equivalent to 2% of appropriations. That law never took effect, because lawmakers repeatedly delayed its implementation – in part because that 2% would have added up to a balance of more than $300 million, a big jump from the $65 million minimum balance currently required.

The 2015-17 budget includes a different approach to increasing the minimum balance, although it doesn’t go into effect until fiscal year 2018. Lawmakers passed a measure that will require the minimum balance to go up by at least $5 million a year. If tax revenues come in over projections, lawmakers would be required to add half the unexpected revenue to the minimum balance.

The new approach is a positive step, as it takes a more realistic approach to increasing the state’s minimum balance. But the increase is very gradual; the state’s minimum balance might not hit the $100 million mark until the fiscal year that starts in July 2023. And there’s no reason to think that lawmakers won’t postpone the increase in the new minimum balance, just as they have postponed similar measures in the past.

The very narrow margin left in the state’s account at the close of the year and the fact that the state had to push costs into future years shows that the state needs a new approach to maintaining a minimum balance, one that is both politically feasible and gives the state a bigger margin of error to work with in case tax revenues don’t come in right on the dot. Whether the new approach to increasing the minimum balance will accomplish that depends on lawmakers’ ability to be fiscally responsible and budget with long-term goals in mind.

Tamarine Cornelius

One Response to “Extremely Narrow Budget Margin Underscores Need to Increase Budget Cushion”

  1. Jake formerly of the LP says:

    That $254,000 is just a projection. Obviously we won’t know what the final number is (or the deficit) until the Oct. 15 Annual Fiscal Report.

    Given that the LFB indicated to JFC that year-end revenues won’t be much different, let’s see if expenses truly were cut enough to squeeze ahead of $0….and if anything else got shoved off into the future, like the $108 million debt payment.