JFC Will Vote Tuesday on Whether to Delay Increasing State Reserve Funds
If Legislators Are Truly Serious about Responsible Budgeting They Won’t Postpone a Long-Overdue Increase in State Reserves
For as long as I can remember, state politicians have been saying that Wisconsin needs to adopt more fiscally responsible budgets by doing things like increasing the state’s meager reserves and bringing revenue and spending into better alignment. Nevertheless, Wisconsin lawmakers continue to postpone building up budget reserves. Instead, when there is a projection of “surplus” revenue it is often used in unsustainable ways that add to the state’s future fiscal challenges.
This Tuesday, May 19, the committee that reviews and revises the state budget bill will have a chance to increase reserves and reduce the “GAAP deficit” (i.e., the gap between state revenue and spending obligations calculated according to Generally Accepted Accounting Practices). That will be decided when the Joint Finance Committee votes on whether to once again delay a statute that now requires increasing the state’s general fund balance to at least 2% of general fund spending in fiscal year 2017-18. (LFB Paper #170)
The statute in question was included in the 1999-2001 budget bill by state legislators and Governor Thompson, and it required gradually increasing the minimum budget balance to 2%. But the 2% minimum, which was originally meant to take effect in 2005-06, keeps getting delayed, and Governor Walker has proposed delaying it by an additional two years, until 2019-20.
Wisconsin has long lagged most other states in setting aside adequate budget reserves. Although state lawmakers have made progress over the last few years in increasing the rainy day fund, that improvement has been offset by the state’s paltry general fund balance (which at $65 million is only 0.4% of spending).
In a January 2015 blog post, I reported on a study by Pew Charitable Trusts, which found that WI ranked 35th nationally in fiscal year 2014 in the relative size of its budget reserves – i.e., in the total of the state’s rainy day fund and budget balance (measured relative to spending). That ranking is likely to be even lower when it is updated because our reserves have declined sharply since then. More importantly, the vast majority of states need to increase their reserves, as this analysis on Governing.com explains.
Most budget experts say a state should have minimum reserves of at least 5% of general fund spending, and after the Great Recession some experts increased that target to at least 10% of spending. Unfortunately, as the Legislative Fiscal Bureau paper points out, Wisconsin’s current balance requirement and rainy day fund add up to just 2% of general fund spending. The combination of the state’s current rainy day fund and the scheduled increase in the general fund balance would bring Wisconsin’s total general fund reserves to about 3.6% of spending.
Because it does not affect the 2015-17 budget, allowing the increase to take effect in 2017-18 by maintaining current law would seem to be an easy choice for state legislators. Ironically, the primary reason why state lawmakers might once again delay the requirement for a higher balance is that the obligation to add funds to the balance in that fiscal year would cause a short-term increase in the structural deficit.
What it comes down to is that the way Wisconsin calculates structural deficits (or “structural imbalances”) can be misleading, but that calculation is nonetheless the primary metric that state lawmakers and political commentators use to gauge whether they have enacted a fiscally responsible budget. Using that metric creates a perverse incentive to delay the fiscally responsible requirement to increase reserves.
I feel confident that when Finance Committee members take up this issue next week, they will know that the right thing to do is not to delay the increase in the minimum balance. But whether they actually vote that way is another matter.