Jump in “GAAP” Deficit Doesn’t Justify Proposed Constitutional Change

Wednesday, December 23, 2015 at 7:01 PM by

[Note: This post has been updated — primarily to add a reference to the WPR story about the increased GAAP deficit.] 

When a state report is released late on a Friday with no fanfare, it’s a pretty good bet the report contains bad news. A case in point is Wisconsin’s Comprehensive Annual Financial Report (CAFR) for 2015, which was quietly posted online last Friday afternoon by the Dept. of Administration. In this instance the bad news is that the state’s General Fund deficit, as measured by Generally Accepted Accounting Principles (GAAP), increased in fiscal year 2015 by $414 million (from roughly $1.4 billion to $1.8 billion).  

Release of the report had been expected about a week earlier. I don’t know what caused the delay until last Friday (Dec. 18), but I can’t help wondering if the quiet posting of the report on a Friday afternoon was intended to minimize media coverage. If so, the strategy was very effective. With the exception of this brief Wisconsin Public Radio story,  I’m not aware of any press coverage of the jump in the GAAP deficit, which is a fiscal development that runs counter to the majority party’s narrative that they have been steadily reducing that deficit. (You can also read more about the report in this blog post by “Jake Formerly of the LP.”)  

A proposal introduced in the legislature in late September would amend the Wisconsin Constitution to require the budget to be balanced each year on the basis of GAAP, rather than on a cash accounting basis. That proposal (Senate Joint Resolution (SJR) 55 and its Assembly companion, AJR 66) would not only prohibit the adoption of a budget that causes or increases a GAAP deficit, but would also create constitutional standards for reducing the deficit in each state fund.   

As I explained in a mid-November blog post, the goal of reducing the GAAP deficit is laudable, but it would be a mistake to put rigid fiscal standards into the state constitution. Although a number of states balance their books on the basis of GAAP, no other state has inserted GAAP requirements into the state constitution, thereby restricting the options available to future lawmakers during a recession. 

Because of the delay in the release of the Comprehensive Annual Financial Report for FY 2015, it was not available last week to the members of the Senate Committee on Government Operations and Consumer Protection when they debated and voted on SJR 55. The committee approved that proposal by a 3-2 vote, with all three GOP members supporting the constitutional change and both Democrats opposing it. 

If or when the debate on SJR 55 moves to the full Senate, I would find it troubling if the legislators who crafted the last budget and increased the GAAP deficit use that increase as a rationale for amending the state constitution. Their track record doesn’t persuade me that we should trust their assessment that Wisconsin should become the one state that puts GAAP into its constitution. 

Rather than going the route of amending the Wisconsin Constitution, I would prefer to see the proponents of GAAP statutorily require its use for balancing the state budget. In that way they could tie their own hands, if that’s what they think is needed, but without locking into place standards that could be too constraining for future legislators when there’s another severe recession. 

The use of GAAP is not a cure-all for the sorts of short-sighted budget choices that have often been made in Wisconsin by lawmakers in both parties. For example, using GAAP doesn’t preclude some of the budget maneuvers (such as delayed tax cuts or spending increases) that have led to large structural deficits. That’s part of the reason why constitutionally requiring a different set of accounting standards is an overly simplistic approach, as well as an overly rigid constraint during some fiscal emergencies. We need a broader, bipartisan shift in the basic expectations for good, long-term budget practices. 

Instead of appeasing legislators who tell us that they can’t be trusted to make fiscally responsible budget choices, and therefore need their options to be constitutionally constrained, we should elect lawmakers who prove that they can be trusted to be fiscally responsible. It’s very tempting to succumb to the argument that we can’t trust legislators to make prudent budget choices, but we will hurt our state during economic and fiscal crises if the state constitution enshrines rigid rules for how the budget is balanced. 

Jon Peacock

Categories: 2013-15 biennial budget, Blog, constitution | Comments Off on Jump in “GAAP” Deficit Doesn’t Justify Proposed Constitutional Change

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