Legislative Fiscal Bureau Projects WI Is Facing a Deficit of $208 Million

Thursday, February 9, 2012 at 10:30 PM by

(How the LFB Saved Me from Becoming a Starry-eyed Convert to the World of Optimism)

The Legislative Fiscal Bureau (LFB) released new revenue and spending estimates today, and the news isn’t good. Although the latest figures aren’t awful, and they don’t come as a huge surprise, it’s nonetheless very disappointing to learn that downward revisions to revenue projections are expected to create a $208 million deficit by the end of the 2011-13 biennium.

The actual amount of red ink is projected to be $143 million, but the new figures translate into a $208 million shortfall after one takes into account the statutory requirement to maintain a $65 million balance (as a small cushion against further bad news). The culprit is a $273 million drop in revenue projections for the current biennium.

As I noted in a blog post in early September, I’ve been worried since late summer that the anemic economic recovery would cause Wisconsin’s tax revenue to fall short of the projections made last spring, when economists were generally more upbeat about the recovery. The fact that our state led the nation in job losses over the second half of 2011 added to my concerns about the sluggish economic recovery. However, in a blog post last month I was almost ready to let go of my usual high degree of fiscal paranoia — because DOR tax collections seemed to be running ahead of expectations, and revenues in other states were rebounding,  The new LFB numbers arrived just in time to keep me from being sucked into a dreamy world of budget optimism in which I would probably have no idea of how to act. (I guess we won’t find out if I could have handled it.)

State statutes require the Governor to submit a bill to take corrective fiscal action if the Department of Administration determines that the difference between General Fund revenue and spending projections amounts to more than 0.5% of the estimated revenue in either year of the biennium. Although the LFB report indicates that the projected deficit at the end of 2012-13 is now about twice that threshold, the Governor said there doesn’t need to be a budget repair bill. I presume that’s because he plans to use his authority to lapse additional funding from agencies to get the budget back into balance.

The crux of the state’s latest fiscal challenge is that the projected rate of General Fund revenue growth has been dialed down to 2.2% in the current fiscal year and 3.1% next year, from the previous projections of 3.0% and 3.6%.  Smaller factors contributing to the shortfall include a $4.5 million revenue reduction from tax changes in Act 49, and a $6.3 million drop in department revenue. The revenue decreases are partially offset by a $44.5 million decline in spending for sum-sufficient programs and a $20 million reduction in compensation reserves.

The Fiscal Bureau report cautions that it doesn’t take into account a couple of areas of potential shortfalls – a likely deficit of $5.8 million in the private bar appropriation for the Public Defender program, and the possibility that cost-cutting measures proposed by the Dept. of Health Services won’t fully close a projected Medicaid shortfall.

We’ll follow up as we learn more about the Governor’s plans to avoid the deficit.

UPDATE: One significant aspect of the deficit calculation that I missed in the initial blog post is that the Governor plans to hold down the deficit by depositing $25.6 million in the General Fund from the national mortgage settlement that will yield $140 million for Wisconsin.  As the Journal Sentinel reported, that plan has created controversy because the settlement payments from major banks and mortgage companies is intended as compensation for people adversely affected by improper foreclosure practices. The $25.6 million would partly offset two shortfalls in department revenue: a $12.6 million drop in projected revenue from circuit court fees and a $19 million reduction in anticipated tobacco settlement revenue.

Jon Peacock

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