LFB Calculates a $725 Million Budget Hole at Start of 2015-17 Budget

Tuesday, October 15, 2013 at 3:53 PM by

New Figure Boosted by Spending for Property Tax Relief, But Doesn’t Take into Account Reduced Federal Share of Medicaid Financing

When lawmakers use a budget surplus, which is one-time money, for on-going tax cuts or spending commitments, they are likely to create a hole that needs to be filled in the next budget bill.  Today the Legislative Fiscal Bureau helped illustrate that point because a new LFB memo estimates that there will be a $725 million hole that has to be filled at the outset of the 2015-17 biennium.     

The $725 million figure is the gap that needs to be closed before a dime of revenue growth can be committed to the spending increases that are needed to address things like inflation and demographic changes, which typically require increased expenditures simply to maintain the status quo.   

The budget gap now projected by the LFB is $180 million larger than the one they estimated in July.  The difference is primarily the result of using the increased carry-over from the last biennium to finance to finance a $100-million property tax cut.      

A $725 million structural imbalance isn’t an insurmountable problem; over the last couple of decades the hole has often been well above that amount.  The surprise is that after congratulating themselves two years ago for eliminating the structural deficit, conservative lawmakers are taking steps that build it up again, rather than using one-time surpluses for more fiscally responsible purposes – such as reversing the substantial increase in bonding over the last few years, or finally increasing the minimum budget balance. 

Of course, the structural imbalance figure will continue to change.  And if the Congress averts a default on the federal debt, perhaps economic growth will push state tax collections above the amounts previously anticipated.  Alternatively, the temporary solutions now on the table in Washington could suppress holiday spending and hiring and cause much lower than anticipated growth, and could significantly reduce tax collections in Wisconsin and elsewhere.     

According to the new LFB memo, if lawmakers enact the property tax bill, the “gross balance” at the end of the current biennium would be $125 million – a reduction of $634 million compared to the $759 million balance that lawmakers are now applauding.  That $125 million balance – which is enough to cover 3 days of state spending – could be reduced substantially because of an anticipated cut in the federal share of Medicaid spending (from 59% to 58%).  The Fiscal Bureau recently estimated that such a change could cost the state $52 million over the last 9 months of the current biennium.   (See this Budget Project blog post.)  

If the federal shared of Medicaid drops by about one percentage point, that would leave the ending balance for the 2013-15 budget just a little over the extremely modest cushion of $65 million required by statute.   (The last two budget bills have postponed by four years the effective date of a statute that would increase the minimum balance to 2.0% of General Fund spending — which would be about $310 million at the end of this biennium.)  Even if there isn’t a $52 million gap in the Medicaid budget, the $125 million closing balance at the end of this biennium is a precariously small margin of error in budgeting, especially when an ongoing impasse in Congress could have catastrophic consequences for the U.S. economy.  

The bipartisan vote for the property tax legislation demonstrates yet again how short-term political gratification almost invariably trumps long-term fiscal responsibility in our state.  The bigger the actual balance at the end of a biennium, the more state lawmakers use one-time savings for long-term commitments and the larger the structural deficit in the following biennium.   

I can understand the political pressure to opt for short-term gratification; we have seen it time after time in Wisconsin.  What disappoints me is that some lawmakers now seem to be trying to cloak their actions in a veil of fiscal responsibility, which is quite misleading.   As we explained in a Budget Project analysis in mid-August, the growing structural deficit in the General Fund is just one of seven indicators that legislators haven’t fully ended the long, bi-partisan practice of kicking the can down the road.   

A far more responsible course of action would be to take this opportunity to undo recent increases in bonding or to reverse the actions that have delayed the long-overdue increase in the minimum required balance to 2% of spending.   But if legislators are intent upon using $100 million of short-term money for property tax relief, they should use this as an opportunity to also provide targeted relief for lower income taxpayers who particularly need it – as my colleague Tamarine Cornelius explains in a WCCF blog post today.  

Jon Peacock

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