LFB Gives Us Some of the Bad Budget News; More May Follow

Thursday, July 15, 2010 at 2:12 PM by

The Legislative Fiscal Bureau (LFB) issued a July 9 memo that provides an overview of the state’s budget situation. The picture isn’t pretty and includes a $2.5 billion deficit or “structural imbalance” going into the next budget periord.  However, the LFB spared us from sketching out the ways in which that picture is likely to get uglier – such as a probable shortfall in the Medicaid budget and other increases to the state’s structural deficit.

The memo contains the “General Fund Condition Statement,” which is simply an overview of the amount of General Purpose Revenue (GPR) and the GPR spending in each year of the 2009-11 biennium. It shows that the state is expected to carry a $271 million balance into the 2010-11 fiscal year, but the projected balance at the end of this biennium will drop to $45 million, which is $20 million below the required statutory reserve.

Another section of the memo is very sobering news for anyone who believes that the next legislature and next governor can begin cutting taxes or funding new initiatives as soon as they take office. It shows how much GPR growth is needed in the next biennium, 2011-13, simply to provide flat funding. The LFB concludes that General Fund revenue needs to grow by a little over $2.5 billion in the next two years to be able to maintain current GPR appropriations for all agencies and programs – without making any adjustments for inflation or increased need for services.

The $2.5 billion figure, which is referred to as the structural imbalance, has risen by $175 million since the LFB last calculated it – partly as a result of phased-in tax cuts included in economic development bills passed late in the session. We’ll take a closer look at the components of the structural imbalance in the near future.

The chart above shows how the projected structural imbalance compares to the figures from previous budget periods.

There are a couple of factors that are likely to make the structural imbalance worse than the $2.5 billion reported by the LFB. One factor is that their calculations assume that the Wisconsin estate tax will return next year, generating $219 million in the coming biennium. The LFB properly counted that revenue because the tax will resume in January 2011 if there isn’t a change in federal law by then. However, there is very little chance that Congress won’t make changes relating to the estate tax later this year, and all of the proposals now getting serious consideration in Congress would prevent the automatic restoration of the state estate tax that is assumed by the LFB calculations.

Assuming the state estate tax is not restored, the structural imbalance climbs to more than $2.7 billion. Filling that hole would require revenue growth of about 7 percent per year, which is far beyond what we can reasonably expect.

The LFB calculations also assume that the state’s Medicaid budget will be in balance. Unfortunately, if the U.S. Senate does not find a couple more votes to end the filibuster of the jobs bill, HR 4213, or a similar bill containing Medicaid relief for the states, Wisconsin is likely to have a very large deficit in its Medicaid budget. In testimony before the Joint Audit Committee yesterday, Secretary Timberlake said the GPR hole in the Medicaid and BadgerCare Plus budget could be as much as $300 million by the end of the current biennium.  As the Milwaukee Journal Sentinel reported today, if $300 million were cut solely from the state’s safety net health care programs, Wisconsin would have to cut a total of roughly $850 million in combined state and federal funds.

The $2.5 billion figure is very sobering news for anyone who tracks state budget issues. Unfortunately, there is little doubt that balancing the budget will be an even more challenging proposition than what the Fiscal Bureau portrayed..

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