Looking ahead to the 2012 State Budget: How Green is the “Recovery”?

Thursday, December 29, 2011 at 12:48 AM by

News from Within and Outside Wisconsin Sends Mixed Signals on Revenue Growth

As I monitor Wisconsin’s fiscal prospects, I try to decipher any tea leaves (not tea bags) I can find, including omens of fiscal health outside our state. The news over the last few weeks has been mixed –making me a little bit less worried about the prospects for getting through 2012 without a new deficit, but still apprehensive about the state’s fiscal health over the next several years.

In this post I’ll examine the fiscal and economic data revealed in recent weeks, including a somewhat encouraging revenue report from the WI Department of Revenue (DOR) in mid-December, as well as a mixture of positive and cautionary data from several other sources. A few reports from outside Wisconsin suggest that although revenue collections are looking up now, ongoing growth will be tepid and federal budget cuts may cause new economic challenges, as well as troublesome holes in federal aid for the states.

DOR Revenue Data – The most positive bit of fiscal news over the last month was the Wisconsin DOR report on revenue collection from July through November. That Dec. 16 report shows revenue growth for the first 5 months of the 2011-12 fiscal year is up 4.6%, which is a bit ahead of the assumption in the biennial budget bill that General Fund tax collections would grow by 3.0 percent for the full fiscal year. It’s very encouraging that tax revenue growth has been running ahead of the anticipated growth rate.

The Philly Fed’S Growth Index –The much more worrisome news is that job growth in Wisconsin has lagged behind almost all other states since the start of the current fiscal year. In a recent Budget Project blog post, we examined an economic growth index that is updated each month by the Philadelphia Federal Reserve and provides a way of comparing growth in the states. As we reported about two weeks ago, it rated Wisconsin as having the lowest growth among all states during the 3-month period of August through October. The November data is now included, and Wisconsin ranks 49th (tied with MN) if one looks at the latest 3 months. We also rank 49th if one analyzes their data for the first five months of the current fiscal year. Our state’s anemic job growth doesn’t appear to have hurt state revenue collections yet, but there is typically a lag between economic changes and revenue collections.

Comparative revenue growth data – The Rockefeller Institute of Government released a December 8 report regarding state tax collections in each state in the first quarter of the current fiscal year. It shows that Wisconsin’s tax revenue grew by 5.0% in that quarter, compared to the same quarter of the previous year. Though that wasn’t bad, it was far below the national average of 7.3% growth.

The Fiscal Survey of States – This Nov. 28 report by the National Association of State Budget Officers says that even as states struggle with tepid revenue growth, they will be called on to spend more because of the economic distress caused by high unemployment. According to NASBO Executive Director Scott Pattison:

“State budgets are certainly improving; however, growth is weak, and there is not enough money for all the bills coming in. State officials will still be cutting some programs, and increases in funding for any program except for health care will be rare.”

The NASBO report says that although state general fund revenue increased in 2011 and is expected to increase in 2012, it remains $21 billion below the 2008 level, and the report adds that states are bracing for further reductions in federal aid because of Congressional efforts to slow the growth of the deficit.

Minnesota Budget Forecast – I also read with great interest Minnesota’s economic and budget forecast, which was issued at the end of November. At first blush it was very encouraging because it projects an $876 million surplus at the end of the 2011-13 biennium ($526 million more than previously forecast). Although I initially thought that positive development could be a harbinger of good things for Wisconsin’s budget, a closer reading of the MN report reveals a number of cautionary trends. The most obvious of those is that it projects a $1.3 billion shortfall for the next budget cycle (the FY 2013-15 biennium), or $2.6 billion if one includes the impact of inflation. Also, the anticipated surplus in the current biennium is not the result of an increase in projected revenue. It stems instead from a higher-than-expected closing balance for the last biennium and a further decrease in spending – saving an additional $348 million in the current biennium. Even though the new forecast uses a higher starting point for revenue collections at the outset of the current fiscal year, the total amount collected over the biennium is now predicted to fall by $24 million.
http://www.mmb.state.mn.us/doc/fu/11/summary-nov11.pdf

In sum, various reports issued over the last few weeks make me more optimistic about the prospects that the state will get through 2012 without having to deal with a large shortfall in tax collections. However, the following biennium could be difficult, and getting through the current one could also be very tough if Congress makes deeper cuts in human service programs and other aid to states. And the Minnesota forecast cautioned that its economic growth projections and revenue estimates would drop significantly if Congress does not renew the payroll tax deduction and the extended weeks of unemployment insurance benefits.

Jon Peacock

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