New Fiscal Bureau Analysis Shows a $210 Million Structural Deficit

Friday, July 24, 2015 at 3:28 PM by

The Magnitude of Future Fiscal Challenges Is Masked by Unrealistic Assumptions about  Funding  Lapses

An updated analysis released today by the Legislative Fiscal Bureau (LFB) calculates that the recently enacted Wisconsin budget creates a $210 million budget shortfall or “structural deficit” that state lawmakers will have to close in 2017 when they write the 2017-19 budget. That’s a smaller shortfall than the LFB calculated a few weeks ago, but it confirms that Wisconsin isn’t on track to have the substantial “structural surplus” that Governor Walker was promising several months ago. 

While the Governor was in South Carolina earlier this year, seeking support for his anticipated presidential campaign, he said: “At the end of the budget we’re debating right now for our next two years in my state, we will end with a structural surplus of $499 million.” The latest LFB figures indicate that the new budget bill puts the state on a track to miss that mark by more than $700 million. 

The latest calculations continue to understate the magnitude of future challenges because the budget bill assumes an unrealistically large amount of funding that agencies will lapse to the state treasury over the next four years – including $741 million in the 2016-17 fiscal year, and almost that much in each year of the 2017-19 biennium. As I explained in a July 8 blog post, the assumption that state agencies will lapse more than $2 billion over a 3-year period is a convenient way to make the structural deficit look relatively manageable, compared to many of the past structural deficits. However, it also means that the structural deficit figure by itself is no longer a very good indicator of the state’s future fiscal challenges, because that figure leaves out the immense challenge of lapsing so much funding year after year. 

What the projected structural imbalance means is that the first $210 million of revenue growth in the 2017-19 biennium will be needed to get the next budget bill into the black, before any additional revenue growth is used to address increased costs or to reduce the size of the lapses.   

The good news in the latest LFB calculation is that the $210 million budget imbalance in 2017-19 is significantly lower than the LFB estimated earlier this month. As I reported in the July 8th blog post, the Fiscal Bureau calculated that the Joint Finance Committee’s version of the budget created a structural imbalance of $490 million for 2017-19. A small part of the reduction in the shortfall can be attributed to vetoes made by the Governor, but most of the difference results from the correction of an error in the previous LFB calculation. 

The bottom line is that the continued phase-in of large tax cuts means that the next biennial budget bill is likely to be another very challenging one to balance, despite the substantial spending cuts in the newly enacted budget bill. And it’s disappointing that there has been almost no recognition in the media of the fact that the newly enacted budget makes the very unrealistic assumption that state agencies will be able to lapse more than $2 billion of funding over a three-year period. 

Jon Peacock

4 Responses to “New Fiscal Bureau Analysis Shows a $210 Million Structural Deficit”

  1. Ron Goodman says:

    This can’t be right. Gov. Walker would never make a public statement like that if it weren’t true. Would he? And here I was thinking he would have made a good running mate for The Donald.

    • Jon Peacock says:

      Just to clarify — the Governor’s statement would have been accurate if he had said that if the budget bill was enacted WITHOUT ANY CHANGES, the state would start the 2017-19 biennium with a positive $499 million “structural balance.” That figure was achieved in part by declaring in the budget that school aid would be cut in the 2017-19 biennium (which was essentially a way of gaming the structural deficit calculation). Since it was pretty clear early in the budget process that the legislature wasn’t going to go along with that ruse, I was a bit surprised that PolitiFact gave the Gov’s statement a “mostly true.” It will be interesting to see if they revisit that — now that the most current calculations show the $499 million estimate was more than $700 million too high.

  2. Jake formerly of the LP says:

    And if I’m reading that “correction” right, it’s because the LFB didn’t include the accounting trick that delays $127 million in payments of school aid to school districts until July. Not exactly the healthiest way to make the numbers add up (and it causes a strain in a district’s cash flow), and it grows the GAAP deficit.

    • Jon Peacock says:

      Jake,
      Yes, the primary reason for the LFB’s correction in the structural deficit calculation is the delay of a $127 million schools aids payment. That amount is supposed to be a 2015-16 payment, but is made at the start of the next fiscal year (and I agree that it puts a fiscal strain on districts). Nevertheless, because that delay is a one-time maneuver, it doesn’t affect the next biennium and I think the LFB correction makes sense.

      I’ve never fully understood how GAAP deficits are calculated, but I think you’re right that the delay in a school aid payment adds to the GAAP deficit in this biennium. However, I think that would only be the case on a short-term basis; I don’t think it affects the GAAP deficit in the 2017-19 biennium. In contrast to a couple of the other things in the budget (which you highlighted in a blog post several months ago), this one isn’t a ploy to game the structural deficit calculation.