New LFB Figures Are a Sobering Reminder of the Need for More Prudent Budgets
Structural Deficit Calculation Jumps to Nearly $1.8 Billion
It’s remarkable how quickly the state’s fiscal picture can turn around, even during a period when the national economy is on the mend. During the campaign season two years ago, GOP incumbents were making a big deal of the fact that they had eliminated the state’s structural deficit. Today we learned from the Legislative Fiscal Bureau (LFB) that the structural deficit has returned with a vengeance; the new figure of $1.766 billion is the third largest structural deficit estimated by the LFB since 1997 (for the 10 biennial budgets from 1997-99 through 2015-17).
Although that turnaround in the state fiscal picture is surprising to many people, it shouldn’t be. Wisconsin lawmakers have a long history of banking on surpluses that are estimated during the first half of a biennium (especially in election years) and promising tax cuts and/or spending levels that aren’t sustainable and that lead to big deficits. And this year by the time lawmakers were putting the finishing touches on the last round of tax cuts, there were already warning signs that the state’s fiscal challenges could be quite a bit larger than the LFB’s previous structural deficit calculations suggested. (See, for example, this March 3rd Budget Project Blog post.)
The mistake that Wisconsin lawmakers made once again was to rely on projected revenue increases, without an adequate contingency plan for a slower rate of economic growth. The last tax cut bill suspended a state statute that says that when tax collections increase faster than previously expected, half of the increase shall be deposited into the Rainy Day Fund. And the 2013-15 budget bill once again postponed a statute requiring an increase in the budget balance the state must aim to have at the end of each fiscal year.
The Fiscal Bureau’s new calculations won’t be the last word on the 2015-17 structural deficit; I assume the new figures will be updated after the state has new tax and spending projections for the current fiscal year and final tax and spending numbers for FY 2013-14. For now, the LFB is simply assuming that tax growth in the second year of the biennium will fall short of previous estimates by the same amount that growth in the first year fell short: $281 million (which is roughly the same assumption that we made in this blog post on Friday.)
What the LFB calculations mean is that if current trends continue, Wisconsin will need nearly $1.8 billion of revenue growth and/or spending cuts to balance the 2015-17 budget. Some people who derided structural deficits in the past are now arguing that this isn’t a big deal because the state can grow its way out of this problem. That’s true in a sense, but also very misleading. Assuming tax collections increase as expected to about $14.4 billion in the current fiscal year, growth of 4% per year in 2015-17 would close the budget hole if total spending is frozen. But keep in mind that the spending needed for a status quo or “cost to continue” budget typically increases almost as fast as revenue – because of inflation and population growth. Thus, freezing spending in 2015-17 at the current level would not be a painless exercise; it would require significant cuts in areas like Medicaid, K-12 and higher education, and the corrections system budget.
It’s also important to keep in mind that the current structural deficit calculations focus only on the General Fund and assume that in 2015-17 the state will stop transferring dollars from the General Fund to the Transportation Fund. In light of the problems in state and federal financing for transportation, there will be significant pressure to continue to make those transfers.
The other thing that is almost inevitable when the state finds itself facing a budget hole going into the next biennium is that lawmakers postpone making the long overdue increase in the state’s budget balance. I expect that to happen again next year, which is exactly why it’s important to build budget reserves when the economy appears to be strong – rather than locking in tax cuts or spending increases before projected revenue growth actually materializes.