Revised Figures Paint Much Less Rosy Picture of Wisconsin’s Fiscal Health
New Structural Deficit Calculation Assumes $2.15 Billion of Lapses over Three Years
The state’s fiscal health isn’t nearly as strong as the Governor and a number of other lawmakers asserted in the spring. While the Governor was courting GOP support in South Carolina for his upcoming 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.” Unfortunately, the latest figures from the Legislative Fiscal Bureau (LFB) show that we need to change that plus sign to a minus sign, because the Governor’s optimistic assertion was off by about $1 billion.
A July 7th memo from the LFB projects that Wisconsin will start the 2017-19 biennium with a structural deficit of $490 million. In other words, the 2015-17 budget developed by the Joint Finance Committee (JFC) puts the state in a position where lawmakers would need to use the first $490 million of revenue growth during the 2017-19 biennium simply to maintain the spending commitments assumed in the second year of the 2015-17 budget. And a closer review of the LFB memo reveals that the fiscal pain that will be felt in 2017-19 is likely to be far greater than the structural deficit calculation indicates – thanks to unrealistic assumptions about the amount of funding agencies will lapse to the state treasury over the next four years.
There are two general reasons why the previously estimated structural surplus has turned to a deficit. First, legislators have yielded to public pressure to ease some of the spending cuts the Governor recommended. Kudos to the JFC and other legislators for that. However, while they were scaling back some of the spending cuts, they also cut taxes more than the Governor proposed, and they accomplished those two things by using unsustainable revenue or savings.
Another very significant factor in changing the state’s apparent fiscal health is that the JFC rejected one of the arbitrary and unrealistic assumptions the Governor made about spending in the 2017-19 budget. His budget made the convenient and rather strange assumption that school aid would be cut by $142 million per year in the 2017-19 biennium, and that unrealistic assumption added $284 million to the “structural balance. The JFC rejected the Governor’s very unrealistic and unpopular premise that school aids would drop by $284 million during the 2017-19 biennium.
Although the projected $490 million gap between the new spending base and the base level of revenue is smaller than many of the structural deficits the legislature has faced in the past, there are a couple of reasons why we shouldn’t take much solace from that. First, the gap often grows over the course of a biennial session, when legislators find short-term funding sources and use them to initiate long-term tax cuts or spending increases. Second, and more importantly, the new budget continues to make assumptions that disguise the fact that the 2017-19 budget will be extremely challenging – far more so than the estimated structural deficit figure suggests.
A significant problem with the structural deficit methodology is that it treats lapses of money to the General Fund the same as cuts in the base level of spending, even though lapses aren’t intended to be permanent. The 2015-17 budget bill approved by the Joint Finance Committee (JFC) is balanced by assuming that state agencies will lapse more that $1 billion to the General Fund, including $716 million in the second year of the biennium. Because the structural deficit calculation works from that 2016-17 base level, it in essence assumes agencies will continue to lapse the same amount in each year of the 2017-19 biennium – bringing the total in lapses from July 2016 through June 2019 to almost $2.15 billion!
As I explained in a previous blog post, lapses are typically on the order of $250-$300 million per year. Although the state has sometimes lapsed as much as $600 million in a year (during a period of extreme fiscal distress), there is no precedent for continuing to have huge lapses for three consecutive years. The prospect that it might actually be necessary to lapse more than $2 billion over three years should be setting off alarm bells, not causing anyone to claim credit for the fact that the projected structural deficit for 2017-19 is “only” $490 million.
The bottom line is that state lawmakers keep telling us that they are creating a strong fiscal foundation for future budgets, but the tax policy choices they have been making keep setting us up for new rounds of substantial spending cuts.