Sizing up Wisconsin’s Budget Challenges
Several significant pieces of Wisconsin budget data were released late last week:
- Our state is facing a structural deficit of $642 million in the next biennium, which means that $642 million of growth in General Purpose Revenue (GPR) will be needed even if there is no net increase in spending levels in the 2015-17 budget.
- State tax collections were 21% lower in April than in the same month of the previous fiscal year. (See our May 23 blog post.)
- Total Wisconsin tax collections over the first 10 months of the current fiscal year are $21 million less than in the comparable portion of 2012-13.
None of these news items is cause for alarm right now, but the convergence of these facts means the state’s fiscal situation merits watching and might prove to be weaker than some state lawmakers have assumed.
Before taking a closer look at some of the cautionary considerations, let’s start by reviewing several positive perspectives on the state’s budget situation:
- The estimated structural deficit for 2015-17 is substantially smaller than the budget challenges the state faced in most of the other budgets since the late 1990s.
- Revenue growth could quickly erase the structural deficit in the next biennium (though that’s true only if tax revenue grows significantly faster than spending needs).
- The Rainy Day Fund has risen substantially over the last couple of years and is now at almost $280 million.
Yet despite those pieces of positive news, which have been cited frequently by many lawmakers, there are a number of reasons to think the foundation for the next biennial budget isn’t rock solid:
- The structural deficit for 2015-17 could increase substantially if the recent downturn in state tax collections proves to be more than an aberration. If it’s a trend that cuts into the anticipated revenue in 2014-15, that wouldn’t merely eat away at the state’s slim budget balance; it would also cause a jump in the structural deficit by lowering the base level of General Fund revenue, which is a critical variable in those deficit calculations.
- The estimated structural deficit assumes that the state won’t continue to use $108 million GPR per year for transportation spending. If that short-term appropriation is reauthorized, as I suspect it will be, the state’s GPR needs would grow by an additional $216 million in 2015-17.
- Although the Rainy Day Fund has increased in recent years, it is less than 2% of annual GPR spending, and many budget experts recommend that states should have reserves and/or contingency funds of 5% to 10% of spending. In order to allow for larger tax cuts, lawmakers recently suspended the statute that requires depositing 50% of higher-than-expected revenue growth into the Rainy Day Fund. (Read more here.)
- The other part of the state’s reserves is a budget cushion or estimated balance that currently stands at $165 million (a little over 1% of annual spending). The structural deficit calculations assume that balance will be spent down to $65 million in the next biennium, which is currently the statutory minimum. Governor Walker and other governors have made the structural deficit appear smaller by repeatedly postponing a statutory requirement that would make the long-overdue change of raising the required minimum balance to 2% of annual GPR spending.
During the campaign season two years ago, Governor Walker and GOP legislators were able to score points by noting that they had eliminated the structural deficit. They won’t be able to do that this year, but if tax collections rebound and get back on target, thereby keeping the estimated structural deficit from getting any larger, I suspect the deficit won’t be much of an issue this year. On the other hand, lower-than-expected state revenue could significantly increase the state’s fiscal challenges in the next biennium and might add a different dimension to the fall campaigns.