The Ironic Rise and Fall of a Budget “Surplus”
The Department of Administration (DOA) announced last week that the state finished the 2013-14 fiscal year with a budget balance of almost $517 million, and many state lawmakers were quick to congratulate themselves for having a budget “surplus.” I don’t fault them for that; I think I would have done the same thing. However, the fleeting existence of a budget balance doesn’t support the argument some lawmakers have made that Wisconsin has turned a corner with respect to careful budget stewardship and long-term planning.
There are a number of reasons why I think it’s ironic that some lawmakers have been patting themselves on the back for getting halfway through the biennium with a relatively large budget balance. Consider the following points:
The “surplus” will be very short-lived – Because of the latest round of tax cuts, net appropriations for the current fiscal year exceed the budgeted revenue level by $569 million, so the state is very rapidly drawing down its budget reserves. And the $569 million figure probably understates the current demands on the budget balance because state tax revenue is likely to be below the target level this year. Since tax collections fell $281 million short of projections in FY 2013-14, revenue growth is starting from a much lower base this year. To hit the revenue target that was the basis for the $569 million gap between spending and taxes, the state now needs tax growth of about 5.6%, rather than the previously projected growth of 3.5%! (See this Sept. 3 LFB paper about the potential for needing a budget repair bill to keep the budget in the black in FY 2014-15.)
The balance is much less than the budgeted amount (even though the new balance is inflated) – According to the DOA fiscal report released on Oct. 15, the General Fund balance at the end of the last fiscal year was about $517 million, which was $207.5 million less than what state lawmakers were anticipating when they passed a tax cut bill early this year. Furthermore, the size of the budget balance would have been smaller (about $491 million) if the state hadn’t delayed a transfer of $25.75 million from the General Fund to the Transportation Fund. After taking that cosmetic change into account, the decline in the state’s fiscal health is $233 million, which is hardly cause for celebration.
Using up the balance creates future fiscal difficulties – By going from a significant budget balance at the mid-point of the biennium to little or no balance at the end, state lawmakers are repeating a mistake they have made many times in the past. They are using a short-term “surplus” for ongoing budget changes in a way that isn’t sustainable and creates a large structural deficit in the following biennium. As we explained in a previous blog post, the LFB said in early September that the projected spending levels, coupled with tax growth this year of 3.5%, would yield a structural imbalance or budget gap of almost $1.8 billion in the next biennium.
The tax cut bill suspended a requirement to set aside reserves – The last tax cut bill overrode 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. Although lawmakers have gradually increased that fund over the past several years and deserve credit for that achievement, the Rainy Day Fund and other state reserves are still woefully below the amounts that most states aim to build up during times of economic growth. (Read more here about adequate state reserves.)
Budget bills keep delaying a requirement to increase the minimum budget balance – The 2013-15 budget bill once again postponed a statute requiring an increase in the budget balance that the state must aim to have at the end of each fiscal year. That statute requires the state to seek to finish each year with a balance of at least 2% of General Fund spending (roughly $300 million), but each of the last several budget bills has pushed that requirement further into the future. (The last budget bill delayed it until FY 2017-18.)
I’m glad that the state finished the last fiscal year with a balance of roughly $500 million and that state lawmakers are celebrating that fact. But why don’t we strive to be able to have similar celebrations in future years? Why do the lawmakers who are applauding the budget balance use all of it so quickly – even as they suspend state requirements to build up budget reserves?
In light of the self-congratulatory statements that we have heard about finishing 2013-14 with a relatively strong budget balance, can we take hope that next year the governor and legislature won’t once again postpone the statute requiring lawmakers to routinely set aside a more prudent budget cushion?