The State Budget Surplus, and How Not to Use It
Our state is expected to finish the current fiscal year with a balance of about $420 million. There have been scads of ideas for what to do with that money – most of which don’t seem to take into account that a balance isn’t an ongoing revenue stream. Let’s take a look at a few of the options.
Although the anticipated surplus is very good news, keep in mind that one of the main reasons for the expected balance is that state officials projected a $208 million deficit about a year ago and took steps to reduce spending to address the anticipated shortfall. As a result of a number of painful cuts and lapses that were subsequently made, coupled with a rebound in revenue from the low level anticipated a year ago, state lawmakers now find themselves in the very unusual position of carrying a solid balance into the next biennial budget.
Most legislators, especially fiscal conservatives, understand that a surplus or budget balance is a pot of one-time money that shouldn’t be committed to a permanent spending increase that isn’t sustainable. Yet they often don’t acknowledge that the same is true with respect to tax cuts. Thus, many politicians have been saying that the current budget balance should be used for an ongoing income tax cut. What they don’t say is that using a short-term funding source in that way will soon require either a new round of spending cuts or future tax increases.
To avoid the appearance of creating a structural deficit in future years, I think the budget will contain large transfers of General Fund tax revenue into the Transportation Fund to finance highway spending, while categorizing those expenditures as a short-term use of General Fund dollars. I think that’s a bad idea substantively and also in terms of fiscal responsibility, because it would create a long-term expectation of higher transportation spending. As a technical matter, labeling it as a short-term maneuver creates the appearance of being fiscally responsible and avoiding a structural deficit, but only superficially because it will probably create much the same fiscal and political problems for policymakers in future budgets.
I think the most fiscally responsible thing to do with the surplus is to use a significant chunk of it to increase the minimum reserve that the state has to have put aside at the end of each fiscal year. That reserve essentially acts as a cushion or margin of error if revenue falls short of projections. Most states try to have a 5% reserve, but Wisconsin’s is less than 0.5%. For the better part of the last 20 years, lawmakers have been pledging to increase it, but they keep delaying the phased-in increase, and Walker’s last budget postponed the statutory provision that would have increased it in the 2013-15 biennium. I can understand making that decision at the time, but there is no excuse now for not increasing the required reserve in the next budget.
Another fiscally responsible thing to use a surplus for is to pay off existing debt, such as the substantial increase in bonding in the Governor’s last budget. But the same logic doesn’t apply to one of the oddest budget proposals that has been floated recently – increasing bonding for transportation, and selling the UW power plants to help pay off transportation bonds. Apparently, there was a concern that an increase in long-term debt wouldn’t be appreciated by fiscal conservatives (or by liberals less enamored of highway spending). I presume that selling off the power plants is supposed to alleviate that concern – yet it creates a long-term liability for the cost of power needed for University buildings. Unless I’m missing something, that scheme would be a slight of hand that takes many years of debt service costs incurred by the Transportation Fund and trades them for an indefinite period of General Fund liability for energy costs.
I think there will be many assurances made that the Governor’s 2013-15 budget is fiscally responsible. And perhaps it will be. But I hope the budget doesn’t create an appearance of being fiscally responsible by using fiscal schemes that shift substantial fiscal costs far into the future.