Unrealistic Budget Assumptions Conceal Future Budget Challenges

Monday, June 15, 2015 at 7:13 PM by

In the coming weeks there will probably be many assertions that the new biennial budget puts Wisconsin in a strong fiscal position in future fiscal years, but a closer look reveals otherwise.  State lawmakers have learned how to manipulate the structural deficit/surplus calculations by making unrealistic assumptions about future spending and by moving debts further into the future.

One example of gaming the calculations on the state’s fiscal health is the very odd provision the Governor put in the budget that said school aid would be cut by $142 million per year in the 2017-19 biennium. That assumption added $284 million to the “structural balance” that the Legislative Fiscal Bureau (LFB) calculated the state would have as it entered the 2017-19 biennium. However, that was an unreasonable assumption to make in a budget that already holds school aid well below the inflation rate, and the Joint Finance Committee has rejected the future cut. The JFC decision will make the state budget look less healthy in future years, but only when compared against the misleading picture painted by the Governor’s budget assumptions.  

The budget bill still includes another provision that goes even further in creating a misleading impression of the state’s future fiscal health. Another blog, Jake’s Economic TA Funhouse, has pointed out on a couple of occasions that the budget assumes that there will be $700 million lapsed from state agencies to the General Fund in 2016-17, and the structural balance calculations assume comparable lapses in each year of the next biennium. In other words, the positive structural balance in the 2017-19 biennium is premised upon an unprecedented total of $2.1 billion of lapses over a three-year period!  

Lapses are short-term spending cuts achieved when the state directs agencies to return some of their funding to the state treasury.  Funds lapsed by an agency don’t reduce that agency’s base level of spending, yet the LFB’s structural deficit calculations assume that the total amount of lapses in the second year of a biennium will be repeated in each year of the next biennium.  Thus, assuming a big increase in lapses is a convenient way to create the impression that the state is in better fiscal shape in the following biennium.  

Budget bills typically assume that agencies will be able to lapse about $300 million per year.  Occasionally agencies can collectively find more to lapse, but that is usually done during a budget emergency, and agencies haven’t been able to continue large lapses year after year.  For example, the Governor’s first biennial budget bill assumed a lapse of $608 million in fiscal year 2012-13.  The structural deficit calculations made at that time assumed comparable lapses in the next biennium, but that didn’t happen; the 2013-15 budget bill reduced the assumed lapses to $295 in 2013-14 and $335 million in 2014-15. That experience helps illustrate that it’s very unrealistic to assume a total of $2.1 billion of lapses over a three-year period.  

Another way that the Governor’s proposed budget bill proposed held down the structural deficit was by postponing a requirement to increase the minimum General Fund reserve that the state must strive to have at the end of each fiscal year.  The Finance Committee went one step further and totally repealed that statute, which would have resulted in a long-overdue  increase in the budget reserve starting in fiscal year 2017-18.

Postponing or repealing the law that calls for a more prudent budget balance vividly illustrates how a metric like the structural deficit calculation, which is intended to measure the state’s fiscal health, can have the ironic effect of inducing lawmakers to make unhealthy budget choices that game the performance measure. I wouldn’t be surprised to see more of that as legislators wrap up work on the 2015-17 budget bill. 

It’s a positive sign that more journalists and policymakers are paying attention to the structural deficit (or structural balance). However, that increased attention has had the unwelcome effect of causing lawmakers to get more creative in how they push costs into the future, and we need to be vigilant in watching for those types of maneuvers.

Jon Peacock

One Response to “Unrealistic Budget Assumptions Conceal Future Budget Challenges”

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