Wisconsin’s “$306 Million Surplus”: Is It real? When Could We Use It?

Tuesday, June 21, 2011 at 2:20 AM by

The Legislative Fiscal Bureau issued a memo last week that has generated some confusion about the state’s fiscal situation. The June 13 memo concluded that the recently approved 2011-13 budget bill puts Wisconsin in a position to have a surplus of $306 million in the 2013-15 biennium.

This post will explain that the preliminary LFB calculation (which may need to be adjusted slightly to reflect an amendment adopted last week) is not a surplus that will accrue in 2011-13 budget. The LFB projection that the state is in a position to be in the black in 2013-15 is good news, but there are a number of reasons why I think the $306 million figure creates an overly positive impression of the state’s fiscal condition. At the top of the list is that the LFB analysis assumes that the state estate tax would be restored in 2013 and will generate $219 million in 2013-15. That assumption is based on current federal law, but it’s a law that is virtually certain to be changed, and there is almost no chance the state will see that $219 million.

The Fiscal Bureau memo is the agency’s periodic analysis (generally conducted after each stage of the budget process) that examines the spending and taxes in the second year of the budget, and analyzes how existing or newly enacted statutory commitments will affect those figures in the next biennium. Based on the estimated revenue and expenditures in 2011-13, the LFB calculates that if the state essentially froze revenue and spending in the 2013-15 budget (or if spending and revenue both increase by the same amount), the state would gradually accrue a surplus by the end of that biennium of $306 million, (above and beyond the $65 million statutorily-required balance).

Based on news coverage of the projected surplus, some people got the mistaken impression that the state had extra money to use in the 2011-13 biennium, but that is not the case. The LFB figures show a projected balance of just $4 million (above the required $65 million reserve) in the first year of the biennium, and just $1 million more than that at the end of 2012-13. In other words, the budget once again leaves the state with a precariously thin cushion at the end of the biennium.

The LFB memo shows that despite statutes phasing in tax cuts in 2013-15, other changes in state and federal law will more than offset the lost revenue. At the top of the list is the assumption mentioned above that the estate tax will return in 2013-15. That is correctly based on current federal law that – if it isn’t amended – would revert to the 2001 statutes and allow estate taxes like Wisconsin’s to return. However, no one who follows the estate tax issue closely expects Congress to allow that to happen. Assuming Congress changes that law, or the state legislature decides not to allow Wisconsin’s estate tax to return, that would cut $219 million from the projected $306 million surplus.

Other factors in the LFB calculation are the assumptions – based on current state and federal law – that: a) a federal change will reduce spending for the state Earned Income Tax Credit by $32 million over two years, b) a $102 million GPR transfer to the Department of Transportation won’t be continued, and c) that a $42 million boost in school aid in 2012-13 won’t be renewed.

In addition to those factors, another key reason why the state budget is projected to have a surplus in 2013-15 is that the budget bill delays until fiscal year 2015-16 the plan to increase the minimum statutory reserve to 2 percent of gross state appropriations. That change, which had previously been slated to go into effect in 2013-14, would increase the state’s very slim reserve requirement by roughly $250 million.

It should also be noted that continued slowing of the economic recovery could quickly throw the 2011-13 budget and the projections for the next biennium into the red. It is far too early to begin second-guessing the revenue projections made only about a month ago, but the trend in the economic indicators in the ensuing month has been worrisome.

In short, it’s good news that the Fiscal Bureau projects that the current budget puts Wisconsin in a position of not having a structural deficit in the 2013-15 biennium. However, the projected $306 million surplus would have largely been eliminated if the legislature had not delayed the scheduled increase in the reserve requirement, and it will almost certainly be reduced by $219 million when Congress changes the estate tax law. With those considerations in mind, legislators shouldn’t be salivating at the prospect of passing bills this session that phase in new spending or tax breaks in the 2013-15 biennium.

Jon Peacock

Categories: 2011-13 biennial budget, Blog, estate tax | Comments Off

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