Is Social Security’s First Crisis Next Year?

Next year at this time an event many politicians assure us is far in the future is expected to occur:  One of the two funds comprising Social Security ― Disability Insurance (DI) ― will be depleted.

This is no surprise, although the issue has gone largely unnoticed by national political leaders and mass media.

In late July, Social Security’s six trustees warned:  “The DI Trust Fund reserves become depleted in the fourth quarter of 2016, at which time continuing income to the DI Trust Fund would be sufficient to pay 81% of DI benefits.”

Formally, Social Security is known as OASDI, Washington-speak for the Old Age, Survivor and Disability Insurance program.  The OAS portion is what most Americans think of as Social Security with its 48.1 million beneficiaries who are either seniors or survivors.

However, it is the smaller disability insurance (again, DI) part of OASDI that is in trouble.  Last year, $114.9 billion in income flowed into the trust fund, while $145.1 billion was paid out to 10.9 million beneficiaries.

The resulting $30 billion deficit was not the first; shortfalls date back to 2009.  With only $60.2 billion in reserve at the end of 2014, it does not take a rocket scientist to see why DI fund reserves will run out by 2016.

What happens next?  If Congress does nothing, in order to balance DI revenues and expenditures program payments would have to be cut almost 20%.

More likely, Congress will prove true to form and apply a last-minute “band-aid” to DI’s long-festering wound.  It can do this by diverting some of the Social Security taxes we pay toward future retirement to funding disability benefits now.

Members of Congress will then be able to claim “problem solved!”  Except it won’t be.

In their late summer report, Social Security trustees also shared important information about the more familiar part of Social Security (OAS) that goes to seniors and survivors.  First, they noted that trust fund spending has exceeded income, save interest earnings, since 2010.

Second, they projected that OAS reserves of $2,729.2 billion will be depleted in 20 years, or by 2035.  Diverting some of the payroll taxes we pay from seniors to the disabled will only hasten the date at which Social Security payments to retirees will face potential reduction.

There are alternatives to future benefit cuts, of course.  Elected officials in Washington could decide to restore Social Security to long-term health by trimming benefits of future retirees, extending the dates at which those retirees qualify for benefits, or, in a variety of ways, raising additional payroll tax revenues.

None of these options is attractive.  But, as next year’s projected depletion of Social Security’s disability insurance program shows, the alternative is far worse – “surprise” cuts in benefits already being paid out.

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Rising transportation debt service crowds out local aids

Many aspects of Governor Walker’s proposed budget will be scrutinized and debated over the next several months. Transportation spending and funding (including borrowing) are likely to be among the most important.

State highways and local transportation aids are Wisconsin’s two largest transportation expenditures. An important development over the past 15 years has been debt service “crowding out” those aids.

A recent WISTAX blog post looked at increased borrowing for transportation since 2003. The cost of that borrowing is the debt service required to repay the loans. As the table below shows, while total transportation spending rose 60% during 2000-13, debt service jumped more than 400%.

Although the state continued to spend on state highways (up 70%), local transportation aids rose less than 20% during the 13 years. As a share of transportation spending, local aids dropped from 39.5% in 2000 to 29.6%. Combined with strict limits on local property taxes, the modest aid growth has led to relatively small increases in local road and street spending—a 24% increase during 2000-13 that failed to even keep pace with inflation (35%).

Longer and more detailed examinations of Wisconsin transportation funding are here and here.

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Basic State Budget Questions

Gov. Scott Walker (R) recently unveiled his 2015-17 budget calling for $32 billion in general fund spending.  Now, the legislature has begun its three-month review.

Beyond the controversies the budget has generated, there remain simple dollars-and-cents questions to which the public deserves answers:  What is the state’s current fiscal condition?  What new revenues might the state expect?  To what degree is the pending budget balanced?  And, will it strengthen Wisconsin’s fiscal position and reputation?

Fiscal condition?  The surplus or deficit the state inherits from 2013-15 is the starting point for 2015-17.  While the state had a $517-million surplus at the end of 2014, it was predicted in January that 2015 would close with a $283-million deficit.

The governor plans to erase the shortfall over the next four months by collecting overdue tribal gaming revenues; reducing state employee pay increases; and generating cash by restructuring and extending debt.

One reason for the shrinking surplus is income tax reductions enacted in 2013 and 2014.  But two more recent factors stand out.

The first is last March’s $400-million increase in state spending on technical colleges to “buy down” the December 2014 property tax.  The second was January’s re-estimate of state revenues that came in about $500 million below last year’s forecast.

New revenue? There is good news in the pending budget.  The state expects to collect over $1.9 billion in new general fund taxes during 2015-17.  However, much of that is not available for new spending or tax cuts.

About half the amount is needed to fund permanently current spending previously paid for with one-time surplus.  Rising Medicaid costs claim another $663 million.  Add the governor’s request for $200 million in new property tax credits, and only about $100 million of the $1.9 billion in new monies remains.

Balanced budget? State budgets must be balanced; however, that has sometimes been achieved “only on paper.”  The governor proposes ending the next two fiscal years with gross surpluses of $92 million and $123 million, respectively.

The amounts may seem large, but as a share of annual expenditures, they are less 1%.  The state saw similar slim margins under Gov. James Doyle (D).  In 2008, Wisconsin and Arkansas had the smallest budget reserves in the nation; and, here, large tax hikes and spending cuts soon followed.  When budgets have no cushion against surprise, the results are unpopular for all, regardless of party.

An added concern with the new budget is how its small balance was, in part, achieved.  It assumes that, by hiring 102 new tax auditors and related staff, the state can quickly generate $114 million in uncollected taxes.

Fiscal reputation? One other aspect of state finances that concerns CPAs, but few others, is the strength of Wisconsin’s official financial statements.  The statements are prepared after a fiscal year ends and must (unlike state budgets) follow generally accepted accounting principles, or GAAP.

During 2000-11, our GAAP deficits grew from $830 million to about $3 billion.  Since then, they were trimmed to under $1.4 billion.  With state surpluses now evaporating, GAAP deficits are expected to grow again to about $2 billion.

Few politicians care about accounting principles, but weak financial statements can affect reputation.  In 2013, when Wisconsin’s GAAP deficit was $1.7 billion, only six states had such deficits, and only California and Illinois had larger ones.

Wisconsin’s long, bipartisan habit of precariously balancing budgets with minimal emergency reserves while maintaining large GAAP deficits partly explains why state bond ratings dropped over a decade ago and never recovered.

As of January, Moody’s gave 30 states higher bond ratings than Wisconsin and only six states lower ratings.

More detail is available in two recent Focus newletters (Getting to now and Basic nuts and bolts).


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