The response to the Legislative Fiscal Bureau’s (LFB) recent memo about the state’s “structural deficit” has been overwhelming in volume and underwhelming in facts. Straightforward answers to some questions might be helpful.
Is the state running a deficit? A budget deficit occurs when spending exceeds revenues. Wisconsin’s constitution requires the state to balance its budget each year. Wisconsin wrapped up the 2013-14 fiscal year (ending June 30, 2014) with a positive balance of $443 million. In other words, the budget was balanced in that fiscal year, despite the fact that tax collections during the year were $281 million less than budgeted.
For 2014-15, the budget allowed $15.84 billion of spending and anticipated $15.28 billion in revenues, mostly tax collections. The $559 million difference between revenues and expenditures was expected to be paid for with a $724 million ending balance in 2013-14. However, due to the $281 shortfall in tax collections, the state only has $443 million, not enough to cover anticipated spending. If 2014-15 revenues and expenditures come in as budgeted, the state will have a $116 million deficit at the end of the year. That hole could be filled with unanticipated tax collections, by spending below budgeted amounts, or by tapping the Budget Stabilization (rainy day) fund, which has a balance of about $280 million.
The LFB memo hinted that tax collections in 2014-15 might lag. For their calculations, they assumed (not an official estimate) 2014-15 tax collections would $281 million less than budgeted, which would raise the projected 2014-15 deficit to almost $400 million.
What about the $1.8 billion figure I keep hearing about? The $1.8 billion figure is commonly referred to as the structural deficit, though that is really a misnomer. It is really a measure of the anticipated imbalance between revenues and expenditures heading into the next budget. Moreover, it’s a two-year figure that can overestimate the problem. If the first-year imbalance is solved on a permanent basis, the second year imbalance is generally minimized or eliminated.
Essentially, LFB looks at the structure of the state budget (how revenues and expenditures match up) heading into the next biennium. In the 2013-15 budget, 2014-15 expenditures exceed revenues by $559 million. In other words, there is an imbalance between the two which was to be closed using the budget balance. However, as mentioned above, for its calculations, LFB assumed 2014-15 revenues will lag budgeted amounts by $281 million, bringing the 2014-15 imbalance to $840 million.
Now, state law requires a $65 million ending balance, and the 2014-15 fiscal year is projected to end with a $397 million deficit (see above). Factoring those items in brings the 2014-15 imbalance to $1.3 billion
LFB then looks ahead to the next biennium and adjusts revenues and expenditures to reflect commitments already in law or “one-time” items. For example, the state is transferring $108 million to the transportation fund this year, but that is not an ongoing commitment. Thus, LFB subtracts that amount from 2014-15 spending when looking at the structure of state finances heading into the 2015-17 biennium.
Those adjustments reduce the 2015-16 imbalance to almost $1.1 billion. Making similar calculations for 2016-17 show an imbalance of $697 million for that year, bringing the two-year total to $1.77 billion. What this means is that, through 2016-17, the state needs an additional $1.77 billion in revenues to meet current-law commitments and maintain the required statutory balance ($65 million).
Three notes are important here. As mentioned above, the $1.77 billion figure tends to overstate the problem. If the $1.1 billion first-year imbalance were solved on a permanent basis, the second-year imbalance would be eliminated. Second, the figure assumes tax collections lag by $281 million this year. If they come in as budgeted, the first-year imbalance falls to $507 million and the two-year total to $923 million. Third, these structural imbalance figures will change as more information on 2014-15 revenues and expenditures becomes available.
How does this imbalance compare with prior years? The new structural imbalance figures are very similar to those during 1997-2013. First-year imbalances during those years ranged from $589 million heading into 1999-2001 to $1.3 billion in 2003-05.
How does the first-year imbalance compare to revenue growth? General fund revenues have fluctuated over the past 16 years. They declined in three years and rose by more than $1 billion in another three. More typical is growth between $400 and $700 million. Whether the state can “outgrow” the pending imbalance remains an open question.