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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A brief look at state borrowing

Governor Walker (R) is requesting to borrow about $1.3 billion for transportation over the next two years. A look at borrowing authorizations in past budgets puts this figure in perspective.

Total bonding authorizations increased significantly over the past 15 years for several reasons. First, the state borrowed $1.6 billion against the proceeds of a late-1990s tobacco industry legal settlement, and used the funds to balance the state budget. Second, it borrowed $750 million to pay off unfunded pension and sick leave liabilities. Third, lawmakers used money from the transportation fund to balance the state’s general fund and then funded transportation projects with additional borrowing. The chart below shows bonding authorizations from 1997-99 through 2013-15. Total borrowing under the governor’s proposed budget is not yet known.

Traditionally, borrowing for transportation was done with revenue bonds—bonds that were paid off transportation fund revenues. That changed in 2003-05 when the state began to raid the transportation fund to balance general fund budgets. Additional general obligation (GO) debt was used to replace the money taken (see chart below). For example, during 2003-05, $867 million in GO debt was authorized for transportation, bringing total transportation borrowing to $1.2 billion, up from $305 million in 2001-03. In 2009-11, $925 million in GO bonds were authorized for transportation, bringing total transportation borrowing to $1.3 billion. The governor proposes to borrow this same amount over the next two years.

Large amounts of transportation borrowing are taking their toll on the state’s transportation fund. Gas taxes and vehicle registration fees are rising only slightly. But increased borrowing bring great debt service payments. During 1999-2003, debt service claimed less than 7.5% of transportation fund revenues. In 2013, that figure was 16.8%.

 
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