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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School revenues under state budget proposal

State school aid is the largest part of the state budget and probably the most watched. So, when Governor Scott Walker (R) unveiled his proposed 2015-17 budget, attention turned to K-12 education and funding for Wisconsin’s 424 public school districts.

The world of school finance is complex. Districts operate on a combination of state general aid, categorical aid (for special programs), local property taxes, and smaller amounts from other sources, including from the federal government. To complicate matters, the state limits the per student amount of state general aid and local property taxes districts can collect (revenue limits). The revenue limit does not include categorical aids.

The new budget does several things, including:

  • No increase in general aid in 2016 and a $108 million increase in 2017;
  • No increase in revenue limits in either year; and
  • Eliminating in 2016 and restoring in 2017 a special categorical aid payment.

So what does this mean for local school districts? First, the $108 million general aid increase in 2017 provides no additional money to schools. Since school revenue limits are not increasing, school districts must reduce property taxes by a similar amount to stay within the limits. Second, schools will see a $127 million cut in 2016 due to loss of the special categorical payment mentioned above.  Third, restoration of that categorical payment at a slightly higher level increases school revenues by $142 million in 2017.

The impact of the Governor’s proposed budget for an “average” school district is shown below. This year, the typical district is allowed to collect $9,815 per student from a combination of state general aids and local property taxes. It also gets a $150 per student payment—from the $127 million figure mentioned above—for a total of $9,965 per student. With the categorical payment eliminated next year, revenue in the typical district declines 1.5% to $9,815 per student and approaches 2009 levels. In 2017, the payment is restored at about $165 per student and the district’s total rises to $9,980, or $15 above 2015 levels.

 

 
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