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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Minding the GAAP: National Comparisons

Wisconsin’s general fund deficit reported in its annual financial statement declined for the third consecutive year and is now less than half as large as in 2011. However, when compared to other states, our fiscal position is not quite as rosy. That is the leading news that came from the December release of Wisconsin’s Comprehensive Annual Financial Report (CAFR).

The CAFR is produced by state accountants and reports state finances using generally accepted accounting principles (GAAP) as opposed to the cash accounting used for state budgeting. A simple example can help explain the difference between the two. Under cash accounting, when Sally buys a new appliance in December with a credit card, no money is considered “spent” until the credit card bill is paid, presumably in January of the following year. Under GAAP accounting, Sally’s charge is a December expenditure; she bought and owns the appliance.

As discussed in our recent Focus newsletter, the state’s GAAP deficit at the end of June 2014 was $1.38 billion, down from $1.73 billion in 2013 and $2.99 billion in 2011. The decline was due primarily to higher ending balances in the state’s general fund and less over-withholding of income taxes due to revisions last spring.

In addition to allowing a look at state finances through accountants’ eyes, GAAP reporting is useful because its uniformity permits comparisons across states. Although 2014 figures are not available for all states, 2013 figures show the Badger State still has work to do.

Very few states have a GAAP deficit. In 2013, the number—which included Wisconsin—totaled six. On a per capita basis, Wisconsin’s deficit ($303) was the third largest behind only Illinois ($570) and California ($375). Even with the improvement in 2014, the Badger State will likely remain in that spot.

Moreover, GAAP deficits have been more persistent here than in almost every other state. Since 1992, only two states have reported GAAP deficits every year: Wisconsin and Illinois. On a per capita basis, Wisconsin’s were larger in every year during 1992-2008. Since then, the tables have turned. However, the Badger State has a long way to go to join the other 44 states with GAAP surpluses.

 

 
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