The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

May 14, 2008

The fix that fixes nothing

Here is the easiest headline that can be written for an opinion about the state budget repair deal created by legislative leaders Monday, approved 17–16 by the Senate Tuesday, and scheduled to be voted on by the Assembly Wednesday:

Deal or no deal?

No deal

I would opine that the agreement to fix the estimated $652 million state budget shortfall is an example of state government’s financial chickens finally coming home to roost, except that this appears to be a yearly occurrence in this state. In fact, this has been an annual occurrence since 1997, the year after the last time a budget that included no commitments to future budgets, or “structural deficit.”

How awful is this “deal”? Let us count the ways (thanks to Boots and Sabers):
  1. The cuts in this budget total less than one-half percent of the budget. That’s the budget equivalent of cutting the last cup of coffee from your daily consumption, if that.
  2. But it includes a $15 million tax increase by eliminating deductions for “certain rental and interest payments by businesses to related entities.”
  3. It includes yet another raid on the transportation fund, $50 million, creating a transportation fund deficit of $28 million, which in turn will obligate taxpayers to pay back the bonds (with interest) that are covering that transportation fund deficit.
  4. Delaying $125 million in school aids into the 2009–11 budget cycle creates an instant $125 million addition to the state’s structural deficit (more about that later). That’s on top of the $125.4 million in debt payments being pushed out of this budget cycle into the ’09–11 budget cycle, so now a $250 million budget crisis next year is under way.
  5. And speaking of schools, it requires that any school district that operates a four-year-old kindergarten program offer it to all students instead of, for instance, students who go to schools in low-income areas or students deemed to need four-year-old kindergarten. The name for that is “unfunded mandate.”
  6. It also delays until 2009–11 the implementation of the federal Real ID act. Which might seem insignificant except that vehicle registration fees increased a year ago to pay for the Real ID act, which means our increased registration fees are also now part of the budget fix.
  7. A state that already has insufficient reserves (according to the Wisconsin Taxpayers Alliance, states average almost $1 billion in budget reserves, but Wisconsin’s are estimated at $65 million at the end of the 2008–09 fiscal year) now will have just $26.26 million in reserve funds as of June 30, 2009 — $1.26 million more than the legally required $25 million balance. (That $25 million requirement is reduced from the previous $65 million balance requirement, which apparently was needed to fix this budget hole.)
Apparently Republican-leaners are supposed to be happy because the budget doesn’t include the proposed hospital tax, which would be a tax increase, of course, on those paying for health care — the readers of this magazine and Web site. It also doesn't include combined reporting, in which businesses would be required to pay taxes on all their income, not just income generated in Wisconsin. (Don't assume either of those ideas is dead, though.) From here, those are the only good thing about this entire mess.

You can’t disagree with Rep. Stephen Nass (R–Whitewater), who says,
“Any legislator that supports this kind of budgeting malfeasance is guilty of political fraud on the taxpayers of this state.” Which, as of Tuesday night, includes 17 state senators, including, in Marketplace's circulation area, Sens. Roger Breske (D–Eland), Dave Hansen (D–Green Bay) and Julie Lassa (D–Stevens Point).

None of this does a thing to deal with the state’s real budget deficit, either — the deficit based on Generally Accepted Accounting Principles, upon which most states, but not Wisconsin, base their budget calculations — and that deficit is estimated at $2.15 billion. Pushing spending into another budget cycle also worsens the state’s structural deficit, which now sits at $1.7 billion.

The temptation is to just throw up your hands and assume that state government is not only broken, but can’t be fixed at all.
I see no state legislators with the courage to propose $652 million in budget cuts, which would total less than 5 percent of state General Purpose Revenue spending. (And to all those who claim that, well, yes, we have high taxes, but we have a high quality of life: Our quality of life has absolutely, positively NOTHING to do with government. And to all those who claim that, well, yes, we have high taxes, but we have high-quality government services: Prove it.)

Yet, “What is not readily understood is that the cost of operating state governments accounts for only 17 percent of general fund expenditures,” says Wisconsin Taxpayers Alliance
President Todd A. Berry. “The public and press often presume that cutting state agency budgets can solve a budget problem, yet the uncomfortable truth is that more than four of every five dollars in the state budget are spent elsewhere.”

As much as I’d love to see, say, the State Patrol eliminated (the state would be financially better off sending the money it spends on the State Patrol directly to sheriff’s departments), or cutting, say, 16 percent of state employees or the state payroll (see the next paragraph), Berry’s observation shows why fixing state finances can’t stop at state finances. In Wisconsin’s federal-like system, with as much money the state gives to municipalities, counties and school districts, the state has the right to decide how much gets spent, and on what. (The late Gov. Lee Dreyfus had his own version of the Golden Rule: “He who has the gold makes the rules.”) A Taxpayer Bill of Rights that sets spending limits on every level of government in Wisconsin, not just state government, and limits that are almost impossible to circumvent, is long overdue. The fact that, for instance, Wisconsin teachers get 50 percent more employee benefits than the national average helps explain why our taxes are out of sight, and yet the state lives in a perpetual state of budget crisis.

Given the impact of lower tax revenues from a slowed-down economy (the Legislative Reference Bureau estimates tax revenue growth at only 2 percent, less than half of the average of 5.5 percent), it’s unlikely that the state’s long-term budget impacts can be addressed at all until the economy picks up again. And if state legislators are unwilling to suggest cutting the state budget by 5 percent to cover the cash deficit, how likely are they to suggest cutting state spending by 16 percent to cover the GAAP deficit?

The Wisconsin Policy Research Institute wrote this:
The current budget shortfall will require the Governor and the Legislature to make deep cuts that will affect nearly every citizen. One would never have imagined a problem of this magnitude a few short years ago, when the economy was robust and state government seemed able to attack nearly every problem with a new spending initiative. The feast-or-famine nature of Wisconsin’s budgeting practices is extraordinary and stands to disrupt the lives of millions of citizens.
I forgot to add something to the first sentence of this paragraph: The Wisconsin Policy Research Institute wrote this ... in 2003. What has changed since then?

The WPRI’s 2003 study had several recommendations:
  • Create a long-range plan to determine “how much state government (or state and local government) can spend and tax its citizens over an extended period of time,” preferably included in the state Constitution and including provisions that prohibit governors or legislatures from exceeding the limits.
  • Create an Economic Council, made up of the directors of the Legislative Fiscal Bureau and the Legislative Audit Bureau, the state budget director and the secretary of revenue (both of who are appointed by the governor), plus “three financial experts from the university and business communities,” which would provide the state’s official economic forecast and create spending parameters for each budget based on the spending plan. (I would support this if I didn’t suspect it would be an excuse to add another 100 state employees.)
  • Require a 2 percent reserve in each budget. (In contrast, the budget fix would leave a budget reserve of 0.19 percent.)
  • Use one-time revenues (for instance, the tobacco settlement) to fund the budget reserve, not new spending.
  • Reduce the aforementioned GAAP deficit with the goal of eventually changing the state budget from cash accounting to accrual accounting.
Those are all long-term goals. The first thing to do is for either the Legislature to kill, or Gov. James Doyle to completely veto, this non-fix budget fix, which only makes the state’s financial fix worse, and to go back and create a real budget repair that doesn’t use accounting tricks, doesn’t raid from funds that are not supposed to support general spending, and doesn’t make things worse.

To quote the Wisconsin State Journal, “
If you find yourself in a hole, the first thing to do is stop digging.”

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