Sunday, August 31, 2014

Clearing up some budget confusion

I wanted to follow up on this week's revelation of the state's revenue shortfall of $281 million, and clear up a few conflicting items reported in the last few days.

The first tries to answer the question of "how much are we in the hole in Wisconsin? Here's what One Wisconsin Now put up on their whiteboard when the revenue numbers dumped on Thursday.



The Wisconsin State Journal story claimed the deficit was really $115 million, and even really smart dudes like UW Professor Menzie Chinn quoted the "$115 million deficit" figure. I replied in that Econbrowser article of Prof. Chinn's that I believe the real deficit for the 2015 fiscal year should be figured at $472 million based on the revenue shortfall, and here's my explanation for that (follow along with One Wisconsin Now's whiteboard if it helps you with the numbers).

When the LFB made their updated revenue projections in May 2014, after the latest round of Walker/WisGOP tax cuts was put in place, they figured we would end the 2014 fiscal year on June 30 with $14,229 million in tax revenues. Then they figured tax revenues would grow by 3.5% in FY 2015, based on the economy, inflation, and numerous other factors. Well, we haven't changed any laws that would change the rate of revenue growth in Wisconsin since then, so wouldn't it be logical to still assume a 3.5% increase in tax revenue, all other things being equal?

So we now know actual tax revenues came in at $13,948 ($281 million below what was predicted), and that would make the ending cash balance for FY 2014 at +$443 million, not the $724 that was originally projected.

A 3.5% increase from $13,948 = $14,436 in tax revenues FY 2015.

The old LFB prediction was 14,725 million for FY 2015

$14,725 - $14,436 = $291 million shortfall in FY 2015

If you plug that into the OWN whiteboard, it drops the total available for FY15 from $15,727 to $15,436.

$15,436 avail. - $15,843 appropriations = $407 million deficit

$407 million + $65 million in reserve = $472 million to be made up by June 30.

This is how one revenue miss compounds into further revenue misses, because you're starting from a lower number. This is also an explanation as to why I predicted this would balloon the 2015-17 structural deficit past $1.3 billion, if you plug the new revenue figures into other LFB calculations.

By the way, one other interesting note to bring up, courtesy of frequent blog commentator GeoffT. The two states run by Dems that border Wisconsin actually had revenue surpluses for the recently-completed fiscal year.

Minnesota was $168 million to the upside compared to its February projections, and $235 million better than what they predicted in April. The higher-than-expected revenues are noteworthy, because our neighbors to the west already had a projected $1.23 billion budget surplus BEFORE the higher revenues were known. This was mostly based on Minnesota's booming economy in 2013, the first year Dems resumed control of both houses of its Legislature (by comparison, Wisconsin had its lowest job growth of any of Walker's first 3 years in office in 2013, based on the Quarterly Census of Employment and Wages).

Illinois was $43 million to the upside in FY14 compared to what it thought it'd have this Spring, Income and sales taxes both beat expectations, and Illinois ended up with $1.3 BILLION in surplus revenues compared to what their budget bill planned for Fiscal Year 2014. However, the FIBs still have a backlog of bills worth billions of dollars, and got downgraded by S&P last month not because of excessive spending, but because their state Legislature decided to roll back tax increases put in place in 2011 to cut into that backlog of bills. When even the banks are saying "you really shouldn't follow the ways of Koch-sas Kansas and cut taxes", both FIBs and cheeseheads should keep it in mind.

Keep those realities in mind when the Walker folks try to argue that their way is superior to the way things are done in "Democrat states." Because the two closest blue state governments outperformed deficit-ridden Wisconsin in 2014 when it came to bringing in tax revenues. And Wisconsin's path under Scott Walker seems a whole lot closer to "broke" Illinois' than surplus-laden Minnesota's.

No, it's not working. Not at all.

1 comment:

  1. Given that FY14 growth was 2.0% behind projections, how likely is it that FY15 will actually meet the 3.5% growth projection? Together with the $93m Medicaid biennial spending overshoot, your 2013-15 deficit estimate is looking decidedly optimistic already.

    Right now though I think it's important to also bear in mind the legal aspects here as well as making reasonable extrapolations of the status of the Walker budget: if the LFB were to formally re-estimate FY15 revenue, it would certainly be significantly downwards from the May projection. But I don't think that there's any legal requirement for them to do that, at least not yet. So from a legal point of view, it would behoove us to consider ourselves stuck with the original projections of FY15 for the time being.

    That original projection was for FY15 gross appropriations to exceed tax & departmental revenue by $559m. In mid-October, the FY15 starting balance of the General Fund will cease to be an official projection and become a cold, hard fact. If FY14 departmental revenues come in on target and gross appropriations for FY14 don't undershoot projections by $36m or more, that cold, hard fact will be that the General Fund balance at the start of FY15 is $479m or less.

    At that point, projected gross appropriations for FY15 would exceed the starting balance + projected revenues by more than 0.5%. This is very critical, legally speaking, since that would set off the statutory trigger for a Budget Repair Bill just 2-3 weeks before the election.

    I trust that Burke has an advert waiting to roll and the legislative Dems have a legal team standing ready to compel Walker to obey the law.

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