About that current-year Wisconsin deficit? It's still there

I was curious to see if Governor Walker’s budget had any comments or actions regarding the $283 million current-year budget deficit the Legislative Fiscal Bureau projected in their revenue estimates from a couple of weeks ago. This is particularly noteworthy because by law, there must be a budget repair bill if “the Secretary of the Department of Administration determines that previously authorized expenditures will exceed revenues in either year of the biennium by more than 0.5% of the estimated general fund appropriations for that fiscal year.” For the fiscal year ending June 30, that’s a little less than $80 million – which means the projected shortfall is more than $200 million more than that.

Well, the only reference to the 2014-15 budget situation is in Table 4 of the Governor’s Budget in Brief (thanks to poster GeoffT for pointing this out), and the general answer is that there is no formal bill that would take care of this deficit, but that somehow the Walker Administration will take care of it.

So how would this gap be closed? Part of the answer is that the Potawatomi will now pay the state $49 million as a thank you for rejecting the Kenosha casino their two-year payment to the state as part of their gambling compact. For the rest, compared the numbers in the LFB’s revenue estimates with the Budget in Brief, and got these differences.

Closing 2014-15 gap of $234 million
Other Departmental revenues: UP $1.8 million vs LFB
Gross Appropriations + Sum sufficient: DOWN $4.3 million
Compensation Reserves: DOWN $98.0 million
Lapses: INCREASE by $130.4 million
TOTAL: $234.5 made up, $300,000 in reserve.

The first two seem possible, although I'd like to see what went into the assumptions as to how they get to those numbers. But the big numbers are the Compensation Reserves and the Lapses. The Compensation Reserves are basically extra funds set aside on top of the amount appropriated to expenses, and this summary from the last budget describes why it’s added in.

Typically, amounts within the compensation reserves are funds to pay for such items as: (a) the employer share of increased premium costs in the forthcoming fiscal biennium for state employee health insurance; (b) the costs of any general wage adjustments or negotiated pay increases; (c) increases in the employer share of contributions to the state retirement fund for employees' future state retirement benefits; and (d) pension obligation bond payments for the state's unfunded prior service liability for retirement benefits and the accumulated sick leave conversion credit program.

In the first year of the biennium, only $57.9 million of the $78.75 million set aside in the Comp Reserves was used, (shown on Page 15 of this report) allowing nearly $21 million to lapse back into the General Fund(it’s worth noting that the 2015-17 budget only accounts for $29.5 million COMBINED in this Comp Reserve. Good luck with that).

What the Walker budget document anticipates is that only $35.0 million of a budgeted $133.0 million will be spent out of the Comp Reserves for this fiscal year. This seems overly hopeful, given that classified employees received a 1% pay increase at the start of Fiscal Year 2014-15, but perhaps the state is able to realize some savings from the employer (and employee) contributions to the state’s pension fund. That required contribution dropped to 6.8% from 7.0% of pay for 2015 largely as a result of the WRS pension fund’s strong returns in the stock market in recent years.

It is also possible that the increase in fringe benefits is lower, reflecting smaller increases in health care costs that have happened in the Age of Obamacare. Not that the Walker Administration would ever admit this, but it would be quite ironic to see Obamacare’s “bending of the cost curve” be a big reason why they would avoid the inconvenience of having to do a budget repair bill as Walker ramps up his presidential bid. A bid which has as one of its planks….defying and repealing Obamacare.

So this $98 million in Comp Reserves savings seems very ambitious, but if it is to happen, it’s only due to the Obama Recovery on Wall Street and the cost-containment that’s happened due to Obamacare. Hilarious!

The other area to look at is the lapses. The $130 million in additional lapses that is built into Walker’s budget plan for 2014-15 brings that total to $454.8 million for this fiscal year, or 2.87% of the Gross Appropriations. This would be well above the $345.2 million and 2.3% in lapses that we had in the last fiscal year. Outside of a memo by UW System President Ray Cross after word of the major UW cuts leaked out last week, I know of no other agencies that have been put on cost controls (although if I’m wrong, feel free let me know).

With that being the case, I’m wondering where all of these extra lapses might come from. My guess is that the Walker Administration is just hoping and praying and trying to avoid the issue. But I’m betting they won’t be able to do so much longer, as I am extremely skeptical that the revenue estimates that are out there will hold for the last five months of the fiscal year. Again, I’ll direct you to the LFB’s revenue estimate paper from two weeks ago, which counts on a major increase in income taxes starting in January 2015 and carrying through to the end of June.

…Over the remainder of 2014-15, it is anticipated that collections will increase by 15.1% due to several factors. First, refunds for tax year 2014 will be significantly reduced and final payments will be increased because of the decreased amount of withholding taxes paid since last April. Also, beginning in April, 2015, growth in withholding collections should improve significantly because the current-year receipts will no longer be compared to collections that were based on the previous, higher withholding tables. In addition, it is believed that federal tax increases enacted late in 2012 induced taxpayers to realize additional investment income in that year, which otherwise would have been realized in 2013. This is believed to have artificially suppressed collections last Spring, which should lead to a "bounce-back" this year. These positive impacts will be partially offset by the effects of state tax reductions, primarily the decrease in the bottom marginal tax rate enacted in 2013 Act 145 and the continued phase-in of the manufacturing and agriculture credit.

While I agree that the lower tax refunds are going to help the income tax numbers vs last year (but it’ll sure piss off a lot of unsuspecting Wisconsinites), the other parts I’m not so sure about. The “bounce-back” thing, and a 15.1% increase in overall revenues, which will blunt the corresponding drop that will happen due to rent-seekers on those tax credits? I’ll believe that result when I see it.

We should start to get an indication on the revenue figures in the near future, with January’s figures scheduled to be reported in 2 weeks, and the “tax season” months of February, March and April giving the definitive details. If those don’t reach the LFB’s lofty projections, look out below!

To summarize, some of the current-year budget adjustments that the Walker Administration says it will take care of seem to be in reach, particularly involving the Gross Appropriations, and perhaps even the Comp Reserve cuts (with a lot of help from President Obama’s accomplishments). But if the Walker Administration can’t lapse the $109 million extra it says it will, or if revenue figures continue to disappoint as they have in the first 18 months of this budget, then a budget repair bill will have to happen. And there will be very little time to correct the damage, leading to huge short-term cutbacks or budget tricks that have to be played.