Sunday, February 18, 2018

Sorry Guv, but CAFR shows all you've done is can-kicking

In this last week, we had the long-awaited release of Wisconsin's Comprehensive Annual Fiscal Report (CAFR). And Governor Walker used the opportunity to brag about how the state's finances looked at the end of the 2017 Fiscal Year, on June 30.

(By the way, nice use of state resources for campaigning, guv).

Not mentioned by Scotty was that the Legislative Audit Bureau took a second look at the CAFR, and noticed that a few high-amount transactions were missed and/or mislabeled. This means the real final numbers ended up being a bit different.
In addition, in conducting our audit work related to the State’s General Fund financial statements to be presented in the State’s CAFR, we questioned a $38.2 million increase in a liability that, after discussion with SCO staff, was determined to be the result of an error in the cash balance for the General Fund as of June 30, 2017. The error had been appropriately identified as a reconciling item in the bank reconciliation process and was corrected on STAR in fiscal year (FY) 2017-18. However, SCO staff did not ensure the error was considered for FY 2016-17 financial reporting. This error resulted in a $38.2 million overstatement of the General Fund cash balance as of June 30, 2017.

Further, after we discussed these errors with SCO staff, we were informed that SCO had identified a third error that occurred during the implementation of the STAR payroll module, Human Capital Management (HCM), in FY 2015-16. This error resulted in a $7.3 million understatement of the General Fund cash balance on the June 30, 2017 financial statements.

Finally, as part of our audit of the bank reconciliation, we raised questions regarding an outstanding receipt of $9.6 million that was deposited in the bank in March 2017, but was not yet recorded in STAR as of June 30, 2017. SCO staff researched this reconciling item and identified that it related to a deposit that had been made to a disbursement account. This error resulted in a $9.6 million understatement of the General Fund cash balance on the June 30, 2017 financial statements.
Put that together, and it means that the “surplus” Walker keeps claiming is actually $21.3 million less than what we thought it was. It's still $558 million at the end of FY 2017, but it also drops the 2017-19 budget's cushion to $364 million. And that's before we begin to account for all of the goodies Wal(typical borrowing er and the WisGOP Legislature try to give away in the next few weeks.

Another main part of the CAFR includes the GAAP accounting balance. This figure improved from $1.723 billion to $1.626 billion, but that's only an improvement of $96.7 million while the cash balance went up by $248 million (before the $21 million adjustment LAB found).

So where did the other $151 million go? Even if you account for designated, multi-year appropriations going down by $80 million (as you'd expect in the 2nd year of a 2-year budget with many funds having a 2-year life on them), there is still a $71 million difference in the GAAP budget, which indicates a higher amount of delayed payments to other governments and entities. In other words, exactly the opposite of what "reformer" Scott Walker was promising voters in 2010.

The CAFR also gives information about the state's debt standing, and unlike how Walker and WisGOP try to portray it, what we owe went up in all areas in Fiscal Year 2017. This is on page 40 of the PDF, and the change is compared to what we ended FY 2016 from.

General Government Obligations $6.190 billion (+$135.4 mil)
Annual Appropriation Bonds $3.114 billion (+$81.5 million)

Revenue Bonds (mostly DOT-related where registration fees pay it off) $2.315 billion (+$57.9 million)

So debt continues to go up on all sides, and another interesting sidelight of the CAFR shows the schedule of when debt is supposed to be paid off (it's on Page 111 if you're into that sort of thing). What it shows is that the amount the state is slated to spend in future years for debt went up last year. Some of this isn't surprising (any added debt will add to debt service), and in the 2 largest expenses of debt service, the higher payments only go up between $30-$40 million year, and even some of that is offset by money sitting in an escrow account from new debt.

But the real jump starts in Fiscal Years 2021 and 2022, where state taxpayers and car owners are expected to come up with more than $60 million more in 2021, and $140 million more in 2022.

That's bad enough for a higher tab to pay off in the future, but even worse is the situation involving Appropriation Bonds. In August 2016, the Walker Administration did a debt refinancing of $571 million to avoid a massive balloon payment in this current Fiscal Year. But as you can see, what they did is merely push off most of it until 4-5 years later.

Cute trick, eh? Yes, the Walker Administration has reduced total debt costs by quite a bit in the last year, due to these aggressive refinancings (an option that's going away as interest rates rise, by the way). But when we pay that off is also important to keep in mind. And it looks really bad in a few years.

The last part of the CAFR I want to point out is a new segment that began with this report.
Wisconsin statutes authorize tax abatements to encourage economic development and other actions beneficial to the State or its citizens resulting in a reduction in tax revenue the State would otherwise be entitled to collect. GASB Statement No. 77, Tax Abatement Disclosures, requires disclosure of tax abatement agreements entered into by a reporting government, along with agreements entered into by other governments, which reduce the reporting government’s tax revenues. Most tax abatement programs meeting the criteria for disclosure in the State’s CAFR are certified by the Wisconsin Economic Development Corporation (WEDC), a separate legal entity also reported as a component unit in the CAFR. WEDC enters into the abatement agreements and administers the programs. The Wisconsin Department of Revenue (DOR) is responsible for ensuring the certified tax abatements were properly applied when processing income tax returns filed by recipients.
Almost all of the abatements are WEDC business incentive programs.

Tax abatements, FY 2017
Historical Preservation Tax Credit $28.6 million
Business Development/Jobs Tax credit $26.6 million
Qualified New Business Venture $12.8 million
Enterprise Zone Tax Credit $8.8 million
Development Opportunity Zone Tax Credit $0.2 million

State Historical Society
Historical Homeowners Tax Credit $1.2 million


The notes from LAB indicate that this is a new reporting requirement, and I think this is simply informational, explaining how much in taxes we wrote off in the name of "economic development." And of course, that $78.2 million is ON TOP OF what the state already gives away with the Manufacturers and Agriculture tax credit, other corporate tax breaks, and wage suppression measures. And this number will explode if Foxconn ever opens up.

Bottom line on the CAFR - continued growth with the 2016-17 US economy also helped Wisconsin's books be balanced in the short term. But it also isn't nearly as sunny as the Walker Administration tries to portray it. And with the increased debt payments that are coming in the next few years, it would seem foolish to get rid of the tiny fiscal cushion we have on pre-election stunts. But let's face it, in a WisGOP that chooses politics over responsibility every time, they're likely to screw this up in this next month.

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