Thursday, January 16, 2014

It's a $1 billion surplus....AND a $1 billion deficit!

The big Wisconsin fiscal news of the day is that the Legislative Fiscal Bureau said that strong state revenue numbers from the last 6 months and a good economic outlook for the US meant that they were upping their revenue forecasts for the state's General Fund by nearly $912 million through the middle of 2015. The end of 2013 generally shown strong increases in revenues compared to the same time in 2012, and it explains part of the reason behind the state's surplus, even with income taxes being reduced in the 2013-14 fiscal year as the Koo-Koo tax cuts take effect.. general fund taxes are estimated at $14,399.9 million in 2013-14 and $15,017.2 million in 2014-15. These amounts are higher than the previous estimates by $387.7 million in the first year and $505.0 million in the second year. The biennial increase is $892.7 million, or 3.1%. The estimates for each of the three major taxes, and the cigarette tax, have been increased significantly, primarily based on strong year-to-date collections data. Smaller adjustments have been made to the estimates for the other taxes.

Individual Income Tax. State individual income tax revenues were $7,496.9 million in 2012-13 and are currently estimated at $7,410.0 million in 2013-14 and $7,800.0 million in 2014-15. Relative to the previous figures, the current estimates are higher by $115.2 million in the first year and $149.9 million in the second year. On a year-to-year basis, the current estimates reflect a decrease of 1.2% for 2013-14 and an increase of 5.3% for 2014-15. The revised estimates incorporate a number of law changes estimated to reduce revenues by approximately $350 million in 2013-14 and $385 million in 2014-15. The most significant law change is the income tax rate reductions and bracket reconfiguration enacted as part of 2013 Wisconsin Act 20. Those changes are estimated to reduce collections by $328 million in 2013-14 and $320 million in 2014-15. Act 20 contained a number of other provisions intended to simplify the state's income tax system, but they have a less significant fiscal impact.

General Sales and Use Tax. In 2012-13, state sales and use tax collections were $4,410.1 million, which was 2.8% higher than the prior year. Sales tax collections through December, 2013, are 7.9% higher than the same period in 2012-13. Accounting for law changes and a one-time tax refund paid in August of 2012, adjusted year-to-date sales tax collections are 6.8% above the same period in 2012-13. State sales and use tax revenues are currently estimated at $4,640.0 million in 2013-14 and $4,815.0 million in 2014-15, which represents increased revenue of 5.2% in the first year and 3.8% in the second year. These estimates are $142.4 million higher in the first year and $207.8 million higher in the second year than the previous estimates.
The LFB also notes that's agreement to collect Wisconsin sales taxes is giving an estimated boost of $28 million a year (since people weren't reporting the sales tax they should have been paying earlier). Also noted is a surprising increase of cigarette taxes, which the LFB says is due to Minnesota raising cigarette taxes past the Wisconsin rate, which encouraged Minnesotans to cross the border to get their smokes (and should be a cautionary tale about what may happen if Wisconsin has a large rise in sales taxes).

First of all, an option would be to ride things out and see what holds through the end of June 2015, and if the revenues hold out, $443 million would be banked into the state's Budget Stabilization Fund, giving solid protection against future economic donturns. Not surprisingly, with an election coming up in 9 1/2 months, the Republicans running the Legislature and living in the Governor's Mansion don't want to do that, and being Republicans, they'd rather follow in the ways of George Bush and blow this surplus revenue on tax cuts. Governor Walker even sounded like Bush today with his reasoning.
When we took office in 2011, we pledged to do away with the failed policies of the past and confront the fiscal and economic crises we faced. We made tough, but prudent, decisions over the last three years, and now our bold reforms are producing bold results for the people of Wisconsin. The additional revenue should be returned to taxpayers because it’s their money, and my administration will work with the Legislature to determine the most prudent course of action.
Actually, a decent amount of that excess money was taken from public employees and low-income Wisconsinites, but we'll let that obvious point go. What'll be interesting to watch for is to see if the proposed tax cuts that Walker will propose in the State of the State address will be income-tax based, property-tax based (through shared revenue increases and/or rebates), or some other type of reduction.

Of course, I have strong confidence that whatever Walker and the Legislature chooses to do will be the wrong thing, and not only because trickle-down economics is a total failure when it comes to creating jobs and raising living standards. It's also because other Wisconsin services and funds have serious funding needs that go past the $912 million in extra revenues.

The first involves the human services deficits that I have touched on the past. Because of increased poverty and Walker's silly pose on Obamacare, the state has to either come up with more funds for the state's low-income individuals, or subject them to serious cuts. Even the LFB mentioned the $92.6 million shortfall in Medicaid for this biennium in this revenue update, and the surplus announced today makes the decision to kick off 89,000 Wisconsin adults and children onto the Obamacare exchanges instead of spending $43 million to cover them for 3 months especially cruel.

And there are other needs that are gaping in the state, which makes this piece of Walker bragging especially dishonest.
The days of billion-dollar deficits and double digit tax increases are over, and we have led ourselves into a new era of financial responsibility and continued investment in Wisconsin’s priorities. Our state is heading in the right direction, and together, we are moving Wisconsin forward.
Well, being last in the Midwest for job growth and bottom 10 in the nation isn't exactly "moving forward" over your 3 years, Governor. And the days of billion dollar deficits are most certainly NOT over, because we have one in Transportation.

That's right, the Transportation Fund is even worse off than DOT Secretary Mark Gottlieb revealed last weekend (here's the link to my analysis of that issue). The LFB goes into that issue in the revenue estimates, and says that despite the Transportation Fund having an $84.6 million cushion for this biennium, the extra needs put them heavily in the red for the next budget.
...while the transportation fund is projected to have a positive, biennium-ending budgetary balance, the fund faces a structural imbalance heading into the 2015-17 biennium. In 2014-15 (the base year), total revenues, net of revenue bond debt service, are $11.4 million above total transportation fund expenditures. However, of the 2014-15 revenue total, $123.5 million is provided with one-time transfers from other funds ($107.5 million from the general fund and $16.0 million from the petroleum inspection fund). Without the one-time transfer revenues, base expenditures exceed base revenues by $112.0 million annually. Therefore, over the 2015-17 biennium revenues would have to grow by $224.0 million to fund expenditures at the 2014-15, base-year level.

In addition, other factors will increase current law expenditure commitments in the 2015-17 biennium. First, Act 20 provided a 4% increase in calendar year 2015 for the mass transit assistance and general transportation aid programs. Since only a portion of the 2015 aid increase, in both programs, is funded in 2014-15, an additional funding increase would be required in subsequent fiscal years to fully fund the increase. For the general transportation aid program, an additional increase of $9.0 million will be required in 2015-16 (or $18.0 million over the biennium if the 2015 aid level is continued), while in the mass transit assistance program, an additional increase of $3.2 million will be required in 2015-16 (or $6.4 million over the biennium). Assuming that the 2015 aid level is fully funded and that level is maintained, these commitments add $24.4 million to the structural imbalance.

Further, growth in transportation fund debt service, on currently-authorized bonds, will further increase 2015-17 expenditures. Typically, the full, annualized debt service on bonds authorized in one biennium is not paid until the following biennium. Based on current bond issuance assumptions, the Department of Transportation estimates that debt service on currently-authorized bonds will grow by $41.9 million in 2015-16 and by $45.9 million in 2016-17, above the 2014-15 base, for a biennial total of $87.8 million. Finally, the calculations described above do not include the impact of any other costs that the state may incur in the 2015-17 biennium in excess of the 2014-15 appropriation base. Notably, the Department of Transportation estimates that continuing work on the Zoo Interchange and Hoan Bridge projects in Milwaukee County will cost $957 million in the 2015-17 biennium. By comparison, the 2014-15 base appropriation for the southeast Wisconsin freeway megaprojects program is $86 million.
So over the two years of the biennium, the extra cost for the Milwaukee-area projects vs. this budget will be $785 million!

Let's add this up, shall we?

2015-17 start: +$84.6 million
Excess expenditures 2015-'17: -$224.0 million
Keep GTA and Transit aids level: -$24.4 million
Higher debt service due to borrowing: -$87.8 million
Extra costs for Milwaukee-area freeways: -$785.0 million


Hmmm, $1 billion up on one hand, but $1 billion down on the other. Sounds like we're basically even, aren't we? It also means any income or property tax cut that Walker may propose has to be made up with higher gas taxes, registration fees, or even more borrowing for Transportation in the other one.

Seems to be a straightforward solution to me- take care of our needs, move some funds from the General Fund into the Transportation Fund, and save some of the rest until we can see just what effect the Koo-Koo tax cuts will really have on revenue. Of course, this answer is far too pragmatic for this crew, so get ready for the exploding deficit come 2015!


  1. As ever, thanks for the detailed analysis, Jake.

    But do note that it's not a $1 billion surplus for the general fund, but rather a $1 billion projected balance at the end of FY15: when Act 20 was enacted the general fund was projected to lose $514 million over the course of the biennium which is now a projected surplus of $282 million (and the July 1st, 2013 opening balance jumped by $89 million for a reason I can't recollect this moment). So our state's general fund is setting up to do a nice little tail flap, but isn't going to manage a whale breach.

    If the $912 million upwards revenue re-estimate holds good for the base into 2015-17 then without policy changes that biennium will see a $367 million surplus for the general fund, still a very long way short of being able to balance overall although it would leave the general fund (just about) able to write a billion dollar check to bail out the transportation fund. However, the Zoo Interchange work will keep needing funding until at least 2018.

  2. To add off of your point, Geoff, if this crew either transfers money to the DOT or blows it on tax cuts, it'll grow the structural deficit for 2015-'17. These guys better pray we get a '90s-style next 3 years, or else we have a major fiscal crash coming. They're out of bullets without bigtime job and wage growth

  3. Well, seasonally-unadjusted CES overestimated QCEW private sector job growth in the first half of 2013 by about 25,000, which is more than seasonally-adjusted CES estimates we gained during that period.

    The apparently promising first 11 months of 2013 CES (+40,700) is not that likely to be reflected in QCEW figures. In March they'll be benchmarked and we'll have December QCEW in May (or June if the DWD leaves it to the BLS to release them this time).