A $2 billion deficit in Wisconsin? It's not as scary as you think

The Milwaukee Journal-Sentinel had the alarming headline on its website of “Wisconsin could face a budget gap of as much as $2 billion over two years.” That seems quite significant, and it's a different picture from what we had seen in recent weeks. So what’s going on with this?

State spending is projected to outstrip revenue by at least $373 million over two years unless lawmakers cut expenses, raise taxes or get a boost in federal aid, according to a report released Monday.

That spending gap assumes the state doesn’t commit to new spending despite rising costs. When increased health care expenses, other costs and a potential boost in school aid are taken into account, the budget shortfall could swell to more than $2 billion, according to the report by the nonpartisan Wisconsin Policy Forum.

Well, let’s go into the Wisconsin Policy Forum’s report, and see what they’re talking about. Here’s the chart that they include with their analysis.

While there is a legitimate point to be made that the state would spend more than it takes in as-is (aka the “structural deficit”), that $373 million leaves out that the State of Wisconsin is projected to carry over $1.22 billion on June 30, 2021. There is quite a bit of cushion to deal with, and this budget comes out just fine if we limit the budget to that minor structural deficit.

The bigger concern is that costs are also going to go up along with revenues. If you start adding in that inflation, along with extra needs and initiatives over the next 2 years that are part of any budget debate, and the imbalance gets a lot bigger.

That would use up all of the $1.22 billion carryover, and then there would have to be an additional $838 million in tax increases or budget cuts that would have to be found in order to have the budget pass muster.

This isn’t an overly unusual situation, as we had an structural imbalance of nearly $269 million going into Scott Walker’s last budget 4 years ago, and agency budget requests outpaced expected revenues by $1.6 billion at this point 2 years. We also have increased the amount of carryover funds that are available today compared to prior years. So while the headlines are scary, it's a manageable situation if we continue to have decent economic growth.

But that underscores the real budget issue in Wisconsin. The state and the country is in a worse economic situation than at pretty much any time in the last 10 years, and that is the larger threat more than any kind of “structural” deficit. The Wisconsin Department of Administration's revenue estimates expect an increase in tax revenues from FY 2020 to FY 2021 (despite a drop in average employment and a new income tax cut), and then having tax revenues bounce back by 2.0% in FY 2022 and 3.6% in FY 2023. But what if employment and incomes stay depressed as we remain in the significant jobs hole that exists at the end of 2020?

The other significant wild card is how much aid will come from DC to help the budget of Wisconsin and other states. This federal assistance through the CARES program and other relief efforts is a big reason why the State’s budget has held up well in 2020, despite the loss in jobs and higher enrollments in state services. But CARES assistance is set to run out in 3 weeks, and with no agreement on further stimulus (or even regular federal funding) in place as of this time, that is a major variable in finding out if the State has to take on the extra needs and costs that exist in 2021, or if these services will continue to be covered more by the Feds.

And those needs have continued to persist. Just last week, we found out that Medicaid enrollments rose by more than 16,000 in November, continuing a steady rise in Wisconsinites needing that form of medical assistance since COVID-19 started breaking out.

If you dig into the Legislative Fiscal Bureau’s summary of budget requests, and then look at what the Department of Health Services projects for enrollment (which is around Page 80), and we’re still OK if the rise in Medicaid enrollments end in the next few months.

As you can see on the chart above, that elevated enrollment and added costs would result in an increase of $1.15 billion in taxpayer dollars in the 2021-23 budget. But the Policy Forum mentions that there is a way that could cut those huge Medicaid costs in the next budget without reducing services to those in need.

In addition to its reserves, the state might be able to draw on funds from a potential new federal coronavirus relief package to help close the gap. State elected officials also could consider expanding Wisconsin’s Medicaid program using additional funds available through the federal Affordable Care Act, which would save a projected $588.3 million over the two-year budget, according to DHS. However, the prospects for a new federal aid package are uncertain, and state lawmakers have repeatedly rejected proposals to expand Medicaid.

But if the budget is as tough as the Policy Forum claims it to be, and if no help is coming from DC, can the WisGOP Legislature afford NOT to expand Medicaid. Especially when the other options to balance the budget might be much worse for their political futures and cause more voter anger?

I mean, if WisGOP used a recession-affect budget deficit as their excuse to bust public sector unions 10 years ago, they certainly can use a budget deficit as their excuse for doing a thing for good this time. Riiiiight?