In state capitols across the country governors and legislatures have been forced to put all of their energy into solving enormous fiscal shortfalls. Given their dependence on income tax and sales tax revenues, the 2001 recession hit state governments particularly hard. In 2003, no fewer than 39 states, including Wisconsin, experienced budget gaps.
During the 1990s, state treasuries across the country benefited from a robust economy. Every year in the 1990s Wisconsin state government collected more revenues than had been expected when the budget was prepared —in some years, significantly more. The Governor and the Legislature thus had the luxury of debating what to do with the “extra” funds. While the debates resulted in some of the funds being returned to the taxpayers, the bulk of the dollars were devoted to higher spending. A boost in school aids, Medical Assistance increases, and higher spending on a swelling prison population led a long list of spending categories.
The new millennium brought with it a softening of the U.S. economy and a significant fall off in the growth of Wisconsin’s tax collections. After the decade of the 1990s, in which annual revenue growth averaged 6.9%, the first four years of the 2000s saw a 7% reduction in revenues. With good economic times in the rearview mirror, policymakers were forced to look at state finances much more critically. January 2003 greeted a new Governor and a new Legislature with a gaping budget hole of $3.2 billion. Another shortfall, now estimated at $1.6 billion,6 will face the Governor and the incoming Legislature as they construct the 2005-2007 biennial budget.
New spending initiatives will once again be relegated to the back burner. The Capitol will be filled with talk of program cuts, spending freezes, and other measures to ensure that past fiscal mistakes will not be repeated. The state’s fiscal predicament has become so pervasive that serious consideration is being given to amending the state Constitution to guarantee future fiscal restraint at both the state and local level throughout Wisconsin.
Much attention has been given to analyzing the causes of Wisconsin’s financial troubles. One analysis showed that the state’s budget troubles could be traced to three factors: an elevated level of spending during the 1990s, a tax reduction that went into effect in 2001, and the downturn in the national economy. If any one of these three had not occurred, Wisconsin might have been able to withstand the downturn in revenue collections. However, all three occurred and the state is still reeling from the perfect budget storm.
As with any crisis, the postmortem review uncovered signs of the pending trouble that could have been heeded. Often these signs were obscure and would not have been evident at the time. However, in Wisconsin there had been a forewarning, which clearly predicted eventual fiscal problems.
The state controller, responsible for monitoring state finances, had been waving an unmistakable red flag from the fourth-floor window of the Administration Building just two blocks from the Capitol every year since 1990. He didn’t just predict the state’s fiscal trouble and, as would be expected of a CPA, he put a number on it.
Year after year, the controller issued a report, imposingly titled the Comprehensive Annual Fiscal Report (CAFR). It showed that, year after year, the state was operating in the red; for decades Wisconsin had made one decision after another to live beyond its means. And, each year the head of the Legislative Audit Bureau verified the con- troller’s finding that, indeed, the state was living beyond its means.
But each year the controller’s report garnered little reaction from either the public or from state policymakers. The release of the annual CAFR was given scant attention. However, a thousand miles away on Wall Street, analysts were paying attention to the controller’s report. Those cool calculating analysts and investment bankers who under- write Wisconsin’s bonds saw the problem in the early 1990s and grew increasingly troubled as they watched Wisconsin’s deficit grow to its current level.
As the state’s revenue stream slowed to a trickle in 2001, it was no longer possible to ignore the deficit documented by the controller. An ever-growing number of analysts, reporters, and policymakers found themselves scrambling to understand the CAFR. In December 2003 the controller once again waved his annual red flag. His report showed that the state deficit had grown to $2.2 billion, which equated to 21% of total tax collections. Recently, the controller issued the CAFR for 2004 showing the deficit declined slightly to $1.9 billion.
Will policymakers act on the warning from the controller? Only time will tell.
The task will be more difficult because Wisconsin keeps two sets of books: one showing Wisconsin state government with a $1.9 billion deficit and another set showing the state’s finances to be in balance. In nearly every instance when a business or government maintains two sets of books, one is clearly intended to portray the operation in a more favorable light. A financial document, produced every year, showing Wisconsin’s finances in the black is reassuring to those unaware of the true fiscal picture. However, given current circumstances, with fiscal challenges at every turn, perhaps more elected officials are beginning to heed the warning from the controller’s office.
This report will look behind the competing fiscal documents, explain how the $1.9 billion deficit came to be, and what it means to Wisconsin. Further, the report will analyze the impact of this deficit on Wisconsin and will realistically review the options facing policymakers in addressing this deficit.