Constitutional Change Would Limit State Budget

Proposed amendment barring budgets that violate GAAP principles would tie legislators hands.

By , Wisconsin Budget Project - Nov 18th, 2015 03:04 pm
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Wisconsin State Capitol. Photo by Rosina Peixoto.

Wisconsin State Capitol. Photo by Rosina Peixoto.

A proposed constitutional amendment that was scheduled for a public hearing this week is likely to have harmful unintended consequences. Although the proposed amendment – Senate Joint Resolution (SJR) 55 and its Assembly companion, AJR 66 – has the laudable goal of making state budgeting more transparent and more fiscally responsible, it would tie the hands of future lawmakers and delegate some of the authority to set budget parameters to an unelected private organization. One potential consequence is that Wisconsin could be prevented from withdrawing money from the Rainy Day Fund when that funding is needed most.

The proposed constitutional change would prevent lawmakers from passing a budget that causes or increases a deficit, based on Generally Accepted Accounting Principles (GAAP). GAAP is a set of accounting standards developed and periodically updated by a private national organization.  The constitutional amendment would also require that every year until the state has eliminated the GAAP deficit in the General Fund (and in any other fund), lawmakers would have to use at least 10 percent of that year’s growth in the revenue deposited in that fund to reduce the GAAP deficit.

SJR 55 was scheduled for a public hearing this Wednesday morning, November 18, in the Senate Committee on Government Operations and Consumer Protection.

The proposed restrictions on budget options are likely to preclude taking money from the state’s Rainy Day Fund during recessions, when revenue falls and the need for spending on social programs increases. To the best of my knowledge, no state has put a requirement for using GAAP into its state constitution.

One of the primary goals of using GAAP for state budgeting purposes is to improve democracy by increasing transparency and accountability, but SJR 55 would have a very different effect. By putting a requirement to use GAAP into the state constitution, SJR 55 would delegate authority to a private national organization to set the parameters of Wisconsin’s budget options. As a result, SJR 55 is likely to hurt democracy by making legislators and the governor less responsible and accountable for budget choices.  New York City is required to use GAAP, and its use there has led to complex work-arounds that have decreased transparency. (Read more about the NY City experience here.)

Proponents of SJR 55 argue that Wisconsin needs to have a rigid requirement to use GAAP standards because our state recently had one of the largest GAAP deficits in the U.S. However, a major reason for this is that prior to fiscal year 2015 the GAAP deficit calculations didn’t take into account unfunded pension obligations. Since new GAAP standards do take those obligations into account, and Wisconsin does a better job than other states of funding its pension system, Wisconsin’s rank should be much better when we see the new comparative figures for the GAAP deficits in each state in fiscal year 2015.

I commend the proponents of SJR 55 and AJR 66 for seeking to make budget decisions more transparent and to promote more responsible budgeting. However, those goals can be accomplished through legislation that improves information-sharing with the public and enhances advance planning, rather than by making Wisconsin the only state in the nation to put inflexible GAAP standards into its constitution.

4 thoughts on “Constitutional Change Would Limit State Budget”

  1. LOL says:

    Would delegate authority to a private national organization? That’s nonsense. GAAP is simply the set of accounting rules that businesses in the United States use. No one is being given “authority” simply by using a set of accounting rules. Can we have someone who knows what they’re talking about write the articles now?

  2. RetroRocket says:

    Seriously? The legislature is turning power over to The National Accounting Standards Board? As if the Board decided how the State spends its money? Mr. Peacock needs to take Accounting 101 where he will learn that GAAP is the same kind of accounting required by, say, the Feferal Reserve and the Securitites Exchange Comission for banks and publically traded corporations. Its impact on accounting tricks in Wisconsin is an entirely different issue.

  3. AG says:

    My mind was blown reading this article. I can’t believe how off base this article was on what GAAP is and how it’s used. I was so relieved to see LOL’s and RetroRocket’s comments below the article. Thank you for calling out this author’s inaccurate understanding of accounting.

  4. Bill Marsh says:

    This editorial doesn’t state what Mr. Peacock is really concerned with- Wisconsin Budget Project’s desire for more government spending and increased taxes in Wisconsin. Wisconsin Budget Project is an arm of a left-wing group that wants to grow government. Funny Mr. Peacock can’t be more transparent about his and his organization’s motivations.

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