Revenue Shortfall Creates Tough Budget

A new state report about projected state revenue and the agency budget requests reinforces concerns that the upcoming 2017-19 Wisconsin budget will be another difficult one to balance. The primary problem is that tax revenue growth is well below the level anticipated when the budget bill was enacted in July 2015.

I’ll get to the specific numbers in a moment, but the bottom line is that the state’s large tax cuts, coupled with lower-than-anticipated job gains and revenue growth, mean that as state policymakers develop the next state budget they are going to have to either continue to squeeze spending or close some tax loopholes.

Here are a few key factors in the state’s current and ongoing fiscal challenges:

• General Fund tax collections in the first year of the current biennium were $110 million short of the amount the state anticipated when the 2015-17 budget bill was approved.
• The new DOA report now estimates that tax collections in the current fiscal year will fall $351 million short of the projection made for the budget bill, and $216 million less than the Legislative Fiscal Bureau (LFB) estimated early this year.
• Other sources of General Fund revenue are now expected to fall $55 million short of what was anticipated in the budget bill.
• Even though General Fund spending is now expected to be lower than the budget bill estimated, in the current fiscal year it is projected to exceed new revenue by $226 million.

The new Department of Administration (DOA) report still anticipates that the department won’t draw down all of the budget balance during the current fiscal year; however, the revenue shortfall will reduce the $331 million starting balance on July 1 of this year to just $105 million at the end of the fiscal year. That’s a perilously small cushion — equivalent to only 2.4 days of spending.

Monday’s DOA report anticipates tax growth of just 2.3% this year, followed by 2.9% in the first year of the next biennium and 3.0% in 2018-19. Tax collections grew just 1.4% during the first quarter of this fiscal year, but new tax figures released today by the Department of Revenue show a modest uptick to 2.3% growth over the first four months, which is consistent with the very modest growth projection announced yesterday for the full fiscal year.

The part of the annual DOA report that always draws the most attention is the comparison of agency budget requests to the new revenue projections. As many news stories reported yesterday and today, the report indicates that the requested funding exceeds expected revenue by $693 million over the biennium.

One can look at that $693 million gap as either bad news or pretty good news, depending on your perspective. The more upbeat view of the numbers relies primarily on two arguments – first that the agency budget requests are generally scaled back as the budget bill is developed, and the second argument is that we have sometimes seen much larger potential shortfalls calculated at this stage of the budget process.

Those are legitimate points, but we also need to keep in mind the following factors:

• Most of the agency requests are very modest, and in many cases their base spending has already been pared back in prior sessions.
• At this stage of the budget process, the agency budget requests exclude many factors, including increases for debt service, fuel and utilities, University pay adjustments, and other state employee pay increases and fringe benefits.
• The DOA document only looks at the General Fund side of revenue and spending, so it doesn’t include the huge shortfall in the Department of Transportation budget.
• This session’s budget challenges are despite the fact the Walker administration recently delayed an additional $101 million in debt payments.

I’m a bit relieved that the shortfall between agency requests and the new revenue projections isn’t larger, but it’s very worrisome nonetheless. Many lawmakers have expressed interest in making additional tax cuts, and the new DOA figures make it clear that another round of tax cutting will require spending to be far less than needed in key areas like education and health that are critical for Wisconsin’s future economic success.