State’s ‘Hidden Deficit’ Lowest in 30 Years

The wonky nonpartisan Wisconsin Policy Forum has just come out with very interesting analysis of something I’ve never heard of: the state’s “hidden deficit.”

It’s a bit similar to the term “structural deficit,” which used to get tossed around in the state Capitol and in occasional thumb-sucker stories by reporters with a high tolerance for dreary budget details. It was also something that got discussed by the old Wisconsin Taxpayers Alliance, whose director Todd Berry used to complain was a meaningless term that got defined in too many different ways.  A better way to measure the long-term condition of state finances, he argued, was to do it just as the financial statements of publicly traded companies do, using Generally Accepted Accounting Principles (GAAP) to measure their budget.

Berry is now retired, after his WisTax group merged with Milwaukee’s Public Policy Forum to become the Wisconsin Policy Forum (WPF), and its research director is Jason Stein, a former reporter for the Milwaukee Journal Sentinel who used to interview Berry about such financial ephemera. And voila’, we now have an analysis of the “hidden budget deficit”, which uses a GAAP analysis to tell us the Wisconsin’s budget. 

While it has its limitations, which I’ll get to, it’s a useful way to objectively measure on a year-to-year basis how close to a truly balanced budget the state is. The WPF analysis reports that the state’s latest financial statements, as of June 30, 2019, show the state’s general fund “had a negative balance of $773.5 million – the lowest level after adjusting for inflation in records going back to 1990.”

That 2019 figure was a $480.1 million improvement in 2019 – a 38.3 percent decrease over the previous year’s ending negative balance of $1.25 billion, the report noted. 

That’s very good news. And yet the reality is that Wisconsin is in much worse shape than nearly any state. Only two other states have a negative GAAP balance, Stein found: Kentucky has a negative balance of $59.1 million, lower than Wisconsin’s and only Illinois, beset with massive pensions problems, has a higher negative balance — an astounding $7.76 billion. 

Wisconsin, the report makes clear, has always run negative GAAP balances, going back 30 years, since the state first began calculating this figure. It stood at $3.1 billion in 2003, the last year of Republican Gov. Scott McCallum’s budget and was a key issue Doyle raised, assailing him for having such a high long-term deficit (my recollection is he called it a “structural deficit”). Yet it stood even higher at $3.4 billion in 2011, Democratic Gov. Jim Doyle’s last year, which Republican Gov. Scott Walker repeatedly bashed Doyle for during Walker’s winning 2010 campaign. And Walker did help to greatly lower that figure, to the lowest amount in 30 years. 

Which brings us to the limitations of the data. Doyle, after all, was governor during the greatest downturn in American history since the Great Depression, which meant state revenue collected thought the sales and income taxes plummeted, which made it far harder to balance the budget. Whereas Walker saw the national economy get better every year he was in office, increasing the sale and income taxes collected. 

As for 1990, the previous low in the state’s GAAP deficit, that was back when Gov. Tommy Thompson was basking in an income tax that was not indexed for inflation, generating hefty automatic increases in the tax haul each year, enabling him to increase state spending at a rate exceeding that of any governor save Democrat Patrick Lucey over the last half century.

Then there is the issue of shared revenue to local governments. After the state income tax got indexed in the late 1990s, governors and legislators began to squeeze that aid, increasing it at a rate below inflation, even as the state budget increased faster than inflation. That made it easier for the state to balance its budget, but harder for municipalities and counties to do so. Under Walker that squeezing increased, along with real dollar cuts in school aid that made it harder for local school districts to balance their budgets, causing an explosion of local school referendums asking voters for increases in the property tax levy. 

The WPF has done reports noting that both Milwaukee County and the City of Milwaukee face massive financial challenges for which a key driver is the decline in state shared revenue. 

Finally, there is the issue of the state’s long-term debt. Its transportations fund debt, in particular, soared during Walker’s time as governor, something this analysis doesn’t examine.

All of which is not to undercut the WPF report, which is a beam of light on just one issue that helps us better understand state government and with a term, “hidden deficit”, that is on point and easy to grasp. It also reveals some fiscal tricks the state has used for years to makes budgets that aren’t balanced look like they are, which merit attention. 

As for the report’s bottom line finding, I would never have imagined that Wisconsin would rank worse than 49 states in its hidden deficit. In the old days, back when newspapers marshaled a large cadre of Capitol reporters, that would have been a major headline. Nowadays, not one news headline.