It’s worse than you think, 2010–11 edition

Regular readers know that state finances were worse than the Doyle administration admitted during its eight years of fiscal incompetence. But state finances are also worse than the Walker administration admits now.

The proof is the state’s Comprehensive Annual Fiscal Report, an inch-thick annual tree-killer that summarizes the differences between politicians’ claims about the state’s fiscal health, and the reality of the state’s fiscal health.

The differences lie in correctly measuring state finances, as the Wisconsin Taxpayers Alliance explains:

When does an expenditure occur — when a credit card is used to make a $10 purchase, or when the $10 charge on the credit card bill is paid? Elected state officials would say the latter: No cash transaction occurs until the credit card bill is paid. CPAs who follow generally accepted accounting principles (GAAP) in preparing the CAFR would disagree: When an item is charged is key, for it creates an obligation that must be paid. In technical terms, the difference between the two viewpoints is the difference between cash and accrual accounting.

What this means practically is that governors and lawmakers can “balance” a budget—as state law requires—even when the relevant CAFR later shows a deficit for the same period.

State law requires that the state budget be balanced on a cash basis. It is, to put it bluntly, insane for an enterprise that spends nearly $35 billion every year to balance its books with the same accounting method as a four-employee business. (Shareholders of a $35 million business would fire its CEO if he claimed that cash accounting was OK for a business of that size.)

Failure to correctly balance the state budget violates, at least in spirit, Article I, section 22 of the state Constitution:

The blessings of a free government can only be maintained by a firm adherence to justice, moderation, temperance, frugality and virtue, and by frequent recurrence to fundamental principles.

Keep this in mind before you read on: Between the 1999 and 2009 fiscal years, only 15 states had a GAAP deficit in any of those fiscal years. But between the 1990 and 2011 fiscal years, Wisconsin had a GAAP deficit every single fiscal year, starting at $740 million in 1989–90, to $1.08 billion in 1990–91, to $2.24 billion in 2002–03. The GAAP deficit grew every fiscal year during the Doyle administration from 2004–05 onward.

At the end of the 2008–09 fiscal year, Wisconsin’s GAAP deficit was $2.71 billion, better than only California, Illinois and New York, four of the 12 states that had GAAP deficits in 2008–09, according to the WTA. The 2008–09 GAAP deficit was $479.53 per capita and 1.11 percent of GDP, better than only Illinois.  Wisconsin was one of only 15 states to have GAAP deficits in any year between the 1999 and 2009 fiscal years, but Wisconsin and Illinois were the only two states in the nation to have GAAP deficits in every one of those fiscal years.

On June 30, 2010, the end of the 2009–10 fiscal year, the state had a cash balance of $89.6 million. But measured by the more accurate Generally Accepted Accounting Principles, the state had a deficit of $2.94 billion, or $517 per capita.

So how is the state doing after a year of the Walker administration? By at least two measures, worse.

The general fund balance deficit of $2.94 billion in the last full fiscal year of the Doyle administration has grown, as listed on page 44 of the CAFR, to $2.995 billion. The only good thing about that number is that it is a smaller percentage of state government spending, 13.5 percent vs. 13.8 percent in the previous fiscal year.

Eight months ago, I wrote that the state’s Unrestricted Net Assets (gross assets minus money owed on those assets) was a negative number, $9.46 billion, better than only seven states in dollar amounts and, at 3.7 percent of GDP, better than only five states. The WTA’s report noted that “this means ‘no funds were available for discretionary purposes,’ such as paying off creditors.” One fiscal year later, the definition of “no funds were available” expanded to a bigger (in absolute value) negative number, $9.7513 billion.

It should be pointed out that the state was operating on its 2009–11 budget, crafted (if that’s what you want to call it) by the Doyle administration and enacted into law (with, remember, $2.1 billion in tax increases) by the Democratic-controlled 2009–10 Legislature. It also should be pointed out that Walker and the 2011–13 Legislature passed the controversial (to say the least) budget repair bill early in 2011 to address the $136 million deficit in the existing 2009–11 budget. It also should be pointed out that the 2011–13 budget was enacted to eliminate the $3.6 billion structural deficit the 2009–11 budget created for the 2011–13 budget cycle.

The WTA adds:

The good news is that the descent into debt slowed. The state added more than $200 [million] to the GAAP deficit in each of the prior two years but only about $50 [million] in 2010-11. Moreover, with few, if any, budget-balancing maneuvers used in the new 2011-13 budget, the deficit reported on the CAFR appears to have “bottomed out.” Whether the trend can now be reversed is up to the state’s current and future elected officials.

WTA president Todd Berry observes:

There is no question that the 2011-13 state budget is a tight and painful one that cuts most major programs, except Medicaid, but it will not erase the deficit reported on state financial statements next year at this time. It will, however, accomplish something not done since the mid-1990s: Lay the foundation for a new state budget (in 2013) that does not first require paying off budget-balancing IOUs from the prior year.

What this means according to state budget experts is that, entering the 2013-15 budget period, Wisconsin would have no “structural deficit” for the first time since the mid-1990s. Lawmakers would be able to prepare a budget with an eye to future opportunities, rather than past obligations.

Before state legislators and lobbyists begin planning future spending increases, however, they would be wise to remember that underlying state fiscal problems remain. State financial statements will still have large general fund deficits that require repair.

As a bipartisan state legislative committee (on which I served) urged 10 years ago, now is the time to begin scaling back the deficits on these financial statements. Those evaluating state bonds will respond with higher ratings, and markets will respond with lower interest rates that the state must pay. Then Wisconsin citizens can say that state finances are truly “back on an even keel.”

It boggles the mind that most states are able to balance their budgets on a GAAP basis, but Wisconsin has not been able to for more than two decades, with Republican and Democratic governors, and with Republican, Democratic and split party control of the Legislature. Any state legislator or commentator who claims state government is lean is not telling the truth.

Berry claims the 2011–13 budget was “a tight and painful one,” but truth be told, it was not nearly “tight and painful” enough. The Walker administration credits itself for having eliminated the 2007–09 deficit through making government employees pay more for their benefits without large-scale state employee layoffs. All that did was to reduce the GAAP deficit on a percentage-of-state-spending basis, not in an actual dollar amount.

If eliminating the GAAP deficit means cutting state general-fund spending by 13.5 percent, that is what is required, and that is what should have happened in the 2011–13 state budget. If that means permanently laying off thousands of state employees and eliminating state programs, that is what is required. (The only jobs worth creating are private-sector jobs.) Every budget cycle state legislators put off actually balancing the state budget, state finances get progressively worse.

Fortunately, some people realize the ugly state of state finances. Walker created the Governor’s Commission on Waste, Fraud and Abuse, whose mandated report came out this week. The fourth of the commission’s five recommendations, according to the MacIver Institute:

The State of Wisconsin should be doing business on a GAAP basis. In my opinion the modified cash basis currently in place allows for cutoff issues and could be used to circumvent the State’s balanced budget requirement.

“Could be used” should have been written instead as “is being used” to make a mockery of the state’s balanced-budget requirement. That should be fixed in two ways — the state law that requires only cash balancing should be changed to require GAAP balancing, and then that GAAP-balance requirement should be added to the state Constitution. (Along with constitutional limits on year-to-year spending increases and supermajority or referendum requirements for tax increases.)

The state of state finances — whether you’re slightly optimistic about the current direction or not — demonstrates once again the necessity of protecting us taxpayers from our elected officials.


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