At this writing, Wisconsin faces a 2001-03 budget deficit whose magnitude could top one billion dollars.   Politicians, members of the press and the public at large will focus on the immediate issue:  How big is the problem?  And how are we going to solve it?

These comments take a broader view something badly needed in discussions about  Wisconsin's economy and finances.  They focus on issues surrounding state finances in three areas:  outside perceptions of Wisconsin's budget process and fiscal management; the need for long-term state fiscal planning; and the potential uses of the budget to gauge state performance.

What Outsiders See

Often as important as the spending a governor and legislature authorize are the symbolic actions they take or don't take.  Consider several examples that signal to outside observers the instability of Wisconsin state politics, budget processes and state finances.

  Budget Timing and Atmosphere.  Compared to other states and to our own past, recent state budgets have been among the last in the country to be enacted.  In 1997, the Badger State was one of the last four states to pass a budget;  in 1999, it brought up the rear with Massachusetts.  In 2001, Wisconsin was one of only seven states not to have completed a budget by the start of its new fiscal year.

So too is the interpersonal and partisan acrimony that has accompanied budget delays.  This year was particularly noteworthy for the extreme positions staked out by legislative opponents solely for bargaining purposes.  Unfortunately, news of such positions can quickly leave the state capitol, enter boardrooms, cross state borders.  In the end, symbolism becomes as important as results.

  Fiscal Management.  Comments published nationally in the past year suggest that word of Wisconsin's fiscal management is spreading, that the state is developing a reputation that is not altogether positive.

Last fall, in a national publication from Merrill Lynch, analysts pointed out that only two states were running deficits, according to generally accepted accounting principles (or GAAP), Wisconsin and Illinois.  Wisconsin's GAAP deficit is reportedly the largest in the country.

In February 2001, Governing magazine, in its annual issue rating state governments, gave Wisconsin a C+ for its fiscal management.  Only six states received lower grades.  It found:

  Wisconsin is required by law to balance its budget, but under Generally Accepted Accounting Principles, it has been running a deficit for years . . . the balance between revenues and expenditures is still worrisome . . . the state spent $475 million more than it took in.  Another bad sign:  The budget was late again . . .

At summer's end, the state's general obligation bonds were downgraded by two national rating agencies.  This was Wisconsin's first downgrade since 1982.  At the time the bad news was delivered, only two rated states had lower Moody's ratings than Wisconsin, New York and Louisiana.  Moody's analysts singled out, among other items, the persistent structural imbalance and the states traditional policies of maintaining minimal reserves and paying relatively little planning attention to recurring spending commitments.

  Planning:  Thinking in Years, Not Months

At its most elemental, a budget is a plan for collecting and committing public revenues.  Yet, what others are writing about Wisconsin suggests a perception that the state cannot plan fiscally.  And, there is abundant evidence here at home that state government, collectively, has given little forethought to the planning uses of its budget.  To wit:

  Surplus Revenues.  The 90's were perceived as boom years in Wisconsin.  At times, personal income growth here outstripped the nation.  Unemployment dipped to record lows.  Tax collections repeatedly beat estimates:  Between 1990 and 2000, actual collections exceeded published budget estimates by almost $1.1b.  When net ending balances are taken into account, the cumulative difference between published estimates and actual figures was more than $1.6b.  No matter how the calculation is done, it is safe to say that Wisconsin's economy generated between $1b and $2b in surplus state revenues during the past decade.  These figures, gathered from state Annual Fiscal Reports, are displayed in the following graph. 

  Yet Deficits.  Despite, or more likely because of these heady numbers, state budgets grew even faster than personal income, but the spending was not pay-as-you-go.  Every budget enacted during the past ten years carried a structural deficit in the second year of the biennium, and these deficits grew worse as the decade progressed:  $58m in 1993, $136m in 1995, $209m in 1997, $274m in 1999, $558m by January 2001, and $761m by May of 2001.  Before the September 11 massacre, the 2001-03 budget carried an estimated $310m hole in the second year of this biennium.

  No Reserves.  The state left itself no room for error.  Although revenue growth was robust, the net ending budget balances enacted by the legislature and governor were virtually nonexistentjust fractions of a percentage point of net appropriations.  They ranged from just 0.03% in 1995 to 0.26% in 1999.  (Source:  Legislative Fiscal Bureau biennial budget bill summaries).  This would be equivalent to an individual with an annual income of $30,000 setting aside between $10 and $75 for the year for emergencies.

  Unwise Accounting.  These practices were arguably made more likely by the states reluctance to follow GAAP accounting in developing and enacting its budgets.  Since 1990, the state has summarized, ex-post, its annual financial condition in GAAP terms.  These comprehensive annual fiscal reports from state auditors show Wisconsin has run GAAP deficits every year since 1990.  The financial imbalances have ranged from a low of $743m in fiscal 1990  to a high of $1.473b in fiscal 1997.  The GAAP deficit in 2000 was $830m.

  Lessons Not Learned, Opportunities Missed.   To make matters worse, Wisconsin has heeded neither the lessons of its own past, nor the preferred practices of neighboring states.  In 1986, the governor's Expenditure Commission warned of the dangers of boom-busting budgeting:

  . . . when government revenues increase . . . expenditures grow to meet the available resources.  When revenues decline, constituent demands to maintain programs begun during more affluent times require tax increases.

The Commission concluded that  . . . the revenue roller coaster in the past has resulted in a shortsighted approach to budgeting.  It recommended the state create a budget stabilization, or rainy day, fund that would segregate surplus revenues during times of prosperity  to avoid service disruptions and tax increases during recessions.  Wisconsin established such a fund in 1986; yet, despite huge revenue windfalls, the state failed to make a deposit to the fund.  Meanwhile, states such as Minnesota and Michigan took advantage of the good times to build reserves of over $1b each.

One way to understand the missed opportunity the 90s represented is to examine state general fund spending in actual (light line) and inflation-adjusted, or real, terms (bold), as the graph (right) does.  In the 15 years between 1975 and 1990, real state expenditures grew 6%; in the decade from 1990 to 2000, spending climbed 45%.  In real terms, the dollars were there to build state reserves.

  A Case Study.  Nowhere are the effects of state government's short-term thinking more evident than in school finance.  In 1994, the state legislature dramatically changed the way Wisconsin funded public education by committing future state budgets to providing, on average, two-thirds of the revenues school districts needed to operate.  In its original form, the idea was floated in February; by the end of March, it was law.  The two-thirds scheme  was passed and signed without a public hearing, without a plan for financing it, and with no attempts at anticipating its ultimate impact on taxpayers, other state programs, or schools.

Hindsight shows the effects on taxpayers were major.  Although school property tax growth was stemmed in many districts, the incentive effects of higher state school subsidies resulted in more than $400m in added annual debt service costs for state and local taxpayers.  Property taxes levied by other jurisdictions accelerated to capture some of the foregone school levies.  And income tax collections soared, growing almost twice as fast as personal income, to cover the costs of rising state school support.

Program dislocations elsewhere in the state budget were huge, and structural deficits were recurrent.  In the past five years, more than 60% of all new state spending was devoted to school aids and related tax credits almost double their share of state general fund expenditures prior to 1994.  Consequently, real funding for state agencies, the UW System, and counties and municipalities was cut or frozen to help generate more than $1.2b in new money for school aids and tax credits.

Finally, no one bothered to review the extensive education finance research that showed, unequivocally, that increased concentration of school funding at the state level eventually results in top-down school governance, micro-management by the legislature cum school board, and, most strikingly, eventual erosion of school performance.

Benchmarking:  To Know Where We Are

If the state cannot plan for the future, it should at least monitor its past.  Examining key economic and social trends can aid in understanding where the state has been and what the consequences of previous actions were.  Unfortunately, on this score, too, there seems to be only limited understanding of recent developments.  Several examples make the point.

  Personal Income Per Capita.  Perhaps no single statistic better summarizes the state's relative economic health than personal income per capita.  As the graph (above) shows, Wisconsin has only been at or above parity with the nation twice.  Briefly in the late 50s and again in the late 70s, per capita income was 0.5% and 0.6%, respectively, above the U.S. average.  The recession of the 80s drove it down to 7.3% below the national norm.  The recovery of the early 90s saw it close the gap to within 3.3% of the U.S. average in 1998.

The statewide perception, one reinforced by state officials and the press, was that the past decade was one of sustained and unprecedented prosperity.  However, the data paint a more complicated picture.  It was only the during the first half of the 90s that the state made true economic headway.  Between 1994 and 1999, per capita income progress vis-a-vis the nation stagnated.  And last year, the Badger state actually lost ground, falling 4.7% behind the U.S.  These trends were known to analysts in and out of state government, but there is little evidence that the executive and legislative branches tracked these developments in a disciplined way.

  Education.  Much the same can be said for education.  Of all expenditures, education has historically been at the top of Wisconsin's priority list.  In 1975 (see graph following), state spending as a share of personal income placed the state 14^th on K-12 education and sixth on higher education.  Those positions had been slowly switching over the ensuing years.  However, the state's decision to increase support for elementary and secondary education in the mid-90s dramatically accelerated that trend.  By 1999, the U.S. Census Bureau showed Wisconsin expenditures ranking 19^th on higher education and sixth on K-12 education.  In fairness, it should be noted that in both education categories Badger state spending relative to personal income is 20% to 30% above national average.

Nevertheless, one has to wonder whether state leaders were fully aware of the shift they set in motion, given their frequent references as of late to the centrality of higher-level training, cutting-edge research and university spin-off of new ventures to positioning Wisconsin for the 21^st century knowledge economy.

  Taxes.  A final example of the state's lack of attention to trends relates to taxes.  The state buy-down of school property taxes was enacted with much fanfare and touted as a panacea for Wisconsin's tax problems.  Federal Census data now show that the state-local tax burden changed little over the past decade.  The state was third in the nation in 1990, and third in 1999.  A state income tax cut enacted for 2000-01 is not reflected in these ranking figures.

Why no change in the relative tax position of Wisconsin?  There are a number of reasons.  One, the aggressive tax reductions that occurred in other states, is out of our control.  Another is the slowing of state personal income growth during the second half of the decade.  This is a factor because tax rankings are most commonly calculated based on personal income, a measure of ability-to-pay.

Another factor was the lack of attention paid by state policy-makers to the individual income tax.  Fueled by a soaring stock market, real personal income gains and state neglect (for more than a decade) of an income tax law in need of reform and updating, the individual income tax edged steadily higher as a share of personal income.  This effectively cancelled out any progress that was made in reducing the burden of the property tax, as the graph (immediate left) shows.

Given political rhetoric in the mid- and late-90s that the state-local tax burden here had been reduced, it is again worth wondering whether state leaders were keeping close tabs on the significant shifts that occurred.

Final Remarks

It is hard to deny that state budgets of recent years have conveyed the impression that Wisconsin is a politically unstable, unpredictable place; that, by amassing deficits in times of surplus and failing to benchmark its successes and failures, has failed to plan adequately for the long-term.

As state government faces its most severe fiscal crisis in twenty years, perhaps now is the time, while the memory of these difficult times is still fresh, to rethink the state's budget processes and long-range planning, so that the mistakes of recent years are not repeated during the next cycle of economic boom and bust.