Tis the season for below-zero temperatures, eggnog, and of course, the beginning of the 2017-19 budget process. And, considering the governor and legislators have been engaging in the transportation budget debate since May, this “budget-season” will likely not disappoint.
Most members of the Joint Finance Committee (JFC) have been announced, except for the two Democratic Assembly members. The governor will roll-out his budget in late January/early February, kicking off the process in the legislature. As with other (recent) budgets, the major items of focus this year will be K-12 education funding, transportation infrastructure funding and Medicaid.
Budget Challenges
State Financial Condition
Overall, the state is expected to head into the next biennium with a small surplus. The Department of Administration projects the state will end the current 2016-17 fiscal year with a $104 million balance; this is lower than anticipated earlier this year. In January 2016, the Legislative Fiscal Bureau projected FY 2017 revenues to increase by 3.2 percent, but the Department of Revenue (DOR) collections through October were only up 2.3 percent over the revenue collected in the same period last year. If there is additional slowed growth, the balance could disappear.
Nationwide, states are experiencing slowed revenue growth. The National Association of State Budget Officers recently reported that in the last fiscal year (FY 2016), 25 states ended the year with revenue collections below budget. And 24 states are reporting the 2017 numbers are below projections.
Heading into the next biennium, DOA projects revenues will increase by 2.9 percent in FY 18, and by 3 percent in FY 19. However, general fund agency budget requests exceed the revenue estimates by $250.2 million in the first year of the upcoming biennium (FY 2018) and $442.8 million in the second year. Agencies requesting more funding than expected is not a new phenomenon. DOA Secretary Scott Neitzel notes this “imbalance” in the opening letter of the report, stating as in the past, not all state agency budget requests will be included in the governor’s budget. This will be the challenge for the governor as finalizes his budget in the next couple weeks.
K-12 Education Funding
The gap between expected revenues and agency requests is largely due to the Department of Public Instruction (DPI).The DPI request includes $707 million more general purpose revenue (GPR) for public school funding over the biennium. Among other proposed changes, DPI’s budget includes a change to school district revenue limits, per pupil adjustment increases of $200 in 2017-18 and $204 in 2018-19 and an inflationary adjustment beginning in 2019-20.
In recent appearances, the governor commits to increased levels of education funding in the budget. It is too early to predict what level of spending will be proposed by the governor, but given the size of the DPI request, it will be a key budget issue this cycle.
Transportation Infrastructure Funding
Transportation funding is traditionally one of the last budget items to be hammered out by the legislature, and given the on-going exchange between the governor, Senators and Assembly Republicans, we can expect a long bumpy road.
Starting early last spring, Assembly Republicans, led by Speaker Robin Vos (R-Rochester) and JFC Co-Chair Rep. John Nygren (R-Mariette) have pushed for a “sustainable solution” to the transportation fund. Governor Walker has held a firm line that there should be no tax or fee increases in the DOT budget unless the increase can be offset by an equal or greater cut in other taxes. The most vocal Senate Republicans, Sens. Chris Kapenga (R-Delafield) and Duey Stroebel (R-Saukville), are supportive of the governor’s position and the DOT budget request.
Department of Transportation (DOT) Secretary, Mark Gottleib, followed the governor’s directive, and submitted a budget request with no increases to taxes or fees. Instead of a tax or fee increase, DOT’s budget request includes $500 million in additional bonding over the biennium. Last summer, the Legislative Fiscal Bureau (LFB) released a memo projecting the Department of Transportation (DOT) will need an additional $939 million in revenue to maintain current transportation funding levels in the 2017-19 budget. Gottleib recently defended this strategy in front of the Assembly Committee on Transportation.
Assembly Republicans speculate they could deal with the transportation budget separately from the rest of the budget. However, Majority leader Senate Fitzgerald has dismissed this idea.
Regardless, of how and when the transportation funding situation will be resolved, it will be one of the largest hurdles in the 2017-19 budget, and may be the reason the budget drags out past June 30th.
Medicaid Program Funding
In addition to the DPI funding increase, Medicaid’s cost-to-continue budget is another big driver in the $693 million discrepancy in agency requests vs. revenues. The Department of Health Services (DHS)projects the program will require an additional $452 million to operate based on projections. Although this request is down from the $650 million needed last biennium, it still a sizeable ask and a fast-growing segment of the state budget.
The other looming factor that impacts the state’s Medicaid program is what will happen with the federal program. If Congress moves quickly to repeal Obamacare and implements Medicaid block grants, the governor and legislators will need to make fundamental changes to the state program and that will take time to sort out.
Summary
Slowed revenue growth into the biennium and big-ticket requests will require the governor to weigh education and Medicaid funding against any new tax relief. The state is in stable financial condition, but is vulnerable to major shifts, like a decline in corporate revenues or possible changes in the Medicaid caseload. The re-occurring budget demands in Medicaid, Transportation and School Funding will undoubtedly dominate the headlines and the legislative discourse this budget season. Be sure to regularly check Hamilton’s Budget Issue page for information and updates.