Gov. Doyle's 2005-07 Budget Bill

Gov. Doyle's 2005-07 Budget Bill Update

The Hamilton Consulting Group

Feb. 18, 2005

Introduction

On Feb. 8, 2005, Governor Doyle introduced his 2005-07 biennial budget bill to the Legislature. (Assembly Bill 100) Initial reaction has been mixed, largely along partisan lines, but most observers agree that the proposal represents an effective budget upon which the first-term Governor can stand for reelection. Financial detractors point to the continuation of raiding other funds, and other questionable measures, to satisfy general program revenue (GPR) spending demand and balance the budget.

Upon initial analysis, the Governor has presented a two-year spending package that balances the budget without raising general fund taxes. In the process, he has simultaneously provided substantial GPR funding increases to core constituencies (schools and local government) and diffused the property tax issue by tying increased state aids to his version of a property tax freeze.

Having dedicated most discretionary GPR to schools and local government in the context of property tax relief, he provides spending increases in the state Medical Assistance Programs to maintain benefits and eligibility by proposing a variety of new fund sources to supplement limited GPR. Beyond that, new fees (such as vehicle registration fees and hunting and fishing license fees) and additional borrowing are proposed to maintain funding in other major program areas such as the transportation and natural resource budgets.

In addition, the budget calls for further reduction of the state workforce (net reduction of 1800 positions) and various reorganization efforts (e.g. consolidation of attorney positions) to generate budget savings. (Total cuts of $272 million in state agency operations with $186 million of that relating to the general fund).

The GPR budget is ultimately balanced with these savings, coupled with:

$336 million in transfers from other funds ($268 million from the Transportation Fund);
shifting various programs from GPR funding to other sources ($103 million);
lapsing various non-gpr funds to the general fund ($97 million); and
reducing the statutory ending balance from current law 2% of appropriations to a fixed amount of $65 million, or $201 million less than current law would require.

By the numbers -- the Governor’s proposed 2005-07 budget totals $52.6 billion (all funds) compared to an adjusted all funds budget of $50.86 billion for 2003-05. (All funds increase of $1.74 billion). The proposed 2005-07 GPR budget represents $25.7 billion or 49% of total budget compared to adjusted GPR budget of $22.5 billion or 44% of total budget in 2003-05. Overall growth in GPR spending is proposed to increase 3.7% in FY 06 and by 3.9% in FY 07.

Compared to FY 2004 actual spending and FY 05 adjusted base spending levels, the proposed 2005-07 budget represents an increase of $3.2 billion GPR, a $148 million decrease in federal funds (FED) spending, a $506 million decrease in segregated revenue (SEG) spending, and an $806 million decrease in Program Revenue (PR) spending.

The budget bill now goes to the Republican controlled Joint Finance Committee for several months of legislative review and modification. Floor action by both houses is expected in June of 2005. Outlined below is a summary of some of the major issues the Joint Finance Committee will tackle in the coming months.

Property Tax Relief, School Funding & Shared Revenue
In proposing his own version of a property tax freeze in the budget, the Governor has effectively diffused a volatile reelection issue and substantially changed the tenor of the debate. It is no longer about whether the state should impose local property tax controls -- it is about how it should be done, and in what legislative vehicle.

The Assembly continues to move forward with its plans to pass freeze legislation as a separate bill. The Governor has indicated he would veto such a bill and has taken the position that property tax controls need to be adopted in the context of the state budget.

The Governor’s budget message is clear in that he has tied his support for property tax controls with a substantial increase in state financial assistance for both schools and local government. Under his proposal, the budget provides $700 million in additional school equalization aid payments and $150 million in school levy credit relief along with $380 million GPR to restore full funding for the shared revenue program.

The debate over the form and substance of a property tax freeze, which, for the Governor, is inexorably linked with substantial GPR increases in school aids and shared revenue, will be a focal debate of the 2005-07 budget deliberations.

Medical Assistance Funding
Medical Assistance funding has been and will continue to be a driving force in state budgeting. Enrollment increases along with increases in medical services and pharmaceutical costs continue to increase the amount of GPR needed to cover base cost of the MA Programs.

DHFS requested an additional $708 million GPR to cover estimated costs of MA, BadgerCare and SeniorCare for the 2005-07 biennium. The Governor essentially recommends the additional funding to maintain program benefits and eligibility, but does not provide the requested GPR. Instead the Governor proposes to cover MA costs with a number of alternate funding sources; some of which were proposed and rejected last session.

Under the proposed budget, MA cost increases would be provided as follows:

transferring $168 million from the Patients Compensation Fund;
generating $111 million by imposing a new HMO gross receipts tax on HMO’s that serve MA and BadgerCare recipients and raising the nursing home bed tax from $75 to $125, both of which would be used to leverage additional federal matching funds;
authorizing $130 million in revenue bonding;
agency savings ($62 million) and reestimates of $88 million less than originally requested, and;
GPR support of $149 million.

Similar to last session, the proposed MA budget will raise substantial debate regarding alternate fund sources and one-time fixes to an ongoing GPR problem. Proposed savings related to reimbursement of pharmaceutical costs and pharmacist dispensing fees are also expected to be heated issues.

Notwithstanding the unpopularity of elements of the Governor’s proposal, the Joint Finance Committee will be challenged to come up with GPR funding, other alternate fund sources, or program savings through changes in benefit and eligibility structure to rebalance the MA budget.

Transportation Budget
In many respects the transportation budget debate will be a repeat of last session. In summary, the Governor proposes modest increases in most major transportation programs and maintains funding to keep major highway projects, including the Marquette Interchange, on schedule.

Debate on this area of the budget is likely to focus more on how funding is provided than on the proposed funding levels.

Similar to last session, the Governor relies heavily on transfers from the segregated transportation fund (SEG $) to balance the GPR budget. This session the Governor proposes to transfer $268 million to the general fund ($250 million in FY 06 and $18 million in FY 07).

Lost revenue to the SEG fund is partially offset by additional borrowing, which includes $250 million in GPR supported general obligation bonds. In addition, the Governor proposes to permanently shift certain programs currently supported by GPR to other fund sources. For example, the budget would permanently shift school transportation costs off of GPR and fund the program with DOT SEG (impact of $52 million on the SEG fund over the biennium).

It should be noted that DOT SEG is already providing an ongoing $120 million over the biennium for school transportation costs as a result of the 2003-05 budget bill.

The transportation budget also includes proposed fee increases in vehicle registration fees, titling fees and vehicle rental fees to generate new SEG revenue. The fee increases requested by DOT were estimated to generate $155 million in SEG revenue but the Governor trimmed the fee increases in some categories.

Other Issues
The budget areas discussed above represent three main areas likely to dominate the discussion over the course of the next several months. These areas drive bulk GPR decision-making and are somewhat interconnected in that context. However, there are a number of other issues that are anticipated to generate considerable debate. A partial listing of such issues includes:

Proposed increase in hunting and fishing license fees.
Tribal Gaming revenues and expenditures.
Proposed repeal of the Qualified Economic Offer (QEO) statute relating to collective bargaining among teachers and school districts.
Corrections budget and proposals related to early release and alternate sentencing.
UW funding and tuition increase proposal.
Consolidation of Attorney’s and other administrative functions in DOA.

The Hamilton Consulting Group will be tracking the budget throughout the process and providing periodic updates on Joint Finance Committee action.