Budget Reform - Summary

Overview of Budget Reform Bill

HFO & Associates

July 12, 2002

This overview of the 2001-03 Budget Reform Bill, January 2002 Special Session AB 1, reflects those provisions passed by the Legislature in early July 2002. The Governor is expected to take action on the bill on or about August 1, 2002. HFO will update this overview once the Governor completes his veto review.

Introduction

Not unlike the recent All-Star baseball game, the Legislature went into extra innings on the Budget Repair Bill and concluded with a disgruntled result. The Conference Committee Report narrowly passed in both houses.

Seventeen out of 18 Senate Democrats and 50 out of 55 Assembly Republicans voted to pass the bill on to the Governor. The minority caucuses in both houses took no ownership of the final product and were content to let the majority caucuses struggle to come up with the votes; no Senate Republican and no Assembly Democrat supported the measure. One legislative leader summed it up well when he commented that "the only thing worse than passing the bill was not passing it."

Some Agency Cuts; Mostly Tobacco Money
So how does the bill address the current $1.1 billion deficit? The Governor and the Legislature first looked to the tobacco settlement money. Ultimately the bill uses over $800 million in one-time tobacco dollars to balance the books this biennium. (Add that to the $450 million in tobacco securitization proceeds used in the initial 2001-03 budget, and all of the tobacco money is spent.)

Next they looked at state agency cuts and various versions of across-the-board reductions in agency funding. The Legislature settled on a total of $77.4 million in agency cuts; a 3.4% overall reduction in GPR state operations. The UW system, as the largest GPR supported agency, took the largest dollar reduction in this category at $27.4 million or 3.0% of its current operations budget. Corrections took the second largest hit with an $18.5 million reduction (2.9%). Reducing state GPR programs and various lapses of fee-based accounts to the general fund generally made up the remaining deficit of roughly $200 million.

Shared Revenue Spared
The budget repair bill is more notable for what it didn't do; and therein lays the turmoil. The main debate centered on the interrelated issues of dealing with the structural deficit into the next biennium and cutting state aid payments to local government. The Governor proposed to address the structural deficit by phasing out the $1 billion a year the state currently distributes through the shared revenue program. The Governor's plan, while fiscally solvent, was effectively attacked by local government and rendered politically unpopular.

Assembly Republicans softened the Governor's plan by adopting a zero cut in 2002, but maintained that the budget should be repaired with real cuts into the next biennium to avoid future deficits. The Assembly-passed budget would have cut $250 million in the 2003 aid payments and $500 million in the 2004 aid payments for a total reduction in state spending of $750 million in the 2003-05 biennium.

Senate Democrats capitalized on the issue and opted for a more politically expedient strategy that entailed no cuts in shared revenue and left worrying about the structural deficit until next session. The Senate strategy prevailed and the bill left the Legislature with shared revenue funding largely preserved. (The program was ultimately cut by $40 million in 2004 with $45 million in consolidation incentive payments and various other provisions included.)

Governor and Legislature to Face $2.9 Billion Deficit
Left unresolved is the estimated $2.87 billion deficit the Governor and the Legislature are expected to face in the 2003-05 biennial budget next session. (This estimate assumes current commitments, caseloads and populations estimates, with no assumptions on growth for these areas, including revenue, or for such items as state employee compensation.) The budget repair bill also did not raise taxes - with the exception of failing to update corporate and business tax references to the Internal Revenue Code estimated at $5 million.

In the final analysis, the Legislature addressed the current deficit with one-time tobacco money, real but relatively modest cuts to state programs and agency budgets, and no significant increase in general fund taxes. It did not address the state's ongoing fiscal problems and instead put that off to the next session. The 2003-05 budget deliberations will undoubtedly feature a classic struggle between reductions in state spending versus tax increases; a struggle that will make this year's budget repair bill look like the pre-game warm-up it ended up being.

Fiscal Policy Proposals Killed in Conference Committee
Some important fiscal policy measures that passed one house but that did not make the final cut in conference committee included:

State Employee Early Retirement Plan. The conference committee rejected the Senate proposal that would have provided an early retirement incentive program for certain state employees. It was estimated the plan would generate roughly $60 million in savings this biennium, but excessive long-term costs caused its demise.

Sales Factor Apportionment Formula. The conference committee rejected the JFC/Assembly proposal to increase the sales factor to 55% of the apportionment formula used under the income and franchise tax on corporations. (Existing law is one-third each for sales, payroll and property value)

Levy Limits. The conference committee also rejected the JFC/Assembly proposal to modify municipal levy limits.

The bill is now being reviewed by the Governor who is expected to sign the bill and announce veto decisions by August 1, 2002. Below are summary highlights of how the Legislature dealt with various issue areas.

Major Provisions

The provisions discussed below are those issues of interest to our clients. Other major provisions may not be noted; for example, truth-in-sentencing provisions. For a detailed description of all provisions passed by the Legislature, go to Fiscal Bureau Comparative Summary of Assembly, Senate and Conference Committee Recommendations. (Warning: this is a 381 page PDF document) For a quick comparison of the positions taken by the Governor, Joint Finance, Assembly, Senate and the Conference Committee, go to HFO's Comparison Chart.

Campaign Finance Reform
The budget repair bill sent to the Governor includes comprehensive campaign finance provisions. The proposed changes would not go into effect until July 1, 2003 (tax check-off changes would go into effect for tax returns filed for calendar year 2002). Many observers question whether the sweeping changes will survive judicial review; a review that is guaranteed under a provision directing the Attorney General to promptly commence a declaratory action to determine whether the proposed changes are constitutional. Because of a controversial non-severability clause (some reform advocates call it a poison pill), if any provision is found unconstitutional, the entire reform package falls.

Highlights of the proposal include the following:

Independent Expenditures. Requires special interest committees to report independent expenditures and obligations incurred in support or opposition of a candidate for the 30 day period immediately prior to an election. Disbursements or obligations exceeding $250 must be reported within 24 hours and trigger reporting requirements beginning 60 days prior to the election.

Issue Ads. Imposes registration and reporting requirements on individuals or groups that run an issue ad within 60 days of an election.

Out of State Registrants. Requires out-of-state registrants to report the same information as in-state registrants. (Current law only requires out-of-state registrants to report on transactions involving Wisconsin sources or campaigns).

Contribution Limits. Maintains current law individual contribution limits, and generally maintains committee contribution limits, but provides that contribution limits would be reduced by 50% for a legislative candidate who does not accept public financing or file an affidavit of voluntary compliance with the disbursement limit.

Contributions to Incumbents. Prohibits contributions to incumbents from the first Monday in January of odd-numbered years until the biennial budget bill is enacted. Also prohibits fundraisers in Dane County while the Legislature is in session.

Public Financing. Creates a $20 tax check off and associated non-refundable tax credit to pay for public financing grants. (Credit scheduled to first go into effect for tax returns filed for tax year 2002). Increases the maximum public financing grant amount to 40% of the disbursement limit for the applicable office.

Supplemental Grants. Provides supplemental public financing to match opponent spending in excess of the disbursement limit established for that office, and to match independent expenditures and issue ads.

Public Broadcasting. Requires public broadcasting television and public access channels to provide free airtime to candidates.

For more details on the proposal, see Legislative Council Summary.

Energy
As with most areas, the major news is what the Legislature didn't do. They did not cut public benefits funding, as proposed by the Assembly; they did not eliminate the ethanol producer grant program, as proposed by the Senate; nor did they pass restrictions on utilities that affect residential wells, as proposed by the Assembly.

The Legislature did pass provisions that allow utilities to retain certain amounts of public benefits funding until December 31, 2004. After that date, these funds would flow to DOA's energy conservation public benefits fund. They also passed a limited provision on distributive generation. Under this provision, DOA and the UW Board of Regents must negotiate an agreement with a public utility that provides 150 megawatts of electricity to the University of Wisconsin-Madison, along with steam, and chilled water services.

An issue that was folded into the shared revenue debate related to utility aid payments for local governments as incentives to site new electric generation facilities. The Conference Committee compromise (adopted by the Legislature) deleted creation of a separate utility aid appropriation, a capacity-based distribution formula and aid payments for decommissioned plants.

Environment
Again, most of the major policy provisions were cut from the budget. The following major provisions were dropped:

Limits on civil immunity for those conducting environmental audits, and creation a "Green Tier" regulatory flexibility program.
Transfer of funding and positions from DATCP's Land and Water Resources Bureau to UW-Extension and DNR.
Ban on mercury thermometers.
Reductions in Stewardship bonding authority.
Requirements on solid waste facilities to assure waste streams do not include more than "incidental" amounts of recyclables.
Permanent creation of an alternative recycling compliance pilot program to allows local government to opt out of the certain separation and collection mandates.
Delay in initial vehicle emission inspection to the fourth year after model year (now, second year after model year).
Removal of existing limits on DNR authority to require fish ladders for dams.

The only environmental provision tracked by HFO that survived would provide a limited exemption to wetlands water quality requirements for Ashley Furniture. Ironically, during the legislative debate, Ashley announced their decision to expand out of state, citing DNR's wetlands requirements.

Economic Development
The Legislature adopted two provisions contained in the budget reform bill that affect key Department of Commerce programs. Funding for the Wisconsin Development Fund was reduced by $1 million bringing the total amount of funding down to $9 million in 2002-03. (The Senate proposed a $3 million cut.) General Purpose Revenue (GPR) funding for Commerce's Division of International and Export Services was also reduced by $500,000, with 2.5 GPR positions eliminated. The bill does, however, provide $500,000 in program revenue (PR) and 2.5 PR positions to replace the GPR funding and positions.

Forward Wisconsin, Inc. received a one-time $50,000 grant for a study to create a proposal for a national brand image for the state related to technology and biotechnology. They also voted to accelerate the schedule for issuing $158 million in bonding to fund the Biostar Initiative at the UW-Madison campus for construction of biological sciences facilities. Provisions were deleted that would have expanded the use of impact fees by political subdivisions and school districts for facilities and other purposes.

Transportation
he budget reform bill made several changes relating to transportation including the authorization of $140 million in general obligation bonds (subject to Joint Finance Committee approval) to compensate for anticipated reductions in federal highway aid. The budget reform bill also requires DOT to review and make determinations on applications to the Transportation Economic Assistance (TEA) Program on a year-round basis.

Several provisions were adopted relating to the SE Wisconsin freeway system including: requiring DOT to design the SE freeway system (with the exception of the Marquette interchange) to allow for capacity expansion to meet projected capacity needs for 25 years; and, prohibiting DOT from using state highway rehab and major highway funds for SE freeway projects - DOT must instead request the funds be transferred through the Joint Finance Committee's s. 13.10 process.

Financial Institutions
After debating financial modernization for credit unions and banks, super priority status of wage claim liens and the requirement of one free written credit report annually, the end result was to maintain current law in all four areas. They did pass provisions that prohibit retailers from including certain information on sales receipts.

Health Insurance and Health Care
Governor McCallum established a priority of maintaining funding for major health care programs such as Medical Assistance and BadgerCare when he introduced the budget repair bill. Those priorities were shared by the Legislature and no significant cuts were adopted in this area.

The main issues of debate centered on initiatives aimed at controlling health care costs. The Senate proposed a moratorium on hospital construction and expansion, which was ultimately rejected by the conference committee. The Assembly passed a Health Insurance Initiative (a modified version of AB 876), which included $850,000 to fund the Private Employer Health Care Coverage Program (PEHCC), a small business catastrophic reinsurance pilot program, a defined contribution plan for state employees, and OCI requirements to develop a uniform employee application form and uniform claims processing form. The conference committee adopted the Assembly provisions relating to the uniform application and claims processing forms but rejected the balance of the proposal. The conference committee also adopted $850,000 in funding for the PEHCC program but deleted an associated rate band restriction provision that was included in the Senate.

Health insurance benefit mandates relating to mental health parity and coverage of contraceptive devices and services were adopted in the Senate but rejected by the conference committee. The one mandate provision that passed relates to expanding the Point-of-Service requirement. Under current law, an employer that offers an HMO plan or a preferred provider plan must also offer a standard plan and point-of-service option plan. Exempt from the current law requirement are businesses with fewer than 25 full-time employees and businesses that have fewer than 25 employees electing to enroll in the alternative plan. The conference committee adopted a Senate proposal to delete the current law exceptions so that all employers, regardless of employee demand, that offered an HMO or PPP would also be required to offer the standard plan and point-of-service option. Business groups, small business organizations and insurance groups are generally opposed to the provision and likely to seek a veto.

Miscellaneous Provisions

DACTP Consumer Protection Functions. Deletes funding and 28 consumer protection positions from DATCP, and transfers related positions, funding and authorities to DOJ.

Agency Executive Positions. Although both the Senate and Assembly would have reduced executive positions, the conference committee agree not to delete or phase-out executive jobs.

Department of Electronic Government. Eliminates the Department and transfers duties to DOA.

Milwaukee School Choice Program. The conference committee rejected the Senate position that would have eliminated $24 million in funding for Milwaukee school choice program. The law will not change.

To receive further information on these or other initiatives in Wisconsin, contact an HFO lobbyist:

Jim Hough email: hough@hamilton-consulting.com

Bob Fassbender email: fassbender@hamilton-consulting.com

Pat Osborne email: osborne@hamilton-consulting.com

Amy Boyer email: boyer@hamilton-consulting.com