2015-2017 State Budget Preview

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With inauguration day quickly approaching, the leadership has begun to announce the committee assignments for the upcoming session. Most members of the Joint Finance Committee have been announced, with the exception of the two Democratic Assembly members. This week, Senate Majority Leader Fitzgerald announced all the Republican Senate committee assignments, and Speaker Vos announced the Assembly committee structure – creating two new committees.

Budget Challenges

State Financial Condition: The state’s financial condition is solid, but not as good as the fiscal condition going into the last biennium. Going into the 2013-15 biennium, the state, for the first time in over 20 years, began the budget process with no structural deficit and a relatively high $760 million surplus. The surplus is gone and was essentially used to lower income taxes and provide property tax relief after funding increases in less discretionary programs and state expenditures.

The estimated structural deficit going into the next budget (2015-17) was recently revised by the Legislative Fiscal Bureau in September 2014 and went from a previous $642 million to $1.8 billion. The revision was precipitated by a shortfall of $281 million in actual revenue collection in FY 14 compared to budget estimates. To put the structural deficit in perspective – A $642 million deficit would be the second best starting position in over 20 years and a $1.8 billion deficit would be the third worst in over 20 years – with most budgets starting out in the $1.4 to $1.7 billion range.

The ultimate starting position for the next budget will depend on whether revenue collection and/or expenditures are higher or lower than budgeted through the end of this fiscal year (FY 15), which ends June 30, 2015. DOA reported in November that their latest estimates put the general fund at $132 million in the hole at the end of this biennium – assuming that all state agencies spend all of their current appropriations.

Tax Reduction & Property Tax Relief: Tax reduction has been a budget priority the last couple of sessions, and will likely be a top priority in the Legislature next session. According to the non-partisan Legislative Fiscal Bureau (LFB April 30, 2014 report), tax law changes that have passed since Governor Walker took office in January 2011 have resulted in a net savings to taxpayers of $1.94 billion over the last four years.

Individual and franchise taxes were reduced by a total of $1.39 billion, which includes a total of $746 million associated with lowering income tax rates. Property taxes were reduced by $536 million, with the bulk of that savings coming in the form of enhanced aid ($406 million) to the Wisconsin Technical College System as an offset against local property taxes.

While these tax changes are good news for Wisconsin taxpayers, they certainly have an impact on the amount of revenue the state will have available for the 2015-17 budget.

Transportation Infrastructure Funding: In early-April of 2014, DOT Secretary Mark Gottlieb publicly announced that the state is facing a $600 – $700 million shortfall in the next state budget to maintain the current transportation program and services. On November 14, 2014 the Secretary officially submitted his biennial budget request which calls for roughly $1.325 billion in new gas tax and fee revenue ($751 million) and $574 million in general purpose revenue (GPR) support for the transportation budget. He described it this way: “By any measure, this request is ambitious and far reaching.” 

The Governor and legislative leaders have previously indicated a level of support for dealing with long-term transportation funding next session, but have not specifically endorsed the level of funding nor the fund sources outlined in Secretary Gottlieb’s recent budget request. There remains considerable debate on how best to shore up transportation funding. Given the Secretary’s recent budget request, the Governor and legislators have a range of options and choices, which include an unprecedented amount of GPR support, and puts transportation into the general purpose funding mix.

Medicaid Program Funding: The Medicaid program was facing earlier projected shortfalls of as much as $93 million GPR, but the Department of Health Services (DHS) recently reported they are now on track to be balanced by the end of the biennium. The budget challenge for next session relates to the amount of GPR the department estimates will be needed to cover the cost-to-continue for the existing program over the 2015-17 biennium. In the agency budget request submitted to DOA in September, DHS Secretary Kitty Rhoades identified that the agency will need an additional $760 million GPR to fund the current Medicaid program in the next biennium.

The current Medicaid program is budgeted at $4.8 billion GPR for the biennium ($16.3 billion All Funds). It is the second largest GPR expenditure in the budget and now comprises roughly 15% of the $30.6 total GPR appropriations.

K-12 Public School Funding: The single largest GPR appropriation in the state budget is for Elementary and Secondary School Aids. State aid to public schools accounts for $10.1 billion or 33.1 percent of the total, current GPR budget. In November, State School Superintendent Tony Evers submitted the Department of Public Instruction budget request calling for an increase of $613 million GPR for school aides and an overall proposed GPR increase of $695 million. While it is too early to predict what level of spending will be proposed by the Governor or adopted in this area, the sheer size of the appropriation makes it a key GPR budget issue each cycle.

Summary: The state is in relatively good financial condition going into the 2015-17 biennium, but not nearly as good as two years ago. The current financial condition and re-occurring budget demands looming in major program areas (such as Medicaid, Transportation, and School Funding) will put considerable pressure on the allocation of available GPR in the next budget. How much GPR will be available for these budget demands will likely continue to be weighed against the priority the Governor and a number of legislators put on funding additional tax relief.

In total, DOA reported in November that agency budget requests for the 2015-17 biennium exceed anticipated revenue by $2.2 billion. GPR revenue growth for the next biennium is estimated to increase by $1.4 billion. Those numbers alone illustrate that agency requests will need to be substantially modified to balance the next budget. These are not particularly unique budget dynamics for the Governor and the Legislature to deal with, but it does provide a preview of the big ticket challenges confronting policymakers next session.

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