By Steve Prestegard – A special mi Perspectives to the MacIver Institute
Gov. Scott Walker signed the 2011–13 budget into law last month.
As always, it is an imperfect document. The 2011–13 state budget is better in most ways than previous state budgets, and certainly better than anything the previous Governor or previous legislatures would have devised had the Nov. 2 election results been different. Start with the fact that the 2011-2013 state budget did NOT raise taxes to fix the $3.1 billion dollar structural deficit. Can you remember the last time a politician actually fulfilled a campaign promise to not raise your taxes? I can’t.
But because all of mankind’s creations are imperfect, the MacIver Institute recently published an opinion piece on 10 ways the 2011–13 state budget could be improved.
Consider this point number 11: The 2011–13 budget needs to be balanced. It’s not balanced — in fact, it is billions of dollars in the red — and I make that claim that without even reading the budget.
How can I assert that the budget isn’t balanced without reading the state budget? Why, state law requires that the state budget be balanced, you reply. Walker is claiming a $300 million surplus!
The answer is that state law requires that state budgets be balanced on a cash basis. There is no such requirement that state budgets be balanced on the basis of Generally Accepted Accounting Principles(GAAP), a much more accurate measure of finances on which most states measure their books.
I am not an accountant (although my brother is), but the simplest way to describe cash vs. GAAP is that with cash accounting revenues are listed as paid when they are received, and expenses are listed as paid when the actual payments are made. (Those who are really interested in the Governmental Accounting Standards Board GAAP principles can read them at www.gasb.org/st/index.html.)
Bias Software, which sells local-government accounting software from Spokane, Wash., summarizes GAAP by writing that “Many professionals will argue that GAAP should be the preferred method of accounting as it provides much more detailed and sophisticated long term information, thus allowing policymakers to make better decisions. It takes into account the financial impact of future concerns like the corrosion of public infrastructure or the growing liability of compensated absences.”
According to the Wisconsin Taxpayers Alliance, as of June 30, 2010, the state had a general fund balance of $89.6 million and a GAAP balance of $2.94 billion … with a minus sign before the dollar sign. The GAAP deficit on a per capita basis and as a percentage of gross state product was second worst in the U.S., behind only Illinois.
If the state budget is in GAAP balance June 30, 2012 or June 30, 2013, I will figure out some way to make a public mea magnifica culpa, but I’m not going to lose sleep over it.
The GAAP deficit is not a new phenomenon. The 2009–10 GAAP deficit is 8.5 percent larger than the 2008–09 GAAP deficit of $2.71 billion, which was fourth worst in the United States. Even in the Great Recession year of 2008–09, only 12 states had GAAP deficits. But between 1999 and 2009, according to the WTA, Wisconsin and Illinois were the only two states in the country to have GAAP deficits every year. (In contrast, 35 states had no GAAP deficits in that decade.) This problem has been around for a long time and blame can be shared by both parties.
The comparative lack of specificity in cash accounting may explain another feature of Wisconsin government finances: debt up to your eyeballs. Governmental debt totaled $15.21 billion in 2010. The state’s Unrestricted Net Assets (gross assets minus money owed on those assets) totaled $9.46 billion, again with a minus sign before the dollar sign. As the WTA put it, “this means ‘no funds were available for discretionary purposes,’ such as paying off creditors.”
The deficit and debt numbers are certainly reflected in the state’s sinking bond ratings — which inconveniently affect the cost of debt — now in the lower half of states by the three bond rating services. Again, only Illinois has worse state finances as measured in low bond ratings.
Many small businesses use cash accounting. I owned a business in the early 1990s, and we used cash accounting. But our financial figures had five or six digits, not up to 14, as state government uses. It is, frankly, crazy that an enterprise that spends more than $30 billion every year measures its finances with the same method the owner of a lawnmowing service would measure his or her company’s finances. And, in fact, it is illegal for a company of more than $5 million in gross receipts or an organization of more than $7 million to use cash accounting.
It’s easy to understand why state legislators have not rushed to change state law to require GAAP balance instead of cash balance. Most voters probably lack interest in the green-eyeshade details of the budget until it directly affects their pocketbooks. Regardless of the stated vs. actual reasons for the budget repair bill and its curtailing of public employee collective bargaining “rights,” the $136.7 million hole in state finances during the ending-this-week budget cycle certainly focused our minds on the state’s fiscal condition.
That $2.94 billion negative balance is also the equivalent of approximately 41,408 state employee full time equivalents (given that total compensation for a state employee averages $71,000), or nearly 60 percent of the state workforce of 70,000. Or, put another way, to eliminate the $2.94 billion deficit by tax increases would have required tax increases for a family of four exceeding $2,000.
For someone in Madison to propose statutory shifting from cash to GAAP accounting would require admissions from both parties that state finances are a bigger train wreck than either party is willing to admit, and that both parties have had prominent roles in derailing state finances. The 2011–13 budget, even with its minimal (by Wisconsin standards) total spending increase, should instead have been cut by nearly 10 percent to be called a truly fiscally responsible budget.
It’s apparent that the only way that state finances will truly get under control is to put permanent controls on state finances. Around Tax Day, the Tax Foundation estimated the difference between actual state spending and projected spending based on such common spending limits as inflation, population growth and gross state product growth. Had those controls been in place, between 2007 and 2009, the state would have spent, just on General Purpose Revenue (also known as “Fund 10”) spending, $600 million (inflation plus population growth) to $1.1 billion (gross state product growth) less than the state spent on GPR spending. Had spending controls been in place starting in 1977, state government would be 10 to 30 percent smaller (depending on which controls were used) today, and with taxes not needing to be as high, state residents would have had, by one measure, nearly $1 trillion more money.
The state Constitution says that “The blessings of a free government can only be maintained by a firm adherence to justice, moderation, temperance, frugality and virtue, and by frequent recurrence to fundamental principles.” At the moment, Wisconsinites are assured of the fundamental principle of fiscal restraint only to the degree that it serves the political interests of the Governor and the legislature. The 2011–13 budget is an example of comparable fiscal restraint more than actual fiscal restraint.