A Look Ahead at the Upcoming Budget Debate

State agencies request $69 billion for 2017-2019 budget

Will President Trump send significant responsibilities back to the states?

In first year of “201” requirement, MacIver examines agencies’ proposals

January 9, 2017

[Madison, Wis…] Wisconsin state agencies are requesting more than $69 billion in total funding for the 2017-2019 biennial budget, a debate that is quickly taking shape as Governor Scott Walker prepares for his State of the State address Tuesday.

While most Madison insiders and the phalanx of lobbyists hovering about believe that the transportation debate will dominate and may even hold up the passage of the 2017-2019 state budget, the Governor has signaled that he is, once again, looking to make significant long-term changes to state government and the way it operates. Might we see the next big Act 10-like reform that will fundamentally change our state for generations to come? We will soon find out.

As we begin the ’17-’19 budget debate, we take stock of where Wisconsin stands and highlight for you, the taxpayer, all the important upcoming debates – from important policy discussions to petty back-biting and everything in between. While we are not sure where Gov. Walker and the Legislature will end up on the gas tax, tax reform, welfare reform or a whole host of other important issues, we are sure that the budget debate itself and legislative deliberations as the budget moves through the process will prove to be highly entertaining and completely mesmerizing.

This year, agencies have also been required for the first time to submit budget scenarios for a zero percent increase and a 5 percent decrease – named the “201” requirement after the 2015 Act 201 law that forced agencies to submit the different scenarios. Some agencies took the requirement seriously, while some listed shock-value cuts and others barely made an effort at all.

As the Budget Debate Begins, Where Do We Stand?

Wisconsin’s 2015-17 budget ushered in the fifth and sixth consecutive year of no tax increases. It also partially repealed the prevailing wage, froze UW System tuition for two more years, and reduced bonding significantly over previous budgets.

As Wisconsin prepares to begin the next budget cycle, the state’s finances are in solid shape. While taxes have been cut repeatedly, state revenues grew 4 percent from fiscal year 2015 to FY16, a jump from $9.49 billion to $9.87 billion. Overall revenues are projected to continue growing by about 3 percent annually over the next biennium with a modest economic growth projection of 2.2 percent per year.

Wisconsin closed the books on the 2015-16 fiscal year with a positive balance of $331 million. “The State of Wisconsin completed fiscal year 2015-16 with a positive general fund balance of $331.0 million. With this total, we entered fiscal year 2016-17 with the fourth-largest opening balance in 16 years, all four coming after fiscal year 2010-11,” stated Department of Administration Secretary Scott Neitzel.

Total projected revenue in the next biennium is expected to increase by about $1.4 billion over the 2016-17 base. A healthy revenue stream means that Wisconsin is well-positioned for a deliberative, non-feverish budget debate in the coming months.

That’s a stark difference from just a few short budget cycles ago. Back in the Doyle years, Wisconsin lurched from one budget calamity to the next. In response to massive shortfalls between budgets, Doyle and his allies raised taxes, raided funds like the transportation fund, and used every budget gimmick they could to meet the state’s balanced budget mandate.

In the era of Walker, it seems those days are over.

Transportation Battle Takes Shape

The battle between Gov. Walker and some members of the Legislature over whether to increase transportation-related taxes and fees developed throughout 2016. Walker has been steadfast in sticking by his campaign pledge not to raise taxes or fees without a corresponding decrease elsewhere. However, some legislators say they’re open to increasing the gas tax, vehicle registration fee, or finding another new source of revenue like toll roads to tackle the state’s transportation needs.

In an open letter last year, Walker ordered then-Department of Transportation (DOT) Secretary Mark Gottlieb to submit a budget that prioritizes local infrastructure maintenance without raising taxes or fees. In September, the agency complied and submitted a $6.1 billion budget request that invests heavily in local infrastructure funds with zero tax or fee hikes.

The DOT budget request asks for an increase of more than $522 million from its base funding. That includes nearly $15.9 million in increased transportation aid to counties and more than $30 million in increased aid to municipalities. DOT is also requesting an increase of $14 million for the Local Roads Improvement Program and $5 million for the Local Bridge Improvement Assistance program.

New bonding levels are $500 million over the biennium, the lowest amount since the 2001-03 budget and a dramatic 41 percent decrease from the previous budget, which borrowed $850 million for transportation projects.

DOT is also requesting nearly $30 million for highway maintenance and traffic operation needs, $33.7 million for routine maintenance performed by the counties, one-time transfers of $19 million in fiscal year 2018 and $19 million in fiscal year 2019 as revenue to the segregated Transportation Fund.

After the budget request was submitted, then-Secretary Gottlieb spent about four hours testifying before a hearing of the Assembly Committee on Transportation, during which he clashed with several legislators on the funding question. Several weeks later, the administration announced Gottlieb’s sudden resignation. His replacement as DOT secretary is Dave Ross, previously head of the Department of Safety and Professional Service (DSPS). Ross is walking in to a high-profile and testy family fight between Republicans. Will Ross be a calm voice of reason and consensus or will his appointment add fuel to this combustible debate?

The transportation battle is likely to be the marquee matchup in developing the 2017-2019 state budget.

Substantial Tax Reform?

While Governor Walker has made significant and long-lasting taxpayer-friendly changes to state government, now is not the time to rest on his laurels.

With conservatives firmly in charge of the legislative process and Republican majorities at historic levels in each house, now is the time to consider comprehensive tax reform to keep moving Wisconsin forward. The state has made great strides in reducing the state’s tax burden, including taxpayer savings of nearly $5 billion over the last six years – not to mention the $5.24 billion Act 10 has saved since it was enacted in 2011.

Despite the progress, there’s much more work to do to keep Wisconsin economically competitive both nationally and internationally, to attract businesses and families, to help entrepreneurs set up shop and grow, and to encourage people to keep living here after they retire. Wisconsin loses an estimated $136 million in adjusted gross income to tax migration every year. Substantial tax reform could help stem this outmigration and make Wisconsin more competitive among the states.

Legislators should look to the future and consider major tax reforms that would flatten and widen the tax base. If Walker and the Legislature make serious and substantial changes to leapfrog Wisconsin ahead of our nearby competitors, our children and our children’s children will reap the benefits for years to come.

Overview of Budget Requests

Media outlets across the state predictably reported late last year that the state was facing a $693 million shortfall over the next biennial budget. However, this so-called “shortfall” is simply the difference between what state agencies have requested and projected revenues over the 2017-2019 biennial budget.

Remember, unlike Washington, Wisconsin has a strong balanced budget requirement and while agencies always request spending levels they want, Gov. Walker and the Legislature will pass a budget that matches spending with tax revenue so everything balances. Gov. Walker’s record also suggests that if the budget is somehow unbalanced, he will seek spending cuts to balance the budget rather than tax increases to fill the gap.

By recent historical standards, the $693 million figure is modest. In the last go-around, as the 2015-2017 budget was being developed, the gap between agency wish lists and revenues was $2.2 billion.

Here’s a summary of major agency requests:

By far the largest request was from the Department of Health Services, which asked for about $24.4 billion in total, a 5.1 percent increase over the agency’s base funding, which is determined by multiplying the agency’s current annual budget by two.

In a letter accompanying its budget request, DHS stated the request includes $452 million in new general purpose revenue (GPR) funding for Medicaid over the biennium. The previous three biennial budgets increased GPR spending on Medicaid by $650 million, $685 million, and $1.6 billion. While $452 million is a lot of money, the rate of increase in Medicaid spending during Walker’s tenure has slowed significantly.

“These slowing Medicaid growth rates reflect the success of Governor Walker’s entitlement reforms, efforts to improve health outcomes through better care coordination, and initiatives to identify and eliminate waste, fraud, and abuse,” DHS Secretary Linda Seemeyer wrote in a letter sent with the agency’s budget request.

The second largest request was from the Department of Public Instruction, which asked for about $13.8 billion, up 0.3 percent from its base funding. A significant component of the request was for $33.3 million to fund a public library system aid program increase of 13 percent.

The third largest budget request was from the UW System, which asked for $12.4 billion, up 1.7 percent from its base funding – a $210.4 million increase. A significant piece of that increase – $84 million – is a request for program revenue via increased student fees. Another $4 million GPR increase would fund the Focus on Operational Excellence initiative, which is intended to increase transparency and accountability, according to the UW budget request.

Another large increase is $26.1 million GPR for the UW System’s Focus on the Educational Pipeline initiative, which encompasses college options, 360 advising and developmental education, seamless transfer, new traditional financial aid, and meeting Wisconsin’s workforce needs, the budget request states.

UW is also requesting $6 million for its Focus on the University Experience initiative, which “involves creating experiences that cultivate new ideas and increased understanding in the University community,” the request states. In addition, UW requests $6.4 million in GPR funding “to increase creativity, knowledge transfer, and job opportunities across the state through the following programs: UniverCity Year, Wisconsin Vitality, and CareerConnect.”

The UW System’s budget request will likely be contentious as legislators continue to question how it spends the money it gets. In 2013, legislators discovered a nearly billion-dollar slush fund in the UW System’s coffers. More recently, UW-Madison has come under fire for offering a controversial course called “The Problem of Whiteness.”

The Department of Corrections asked for $2.5 billion, up 4.6 percent from its base. DOC proposes to spend the increased funding on various routine programs and new hiring. The department also is requesting just over $3 million GPR and 50 full-time equivalent positions in response to legislation passed last year that made all OWI 4th offenses a Class H felony.

DOC is also asking for nearly $2.4 million GPR and 16.5 full-time equivalent positions to improve staff ratio requirements at the Lincoln Hills School. The department’s budget also requests that minors under the age of 18 be placed at a juvenile correctional facility for sentencing, replacing the current age threshold of 16.

The Department of Revenue’s budget request of $425,558,900 is just a 0.3 percent increase from its base with no significant proposals for new spending.

One agency proposing a budget reduction is the Department of Workforce Development, which is requesting $695,118,000 – a decrease of 4.1 percent. DWD does not create any new initiatives in their budget request.

The Department of Administration also proposes a significant reduction. Its budget request is for $1,918,990,600, down 28.1 percent.

The agencies’ requests were submitted to the DOA last year and are the first stage of the biennial process of forming the next state budget. Gov. Walker’s administration will use these requests to assemble a budget proposal, which will be sent to the Legislature in February.

“201” Compliance

For the first time, agencies must comply with a new law – 2015 Act 201 – and include budget proposals for two additional scenarios:

  • A zero growth target in each fiscal year for the 2017-19 biennium
  • A 5 percent reduction in the agency’s state operations budget from the 2016-17 adjusted base in each fiscal year of the 2017-19 biennium.

Prior to Act 201’s passage, agencies would submit a single request with no particular impetus to reduce or control costs. Included in our basic analysis of each agency’s budget request will be a consideration of that agency’s Act 201 compliance.

While some agencies laid out concrete steps to comply with Act 201, others proposed simplistic solutions like massive staff reductions or draconian cuts to high-profile services to scare the public. Other agencies were downright snarky in their 201 proposals and refused to identify any real opportunities for taxpayer savings.

Department of Health Services – Under the zero percent scenario, DHS proposed staffing levels of 4,906 full-time equivalent positions, a reduction of 1,227.05 from their standard request.

Under the 5 percent reduction scenario, the department proposes 4,719.87 full-time equivalent staff, 1,413.18 fewer than their standard request. That’s in addition to converting some staff from contractors to state positions to save money, returning Milwaukee enrollment functions to Milwaukee County, re-allocating funds from state operations to local assistance, and reforming SeniorCare into a Medicare Part D wraparound program.

Department of Public Instruction – Under the zero percent increase scenario, DPI proposed staffing levels of 332.16 full-time equivalent positions, down nearly half from its standard staffing request of 649 such positions.

Under the 5 percent decrease scenario, DPI proposed the same staffing levels. DPI did not explain their reduction scenarios – they appear to have applied a simple five percent across-the-board cut to comply with the 201 requirement.

UW System – Under the zero percent increase scenario, the UW System proposes a full-time equivalent staffing level of 29,914.6 positions, 5,423.06 fewer than their standard request. UW’s zero percent proposal also states it will, “Limit the ability to be responsive to the needs of students and staff,” among other proposals.

Under the five percent reduction scenario, UW proposes 28,539.63 full-time equivalent positions and suggests a variety of reductions in operations and services. They also suggest the scenario “Will result in fewer class sections and could extend time to degree,” and reductions in public health support.

The UW System apparently misinterpreted Act 201’s requirement. While agencies were supposed to explain how they would respond to the two funding scenarios, it seems they assumed the law asked them to explain how students, staff, academic offerings, and even public health could suffer.

Department of Transportation – Under the zero percent increase scenario, DOT proposes to cut staffing levels by 807.12 full-time equivalent positions, from 3,496.79 under their standard request to 2,689.67.

Under the 5 percent reduction scenario, DOT proposes an additional reduction of 20 positions and a litany of reductions in services, such as eliminating service at travel locations, cutting annual salt purchases, and reducing management training and travel.

The DOT could’ve done better in identifying areas to save money, but instead they simply slashed staffing levels and eliminated services.

Department of Corrections – The department proposes minimal staffing reductions under the zero percent increase scenario, cutting 105.1 full-time equivalent positions from its standard request of 10,206.42.

Under the five percent reduction scenario the department proposes staffing cuts of 866.52 positions and anticipates that counties will utilize services for adult community supervision.

Department of Revenue – The department proposed adding one full-time equivalent position under both scenarios, noting under the five percent reduction scenario simply that it would reduce FTEs. The department didn’t seem very eager to comb through their vast operations for savings – a back-of-the-envelope calculation of staff cuts is so much easier.

Department of Workforce Development – The department proposes a flat draconian staffing reduction of 1,243 full-time equivalent positions under both scenarios, down from 1,631.55 in their standard budget request. DWD also proposes several spending reductions under the five percent reduction scenario. Once again, a department found it easier to simply whip out the calculator and figure out how many staff it would theoretically send packing.

Department of Administration – The department proposes eliminating 76.75 full-time equivalent positions under the zero percent reduction scenario. That’s in addition to converting contractor positions into permanent FTE positions to save money, which is also part of their standard request. DOA also proposes the reduction of various spending authorities.

Under the five percent reduction scenario, DOA proposes eliminating 84 positions, the reduction of even more spending authority, eliminating the mandated use of electric energy that is derived from renewable resources, and finding additional efficiencies.

Keep an eye on the MacIver Institute’s ongoing coverage of the state budgeting process as the complex process unfolds throughout the year.

The MPS Disaster – Do the People of Milwaukee Care?

In 2016, Milwaukee Public Schools (MPS) had an opportunity to reform its failing schools but decided to stick with the status quo. MPS and the Milwaukee teachers’ union battled constantly with reform-minded legislators who authored the Opportunity Schools Partnership Program (OSPP), a program intended to turn around failing MPS schools.

We’d also be remiss if we overlooked the fact that the vast bureaucracy at the Department of Public Instruction (DPI) has hardly lifted a finger to address the failures of the state’s largest school district. That is, other than to roll out new school report cards that conveniently remove MPS from the list of failing schools. Perhaps the state’s education agency is waiting for MPS to tackle its own problems – after all, MPS has more bureaucrats working for it than DPI.

The bureaucrats at DPI and MPS can’t keep ignoring the problems plaguing many of Milwaukee’s schools forever. In 2017, it’s likely that the state Legislature will take further steps to address the many issues at MPS and to work to help out the thousands of kids stuck in failing schools. That could include breaking the district up into smaller districts, removing some of the power from the MPS board, or using more sticks and fewer carrots if the district doesn’t get serious about rescuing its own students from its lowest performing schools. On the other side of the education spectrum, it’s also likely that school choice-friendly legislators will work to expand access to the four choice programs in the state.

Besides, all the political maneuvering in the world won’t exempt MPS from a bipartisan federal law signed by President Obama, the Every Students Succeeds Act (ESSA), which requires states take steps to reform their lowest-performing schools.

Whether they like it or not, the adults behind MPS’ systemic failures for decades will be forced to sit down and eat their veggies in 2017. At least we hope they will be forced to eat their vegetables.

Will the Legislature Finally Strike A Blow For Freedom?

As the budget process unfolds, there are a number of measures that the Governor and the state Legislature should consider to make Wisconsin more friendly to free markets and liberty. Here are some of the things we hope they consider:

Minimum Markup
After enjoying low gas prices for the past few years, Wisconsinites are likely to see prices at the pump climb to a five-year high in 2017. But there is a way the Legislature could help ease the burden of rising gas prices for hard working Wisconsinites while expanding freedom from Lake Michigan to the Mississippi.

A complete repeal of the state’s antiquated Unfair Sales Act, also known as the Minimum Markup law, would lift the requirement that gas stations artificially inflate their retail gas prices by 9.18 percent. Abolishing this price floor and the state’s Price Police that enforce it would encourage gasoline retailers to compete over customers, leading to lower prices.

Repealing the Depression-era law would also allow retailers of all sorts to set their own prices. Since the Minimum Markup law also requires all products be sold at or above the cost to the business, abolishing it would allow retailers to offer deeper discounts, foster more vigorous competition, and would be a win for all Wisconsin consumers.

Prevailing Wage
Speaking of eliminating antiquated, artificial price floors, the job of repealing Wisconsin’s prevailing wage law is only half done. While the prevailing wage was repealed for local projects in the last state budget, all state projects still must pay inflated wages based on arbitrary calculations under the (also antiquated) federal Davis-Bacon Act.

How much could Wisconsin taxpayers save? One study from the Wisconsin Taxpayers Alliance showed that Wisconsinites could have saved $200-$300 million on vertical construction projects in 2014 in the absence of prevailing wage. That estimate doesn’t even consider all other public construction that goes on in the state, including billions of dollars on road construction projects.

Examples abound of cost overruns thanks to the prevailing wage law. One six-mile ATV trail in Vilas county was initially going to cost $30,000 per mile, but when the prevailing wage determination was made the price shot up to $55,000 per mile. In the Village of Grafton, an already-completed water tower maintenance project exploded in price from $597,000 to $861,000. Since the project was already completed, local taxpayers had to come up with an extra $260,000.

If prevailing wage was costing taxpayers so much extra money for local projects alone, imagine how much could be saved if legislators finally repeal it at the state level.

Local Government Property Insurance Fund
When it comes to relics of days gone by, the hits in Wisconsin keep coming. Did you know the state government offers property insurance to local units of government? Well, it does. The state’s Local Government Property Insurance Fund dates back to 1911 when private insurance was still in the horse and buggy days and local governments couldn’t find insurance for their property.

Gov. Walker proposed eliminating the fund in the last state budget, but instead the Legislature balked at the Governor’s proposal. Considering that in today’s world, you can buy insurance from a Gekko or Aaron Rodgers, many local governments have since found insurance elsewhere. As a result, the fund has shrunk considerably and is in danger of becoming a bigger and more expensive liability for all state taxpayers.

As part of its 2017-19 budget, the Office of Commissioner of Insurance (OCI) proposed stopping the issuance of new property insurance policies and not renewing existing ones in an effort to phase the fund out. If the OCI budget passes as-is, the state government will nearly be out of the insurance business. Nearly…

State Life Insurance Fund
The state government is also in the life insurance business. According to the OCI’s website, the State Life Insurance Fund was established in 1911 “in response to a national scandal over the improper practices of some life insurance companies.” More than a century later, the state is still offering life insurance, despite innumerable private options.

Rep. John Nygren, who called for an end to the Local Government Property Insurance Fund, also called for an audit of the State Life Insurance Fund in December:

“Similar to the LGPIF, the SLIF has been experiencing difficulties for years. It is my belief that we should find a prudent solution to this fund and encourage the fund’s financial stability. Just like with the LGPIF, the state should not be in the life insurance business. With so many viable options in the market, a state-run life insurance fund is simply duplicative and outdated.”

Government Transparency
Gov. Walker issued an executive order last year that put new requirements on state agencies to respond to open records requests in a more responsive manner. The order required agencies to respond to records requests within 10 days when practicable, provide electronic copies at no charge when possible, and track requests as a way to measure agencies’ responsiveness.

The Wisconsin Freedom of Information Council praised the steps as “a gust of fresh spring air blowing across state government.”

However, they added that such measures could be expanded: “Local governments–cities, counties, villages, towns, school boards and other government entities, including the state Legislature–would do well to follow the governor’s lead and institute similar steps.”

As committed advocates of open, responsive government, we agree.

990 Motion
Speaking of transparency, the so-called “990 Motion” that the Joint Committee on Finance uses at the end of budget deliberations needs to be looked at. In previous budgets the 990 has been used to slip a wish list of special projects into the budget without much notice by the press or the taxpaying public. Notoriously, the Nth-hour 990 was also used in 2015 to include a provision that would’ve significantly altered the state’s open records law, giving legislators the power to essentially determine what records should be fair game for the public to see.

That attempt was defeated, and as a result, expect the public and the media to pay much more attention to any last-minute maneuvers as this budget is finalized. Reforming the use of the 990 Motion would prevent more last-minute hijinks, with the added benefit of stopping taxpayer-funded goodies from being hidden deep inside the state’s massive budget at the last minute.

The Trump Effect?

The giant variable in all of this state budget speculation is what President Trump’s first federal budget will look like. Will the new President look to prime the economy with an infrastructure-building stimulus plan like President Obama’s “shovel ready” American Recovery and Reinvestment Act?

Will the death-spiral that is Obamacare be repealed in 2017 and with it the 20 tax hikes used to prop up this disastrous law? If Congress believes it must replace Obamacare, what will it look like and how will it be paid for? What happens to President Obama’s promise for the federal government to pay for his financially unsustainable Medicaid expansion? Will Trump and Congress give power back to the states and turn over significant responsibility to the states for education, Medicaid, transportation?

Will Trump finally rein in the unelected bureaucrats who drag down our nation’s economy with stifling and burdensome rules? Any one of these decisions could have a dramatic impact on Wisconsin’s budget and the state’s finances. Only time will tell.

Governor Walker’s State of the State Address on Tuesday signals the opening round of the budget debate. With so many special interests already circling around the state capitol and too many politicians looking to impose their dominance on the process, the posturing has already begun.

Next month the governor gives his budget address where he will lay out the specifics of his next budget and his vision for the future of Wisconsin. Once the Joint Committee on Finance finally sits down to hammer out the actual budget bill, will an all-out public brawl erupt or will their differences be settled quietly behind the scenes? One thing is for sure – taxpayers will definitively know whose side their lawmakers are on.

The initial version of this story incorrectly stated that the DPI, not the DOC, would anticipate greater use of community adult supervision as part of its 201 compliance. This has been corrected.