January 22, 2008

Of Big Deficits and Short Memories
Welcome to the State Budget

By George Lightbourn

As it increasingly appears that we have a recession in our future, I am not comforted by our Governor’s insistence that things are just fine. 

Last week the WPRI published a fine piece done by Christian Schneider that posed the question; how well could the state budget absorb a recession?  The answer is that a recession will blow a $4.2 billion hole in the budget.  Schneider’s analysis was based on modeling a rather mild recession, about the magnitude of the downturn we experienced in 2001.  You will recall that the 2001 recession so mild that it was over before the economists had actually pronounced it a recession.

Yet that weak downturn washed over the Wisconsin state budget with the force of a tsunami.  Sales tax receipts began looking weak right around the Christmas season.  The following spring income tax collections were considerably down.  By summer the red ink was flowing freely.

Every recession has its own footprint.  In 2001 the paper wealth that many of us had accumulated with the run up of the NASDAQ vanished.  What had not vanished were the spending commitments that depended on those revenues.  So too, the recession that looms over the current state budget will have its own footprint.  The tightening of the credit markets is especially troubling in that it stands to pinch business expansion. 

Schneider’s analysis pegs the 2008 problem facing the state budget at $4.2 billion over the next four years – the same period it took state government to recover from the 2001 recession.  That’s $4.2 billion of real money that will have to be made up either through tax increases, spending cuts or more maneuvers like the raid on the Patients Compensation Fund.

The irony of the fragility of the state budget cannot be lost on Governor Doyle.  After all, he was swept into office on a tide of red ink.  Who can forget the $3.2 billion problem left on his doorstep?  Of course none of us can forget because the Governor reminded us about that $3.2 billion at every turn during his first term.

But apparently the Governor did forget.  As Schneider notes, the Governor’s 2008 budget set aside a budget cushion of just $65 million.  That balance (which is $19 million less than the budget balance required in 1984 when the law was changed to require a cushion) is little more than a rounding error in the $13.9 billion budget. 

Last summer we were treated to a fleck of good news when accountants put $50 million into a rainy day account.  This mandatory deposit (amounting to ½ of the unexpected revenue collected last year) was the first made under a law enacted during the last recession.  There can be little doubt that, without that law, the $50 million would have long since been spent.

But no one should find comfort in that $50 million reserve.  Schneider shows how fast that $50 million would evaporate.  In a recession, it would disappear quicker than a roll of quarters at a casino.

So the Governor has had six years to put state finances on sounder footing, but he has passed.  What is baffling is that Governor Doyle seems to have pretty keen political instincts.  His favorable ratings tend to go up and down like any politician, but more than a few life-long Republican business leaders have voiced approval of Governor Doyle’s performance.  So why is it that the Governor would ignore the soft underbelly of state government?  Why would he risk all of the political capital he has accumulated on the fragile house of cards that we know as the state budget?  Why has he been satisfied with Wisconsin’s standing as one of the five states that are least prepared for a recession?

Good questions, maybe he will have some answers in the State of the State.