Fiscal Meltdown on Wall Street and Pinckney Street

By George Lightbourn

As this is being written the details are beginning to emerge about the demise of Lehman Bros. and the acquisition of Merrill Lynch for pennies on the dollar.  One lesson to take from the downfall of these once vital, invincible financial houses is how fast the balance sheet can deteriorate.  And the balance sheets reveal a story of imprudent decision after imprudent decision layered higher than a royal wedding cake.

A series of questionable financial decisions and a rapidly sinking balance sheet – that same phenomenon is happening in Wisconsin government.  State finances are precarious, to say the least, and stand to come crashing down just like those venerable Wall Street investment banks.  However, the meltdown of Wisconsin state government will actually have more of an impact on most of us.  You see, the meltdown of Wisconsin will force a rapid defunding of programs that affect the poor and the young who depend on a helping hand from government.  It will also affect every unit of government that receives financial assistance from Madison.  And surely our financial meltdown will cause increased taxes, probably at a time when people can least afford it. 

The causes for the fiscal meltdown of Wisconsin are exactly the same as those that felled Lehman, Merrill and Bear.  For years Wisconsin accountants have looked the other way while the basic tenets of public finance have been violated.  Democrats and Republicans alike have prided themselves in finding cracks in the law and tiny openings in accounting rules that have allowed Wisconsin to spend more than it is taking in. 

That’s right, Wisconsin state government has been spending more than it is taking in and making up the difference by: “transferring” money from sacrosanct funds, by expanding the definition of borrowing and using the proceeds to patch leaky operating budgets and never putting any substantial amounts aside in a reserve fund.  Wisconsin is one of four states in which the 2008 ending balance is less than 1% of spending.

As with Lehman, Merrill and Bear, those closest to the state’s books know that the balance sheet is rotten, but fixing rotten balance sheets has become a way of life in Madison.  Those men and women who are able to find cracks in the accounting rules that allow the lights in the Capitol to remain lit are celebrated as fiscal stars.  Yet, they know that one day something will happen that will bring down the house of cards they have helped build.  The somber news of their brethren on Wall Street must make them queasy and restive.  It must seem so familiar.

At what point will Wisconsin’s fiscal condition begin the meltdown?  It will probably take a true recession to show how bare are Wisconsin’s fiscal cupboards and how many times our leaders over the years have decided to accelerate spending when all signs pointed to a slowdown.  If state revenues were to decline by as little as 5%, the balance sheet will likely unravel and the spending cuts and tax increases that we have been avoiding for years will all come rushing to the foreground. 

Over the past several months the WPRI has documented some of Wisconsin’s most significant fiscal problems: debt, fund transfers, unfunded liabilities.  We will continue to review the fiscal practices and highlight irregularities and mistakes.  Our goal is for state leaders to stand up, make the tough decisions that are called for all so we can avoid the pain and embarrassment that Wall Street is feeling today.

-September 19, 2008

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