WPRI Report:

WISCONSIN’S “SUBPRIME” BUDGET PLANNING

By Christian Schneider

January 14, 2008

Table of Contents:

I.      Executive Summary / Introduction
II.     The Possibility of Recession
III.    The Recession of 2001
IV.    Wisconsin's History of Weak Fiscal Management
V.     The Minimum Statutory Balance in Wisconsin
VI.    Budget Stabilization Fund
VII.   Is Wisconsin Well Prepared for a Recession?
VIII.  Conclusion / Recommendations
IX.    Appendix A
X.     Endnotes

EXECUTIVE SUMMARY/INTRODUCTION

In late 2000, Wisconsin state government started to get some bad news.  With the economy softening, tax revenues to the state were dropping.  Yet there were still bills to pay.

In fact, the economy went into a full-scale recession in 2001, which slowed the growth in tax revenues almost to a halt.  Yet committed state expenditures were scheduled to keep growing at a healthy pace.

The recession of 2001 exposed a dark secret in the way Wisconsin plans for economic downturns.  It doesn’t.  Wisconsin is near the bottom in the nation in setting aside money for fiscal emergencies, which makes budgeting during a recession a fiscal high-wire act.

Nearly every state in the U.S. sets aside a portion of their budget in a “rainy day” fund, or mandates a minimum balance to protect themselves from economic downturns.  Wisconsin is near the bottom in the nation in both.

This lack of financial planning has had dire consequences in recent years.  In order to cover the shortfalls brought on by a lagging economy, the Governor and Legislature have had to resort to higher taxes and questionable fiscal maneuvers to balance the state budget.

In fact, while Wisconsin has yet to dig out of the hole created by the last recession, some economists are seeing signs that the economy may be weakening once again.  While nobody can accurately determine when a recession will occur, it appears Wisconsin state government will be unprepared in the event that it does.

As demonstrated in this report, even a mild recession, as was seen in 2001, would cause a budget imbalance of up to $1.4 billion in Wisconsin in the state’s current biennial budget.  Furthermore, the lack of state planning for such a downturn serves as a recipe for more damaging tax increases and detrimental fiscal maneuvers.  It appears that despite the pain caused by the last recession, Wisconsin state government has learned nothing.  Wisconsin’s budget planning is clearly far from ideal; to use a term which has recently become familiar, it can be fairly characterized as “subprime.”

THE POSSIBILITY OF RECESSION

In early 2008, the American economy presents a mixed picture.  Rising oil prices, high mortgage default rates, and a slowdown in the housing market have led some economists to forecast a significant economic slowdown, or even a recession.  On November 19th, 2007, the National Association for Business Economics released results of a survey showing roughly one in five of its economists figured the risk of a recession was more than 50%.[i]

Naturally, it is crucial that state governments  pay close attention to what direction the economy might take.  State revenues are linked closely with growth in the economy, and negative growth can throw the state’s books out of balance quickly.  Even a mild recession can reduce revenues to the state significantly.

The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”  Others use a more standard definition of “a decline in GDP lasting for two quarters or more.”  The last recession in the American economy began in late 2000 and stretched into the first three quarters of 2001, which saw negative growth.  In the final quarter of 2001, positive GDP growth again appeared.

In a speech before Congress in November of 2007, Chairman of the Federal Reserve System Ben Bernanke warned of a slowing economy while announcing a quarter-point reduction in the federal discount rate.  Bernanke noted that while economic growth in the third quarter of 2007 had been a strong 3.9%, indications were that such strong growth could not be maintained over the remainder of the year.[ii]  Bernanke warned that because of the reduced availability of credit, the contraction in housing-related activity would continue to intensify.  If the housing market completely bottoms out, it could mean a significant negative effect on other sectors of the economy.

Some experts go even further in their negative reviews of the economy.  In September of 2007, University of Wisconsin-Madison economist Donald Nichols said he believed a recession was likely.  Nichols based his prediction on the “popping of the risk and housing bubbles” caused by the collapse of the market for subprime mortgages.[iii]

In the mid-2000s, a competitive credit market encouraged more lenders to offer “subprime” mortgage loans to individuals with lower credit ratings.  In March of 2007, the value of subprime mortgages in the U.S. was estimated to be $1.3 trillion,[iv] with over 7.5 million first-lien subprime mortgages outstanding.  These subprime loans promised low interest rates in the short term in exchange for a ballooning rate after a certain period.  It is expected that nearly 450,000 subprime loans will undergo this interest rate reset before the end of 2008.[v]  When the rates change, many families are finding that they can’t handle the increased payments, and are forced into foreclosure.  At the least, these families have less disposable income for other purchases.

Professor Nichols believes that the spillover effect from this housing crisis may have already begun, and could drive the economy into negative growth.  He cites slumping auto and retail sales, as well as a survey that indicates a willingness by business leaders to postpone large investment and curtail hiring.

Nichols isn’t the first expert to warn of the possibility of recession.  In February of 2007, former Chairman of the Federal Reserve Alan Greenspan said he believed a recession was “possible” by the end of the year.  Greenspan said he believed that the U.S. economy was nearing the end of an expansion cycle.  While Greenspan said that he believed there was no spillover effect  from the slowing housing market on the economy, he noted that U.S. profit margins had begun to stabilize – which may be the sign of the end of a strong economic cycle.[vi]

Nouriel Roubini, a professor of economics at New York University, not only believes the American economy is headed toward a recession, but that the impending recession will be worse than the downturn in 2001.  Roubini argues that the dot-com bust of 2001 affected mainly wealthy NASDAQ shareholders, while a housing industry-led recession would have a much broader scope.  Roubini points out that 30% of the employment growth in the past three years was housing industry-related, and a significant downturn in home construction and sales could cause widespread damage throughout the economy.[vii]

While nobody knows precisely what direction the economy will take, it is prudent for governments to plan ahead for economic downturns.  This is something state governments across the U.S. have figured out – yet Wisconsin still lags well behind most states in recession-readiness.

THE RECESSION OF 2001

In order to understand what might await state government finances in the event of a recession, it is instructive to review the most recent downturn in 2001.

According to NBER, the U.S. economy went into recession in November or December of 2000.[viii]  This recession was the tenth such recession since World War II and followed a record ten straight years of economic growth.  According to NBER, the previous record for uninterrupted economic growth was set in the 1960s, a period of eight years and 10 months lasting from February 1961 to December 1969.

The late 1990s delivered unprecedented economic growth and consumer confidence.  The rise in internet-related stocks boosted Wall Street and the economy.  Investors in the dot-com boom were making money and spending lavishly.  As a result, state treasuries saw large increases in sales and income tax revenues.

In the 1990s, personal income of the average Wisconsinite grew by 57%[ix], while inflation only grew by 32%.[x]  As a result, state revenues grew from $5.6 billion in 1990 to $10.9 billion in 2000, an increase of 94%.

On March 10th of 2001, the technology-heavy NASDAQ composite stock index hit an all-time high of 5,048.62, which was double its value just a year before.  At this point, technology stocks began to fall quickly.  Massive selloffs of high profile tech companies occurred on Monday, March 13th, which may have set off a chain reaction of individual investors dumping their stocks.  In just three days, the NASDAQ index had lost 9% of its total value, due to large scale dot-com selloffs.

Yale economist Robert Shiller believes that in many ways, the dot-com boom foreshadowed the housing problems of today.  Shiller believes that the same irrational exuberance that caused investors to overvalue technology stocks has caused them to put too much faith in the value of their homes.  As a result, housing is overvalued, partly driven by lowered credit standards.[xi]

With the economy in decline in 2001, tax revenues to the State of Wisconsin fell.  This caused significant problems with state finances, as much of the large revenue increases realized in the late 1990s was committed to new programs.  In addition, Governor Tommy Thompson signed a broad tax cut which was phased in between 2000 and 2003.  As a result, the state reported a $651 million projected shortfall in January of 2001,[xii] a $1.1 billion projected deficit in August of 2001,[xiii] and a $3.2 billion projected deficit by 2003.[xiv]

Despite this large impact on the budget, many economists believe the 2001 recession was rather mild.  According to Curt Hunter, Senior Vice President and Director of Research for the Federal Reserve Bank of Chicago, “the 2001 recession … was mild compared with other recessions,”[xv] and was short-lived by comparison.  In fact, some believe that without the damaging effects of the September 11th, 2001 attacks in New York City, the economic downturn may have been too mild to be considered a recession.[xvi]

This fact may lead one to ask: If the recession was so mild, why did it have such a severe impact on the Wisconsin budget?  If a similar recession were to hit in 2007 or 2008, what would the effect be on the current Wisconsin budget?  These questions will be addressed in the following sections.

WISCONSIN’S HISTORY OF WEAK FISCAL MISMANAGEMENT

There are several fiscal management tools used by state governments to mitigate the effects of economic downturns.  Most notably, nearly every state has a minimum statutory balances and budget stabilization funds from which to draw in the event of a shortfall.

In the years of strong revenue growth in the late 1990s, states were experiencing record ending balances (including stabilization funds).  According to the National Association of State Budget Officers (NASBO), nationwide ending balances reached 10.4% of expenditures in 2000, and 9.4% in 2001.  During the 2001 recession, states were able to draw on $25.8 billion of reserves to help balance their budgets.  As a result, ending balances had been reduced to 3.7% of expenditures.  Balances built up over the previous years served to ameliorate many of the budget problems caused by lagging revenue.

Following the recession in 2001, most states have gotten back on track in setting money aside for in a budget reserve.  In 2006, nationwide ending balances in state budgets had reached $62.1 billion, or 10.9% of expenditures.  Increased revenue due to a growing economy has contributed to these new funds, as states have learned their lesson about the importance of setting aside money for emergencies.

Most states have learned their lesson, but Wisconsin has not.  Wisconsin remains one of only four states which retains a minimum statutory balance under 1% of expenditures.  Wisconsin had ending balances of 0.4% of annual spending in 2006 and 0.6% in 2007, and has budgeted a minimum balance of 0.4% in the 2008 budget.  This compares to a nationwide average of 8.2% in 2007.[xvii]  By the standard set by other states, Wisconsin’s government is running on fumes.

In November of 2007, Standard and Poor’s downgraded the outlook for Wisconsin’s bonds from “positive” to “stable” based in large part on the state’s lack of reserves.  According to S&P analyst Peter Block, “Any variation in revenue performance could produce relatively large funding gaps, which are not easily recoverable given existing resources.”  Block added that while the state has taken steps to reduce its structural deficit, “we just don’t think they have the budget structure – which is a combination of revenues, tax structure, and level of expenditures – to achieve meaningful surpluses.”[xviii]

Of course, any time funds are available to a state government, there are a number of interests competing for those dollars.  In the 1990s when Wisconsin was amassing unanticipated revenue, the Governor and Legislature chose to increase school aids, reduce income taxes, and provide a sales tax rebate rather than saving that money.  Clearly, in their estimation, there was no need to leave money unspent when it could be used to benefit the state’s citizens.  Unfortunately, these decisions led to some costly consequences during the downturn of 2001.

THE MINIMUM STATUTORY BALANCE IN WISCONSIN  

A minimum statutory balance protects the state from incidental revenue shortfalls or expenditure overruns within the current budget.  It is usually money set aside and left unspent, to shield the state from having to borrow to cover cashflow shortages. 

The Wisconsin Legislature first passed a minimum balance requirement in 1981.  The new law required a balance of 1% of biennial expenditures.  Yet before that legislative session expired, the requirement was lowered to 0.5% of biennial expenditures, setting a precedent that would be followed often in later years.  The 1983-85 budget bill kept the minimum balance at 0.5% of total biennial general purpose appropriations, but later in that session it was changed back to 1%.  Ironically, these initial minimum balance requirements were enacted as a response to revenue shortfalls in 1980-81.

Following the 1983-85 budget, the 1985-87 budget bill kept the requirement that the balance be 1% of biennial appropriations.  However, due to a projected budget shortfall for the second year (1986-87) of that budget that was announced in the fall of 1985, a 1986 budget repair bill was passed which lowered the balance requirement to $72.9 million, or roughly 0.75% of biennial appropriations.

Starting with the 1987-89 budget bill, the minimum statutory balance was  set at 1% of annual general purpose appropriations, where it remained with minimal changes for a number of years.  In the 1999-01 budget bill, Governor Tommy Thompson proposed a new graduated scale for the minimum balance.  The Governor’s proposal called for the minimum balance to gradually increase from 1% of annual expenditures to 2% over a period of five years, and remain at two percent thereafter.  In the final version of the budget, the Legislature slightly altered the schedule, and completely eliminated the minimum percentage for 2001-02.[xix]  Fiscal management could not compete with other legislative priorities.

With enactment of the 2003-05 biennial budget, the scheduled minimum balances on a percentage basis were changed.  Rather than a 1.6% and 1.8% balance, respectively, for 2004 and 2005, the Legislature and Governor merely crossed those numbers out and wrote in amounts of $35 million in 2004 and $40 million in 2005.  In the subsequent budget, the minimum balance was increased to $65 million through 2008-09 after which it was scheduled to become 2.0% of annual spending.  Finally, the 2007-09 budget bill extended the $65 million figure for two more years, through 2010-2011, and set the amount at 2% of annual spending thereafter.  Those were challenging budgets, and budget reserves were regarded as a luxury the Governor and Legislature did not think they could afford.

It should be noted that the $65 million ending balance figure for 2008-09, at the end of the current biennium, equates to about 0.45% of annual appropriations, or roughly 0.23% of biennial appropriations.  Hence, in the 28 years from 1981-82 to 2008-09 the ending balance requirement has gone from the initial 1% of biennial appropriations to effectively less than one-quarter of 1% of biennial appropriations.  It’s somewhat depressing to realize that over the past quarter century the state’s required budget reserve has actually dwindled.   

Table 1 details the history of the required general fund statutory balance in the Wisconsin State Budget, starting in 1984.

Table 1

Source:  Wisconsin Legislative Fiscal Bureau 2007 Informational Paper #72, “Budget Stabilization Fund and the General Fund Reserve Requirement,” and LFB Summary of Budget Provisions, 2007 Wisconsin Act 30, December 2007.

As can be seen above, the 2003 fiscal year was the last year in which the percentage balance standard was applied.  Since then, minimum balances have been applied as a fixed dollar amount, which fall well short of 1% of gross appropriations.  In fact, it is worth noting that the current $65 million minimum statutory balance is actually less than it was in 1984 when the balance was first enacted.

BUDGET STABILIZATION FUND

While minimum statutory balances protect states from short-term downturns, budget stabilization funds cushion governments from long-term revenue loss.  Instead of merely being money left unspent, budget stabilization funds usually require an appropriation to a separate fund, which can be carried over from budget to budget.

According to NASBO, 47 states have some form of a budget stabilization fund.  Nearly three-fifths of those states limit the size of their stabilization funds, usually setting them between 3% and 10% of appropriations.  In most states, the fund is set up statutorily; however, in seven states the stabilization fund is mandated by the state constitution.[xx]  Furthermore, moneys are usually appropriated to stabilization funds by some automatic mechanism; in most instances, it isn’t left up to legislatures to decide to fund them.  Generally, there are heightened restrictions on how state legislatures may use the funds, such as requiring legislative supermajorities for appropriation.[xxi]

While Wisconsin has a budget stabilization fund, it had not been meaningfully funded until recently.  In 1985, the fund was created to “provide state revenue stability during periods of below-normal economic activity when actual state revenues are lower than estimated revenues.”[xxii]  However, no funds were deposited in the fund until 1998, when State Representative Doris Hanson and Mr. Nathan Henry donated $10 and $2, respectively, to the fund.[xxiii]  The $12 remains in the account, accumulating interest, along with several subsequent contributions from individuals.

In 2001, the biennial budget contained a provision, introduced by Governor Scott McCallum, that created a mechanism for funding the budget stabilization fund.  This provision was passed during the recession of 2001, in anticipation of future revenue downturns.  Under 2001 Act 16, 50% of tax collections in excess of anticipated revenues were required to be deposited in the stabilization fund, with two limitations.  First, the stabilization fund  could not grow to over 5 percent of general fund expenditures.  Second, the transfer  could not cause the general fund to fall below the minimum statutory balance.  If it did, the transfer had to be pro-rated to accommodate the minimum balance.

Under the new law, the moneys in the stabilization fund  could only be used in the case of a fiscal emergency.  The money in the fund  could not be appropriated without a governor’s recommendation.  According to Wisconsin state law, a “fiscal emergency” occurs when “authorized expenditures will exceed revenues in the current or forthcoming fiscal year by more than one-half of 1% of the estimated general purpose revenue appropriations for that fiscal year.”[xxiv]

The first transfer of money to the stabilization fund under this new law was made in September of 2007, when the Department of Administration transferred $55.6 million to the fund.  This is half of the revenue collected above the level anticipated when the 2005-07 budget was enacted. 

When the $55.6 million stabilization fund and the $65 million minimum statutory balance are combined, Wisconsin’s budget still has total reserves of only $120.6 million, less than 1% of general fund appropriations.

There are several negative consequences  resulting from carrying one of the lowest budget reserves in the nation.  First, having no surplus leaves little margin for fluctuations in revenues or spending estimates.  As has been the case over the last three budgets, the Governor and Legislature have had to take drastic actions to balance the budget, including fund transfers, delayed payments, and one-time funding.  Each of these budget maneuvers exacerbates the state’s structural deficit.[xxv]

While views of budget experts vary, an informal standard of 5% of general fund appropriations is generally seen as an adequate fiscal cushion for economic downturns.[xxvi]  If Wisconsin were to reach the 5% standard, it would need to set aside $691 million in 2007-08 and have $710 million in reserve in 2008-09.[xxvii]  According to the 2007 Wisconsin Annual Fiscal Report, that would make the stabilization fund the sixth-largest single state appropriation, behind school aids ($5.2 billion), medical assistance ($1.7 billion), the University of Wisconsin System ($1 billion), corrections ($1 billion), and aids to local governments ($944 million).[xxviii] 

Between 2003 and 2007, insufficient revenue growth in the general fund prompted the Governor and Legislature to transfer $1.1 billion out of the state’s transportation fund and into the general fund.  The resulting shortfall in the transportation fund was then replaced by bonding, which will cost state taxpayers more in the long term.  Had the budget stabilization fund been funded adequately, this transfer and the related borrowing would not have been necessary.

Second, bond rating agencies consider budget reserves as an important indicator when rating the state’s debt.  The combined effect of a high structural deficit and low surplus revenues may indicate financial difficulties to a bond rating agency.  While the cost of borrowing for a state is largely driven by conditions in the bond market, a state’s rating can affect the price the state receives.  The lower the rating, the more the state may have to pay for the bonds over the life of the term.

IS WISCONSIN WELL PREPARED FOR A RECESSION?

Nobody can predict whether a recession will actually occur, despite the presence of significant warning signs.  However, it is instructive to estimate what would happen to state revenues in the event of a modest recession, as occurred in 2001.

Given Wisconsin’s razor-thin margin for budgeting, an economic slowdown could cause significant problems for the state’s general fund.  Even when general fund revenues grow at a healthy pace, expenditures can outpace revenues.  If revenues were to drop or flatten out, that gap would grow.

To estimate the impact of a recession on the Wisconsin budget, one can examine how an economic slowdown similar to the 2001 recession would affect state revenue collections.  After factoring out law changes which altered state tax collections, state revenues to the general fund grew as follows during and immediately after the recession:

2000-01:  0.1%

2001-02:  -0.1%

2002-03:  1.9%

2003-04:  4.9%

These revenue growth numbers can then be applied to the 2007-08 base year, and compared to projected spending between 2007-08 and 2010-11. 

For the purposes of this analysis, budgeted revenue numbers for the 2007-08 and 2008-09 fiscal years are used.  For fiscal years 2009-10 and 2010-11, Governor Doyle assumed tax revenue would increase 4.7% and 4.5%, respectively, in outyear projections made in the “Budget in Brief” he submitted to accompany the budget bill he presented to the Legislature, so those figures are applied to show projected revenues for those years.  

Similarly,  on the expenditure side, budgeted numbers for the 2008 and 2009 fiscal years are used.  For fiscal years 2010 and 2011, Governor Doyle assumed general fund expenditures  would rise 5.3% in 2010 and 2.2% in 2011, so those figures were used to show projected expenditures for those years. 

In this analysis, it is assumed that the hypothetical recession takes place in the 2008 fiscal year.  (For a full explanation of the methodology used for this exercise, see Appendix A.)

Chart 1 shows what would happen to the general fund if general fund revenues were to drop as they did in the recession of 2001.   By the end of the current biennium, only eighteen months away, the state would face a shortfall of about $1 billion.  By 2011, even if the deficits that arose each year were addressed, estimated expenditures would still outpace revenues by more than $1.3 billion.

Chart 1

The chart above demonstrates the gap between revenues expected for the next four years versus what those revenues would be if there was a recession of the depth of the 2001 recession.

The following tables represent general fund condition statements for both the projected current budget and a budget under a hypothetical recession:

Table 2: Budgeted Revenues vs. Appropriations, 2007-11, Using Assumptions in the Budget Bill Adopted in 2007

Table 3: Hypothetical Recession Revenues vs. Appropriations, 2007-11

As demonstrated in this exercise, even a mild recession could send the state’s finances into a substantial deficit.  The disparity between revenues and appropriation would balloon to nearly $1.5 billion on fiscal year 2010, before closing slightly to $1.3 billion in 2011.

The table and the related chart above show a negative balance at the end of fiscal year 2008.  For the purposes of projecting the impact of a recession, it is assumed that the Governor and Legislature would act to eliminate the deficit each year – either by reducing spending or raising taxes.  Thus, the negative balance is not carried forward from year to year.  (Since it can’t be assumed that any positive balance would be created, no opening balance is shown for future years.)  If the negative balances were carried forward, the resulting fiscal imbalance would be significantly greater.[xxix]

The total magnitude of the problem the state would face in the event of a mild recession can be determined by adding together the deficit figures for all the years that would be affected by the recession.  In the current biennium, the state would have to figure out how to cope with a total deficit of $1.359 billion - $352 million in the first year of the biennium, and $1.007 billion in the second year.  Over the course of a four year period, the deficit problem would total a whopping $4.185 billion.  Table 4 details the cumulative problem if negative balances were carried over from year to year.

Table 4: Cumulative Budget Deficits Under a Hypothetical Recession

In the event this happens, the state has several options: it can raise taxes, cut programs, or continue the fiscal shell games that have produced structural deficits for the last decade.  None of these choices are  especially appealing; yet the lack of any significant rainy day fund makes them inevitable.

CONCLUSION/RECOMMENDATIONS

As demonstrated above, Wisconsin could be in serious trouble in the event of an economic slowdown.  The state’s lack of a fiscal cushion is a recipe for tax increases and budget tricks in the event of hard economic times.

The state could take several steps towards fiscal responsibility in order to protect itself against declining revenue.  Among them:

• Phase in greater minimum statutory balance levels, ending with a balance of 2% of gross annual appropriations.  For instance, start with a 1% balance one year, 1.2% the next year, 1.4% the next, until the balance reaches 2%.  Under currently budgeted numbers, that would require setting minimum balances of $138.2 million in 2008 and $170 million in 2009.

• Phase in a requirement that the state fund the stabilization fund up to 5% of gross appropriations.  Require that the stabilization fund  be the first draw on general fund revenue growth to the state.

• Require that all unanticipated revenues be deposited in the state’s budget stabilization fund, until the fund reaches 5% of gross appropriations and compensation reserves.  Current law only requires 50% of these revenues to be deposited in the stabilization fund.

• Continue the requirement that the Governor introduce a bill to spend the stabilization fund and the minimum balance in the event of a fiscal emergency.  Require a two-thirds majority of both the Senate and Assembly to appropriate these funds, to ensure that they don’t merely become easily accessible pools of money.

• Initiate legislative action to make these requirements constitutional.  As has been seen recently, statutory minimum balance and stabilization fund requirements are only as enduring as the commitment to prudent fiscal management.  The Governor and Legislature have routinely suspended these requirements.

Sound financial practices should not be a partisan issue.  Democrats should applaud having a fiscal cushion, because it will avoid sudden and drastic cuts in funding for core services in the event of a downturn.  Republicans should be equally supportive, since rainy day funds avoid the pressure for increasing taxes and fees during a recession.  Rainy day funds would also lessen the need for transfers from segregated funds.

It is time for Wisconsin to join the rest of the nation in planning for fiscal downturns.  Wisconsin’s lack of foresight has led to a vicious cycle of bad budgeting practices and acrimonious budget sessions in recent years, and threatens to do so in the future should revenues recede.

APPENDIX A

The method for calculating the effect of the economy on state revenues is as follows:

First, general fund tax collections for fiscal years 1999 through 2007 were collected from the state’s Annual Fiscal Reports.  Departmental revenues deposited in the general fund were also obtained, to get a full picture of general fund revenues.  The budgeted revenues for fiscal years 2008 and 2009 were collected from the Wisconsin state budget as signed by the  Governor on October 26 of 2007.  The tax revenue numbers were then increased by a factor identical to the percentage increase the Department of Administration anticipated for fiscal years 2010 and 2011 in the 2007-09 “Budget in Brief.”  The departmental revenues for 2010 and 2011 were carried forward from the budgeted number in 2009, similar to the Governor’s analysis.

On the expenditure side, gross general fund expenditures were collected from the Annual Fiscal Reports.  As done on the revenue side, Fiscal Years 2010 and 2011 were estimated using the Governor’s estimated expenditure increases as a guide.

From there, revenue fluctuation between 2001 and 2004 as a result of the economy was calculated.  In order to get an accurate number, adjustments had to be made to the raw revenue numbers to account for increases and decreases to the general fund due to tax changes instituted by the Legislature, and not the state’s economy.

In Fiscal Year 1999, the Legislature passed a one-time increase in the Property Tax Rent Credit (PTRC).  To achieve an accurate base year with which to calculate revenue growth, $124.6 million has to be added to FY99 revenues to account for the revenue lost due to this tax change.  FY00 saw large revenue growth, but also increased expenditures, as most of that revenue growth was sent back to taxpayers in the form of a sales tax rebate check.  Additionally, much of the growth in state revenues was due to a one-year suspension of the PTRC – however, some income tax changes that reduced revenue also became effective that year.  When all the revenue increases and decreases by legislative action are calculated for FY00, $236.5 million must be eliminated from that year’s base.  Beginning in 2001, restoration of the PTRC and other new tax changes became effective, which once again reduced state tax collections $653.4 million in FY01, $682.9 million in FY02, and $710.5 million in FY03.  Adding those numbers back in to the total actual revenues helps give us a more accurate picture of the effect of the economy on tax receipts, independent of legislative changes.

When all the legislative tax change adjustments are made (since no similar tax cuts are expected for the next few years), revenue in FY01 grew 0.1% over the previous year.  The next year (again, adjusted for tax cuts), revenue was slightly down – decreasing 0.1%.  With the economy picking up steam the next two years, revenues increased 1.9% in 2003 and 4.9% in 2004.

To complete the model, these percentages were then applied to general fund tax receipts beginning in 2007.  The percentages were not applied to departmental revenues, which were then added in without the adjustment.

ISOLATING THE IMPACT OF RECESSION ON REVENUE GROWTH, 2001-04

ENDNOTES