Tuesday, April 12, 2011

It's worse than you think

On Sunday (before various weather reporting knocked everything else off the front pages), two Wisconsin newspapers featured stories about the state budget, and crises thereof.


The worse reporting job was done by the Wisconsin State Journal in Madison, in a story headlined "Is Wisconsin 'broke'? Answer is in the eye of the beholder, experts say." (It pains me to so criticize because I started reading the State Journal when I was 2 years old,  according to my parents.) The better, but not quite complete, reporting job was done by The Post~Crescent in Appleton: "Longtime imbalance at core of fiscal mess."


The State Journal (which used to be Madison's conservative daily and is now just Madison's less liberal daily, as if using the term "liberal" to describe The Capital Times is appropriate) appears to have written a story to back its thesis that the state is not broke:


Trouble is, many experts say Wisconsin isn't really broke.

"That is not correct," said Andrew Reschovsky, a professor of public affairs and applied economics at UW-Madison's La Follette School of Public Affairs. "Wisconsin has a range of options other than cutting spending."

There are a number of ways to judge whether a state's finances are in order.

Economists often look at a state's pension funds, and whether they have more liabilities to be paid than money saved. They also typically look at the imbalance between the money coming in and money going out in any given budget, known as the structural deficit.

Reschovsky is correct that Wisconsin has at least some options ("a range" is a matter of personal definition) to fund the giant sucking maw that is state government. The term "broke" or "bankrupt" also depends on your definition. TeachMeFinance.com defines being bankrupt as not having "the financial means to pay their incurred debts as they come due."

Does Wisconsin lack the financial means to pay incurred debts as they become due? Probably not (although read on for a dissenting view). The state has debt refinancing or bonding, assuming the state can find a willing lender. The state can move money out of segregated funds to pay for general fund expenses. (See Doyle, James.) The state can use one-time funds for general fund expenses. (See McCallum, Scott, Tobacco Settlement.) And there's always the grand state tradition of increasing taxes and/or fees. 


The State Journal's story fails, however, because the State Journal did not interview one single person who does not have a vested interest in state government -- as in someone who doesn't receive his or her paychecks from the state. UW Prof. Andrew Reschovsky is a reliable source whenever a reporter wants a quote from someone who believes this state doesn't tax or spend enough. UW-Milwaukee Prof. Mordecai Lee is less obviously biased than Reschovsky, at least until he starts using pejorative terms like "Republican broke."

The story also left unchallenged the assertion by Assembly Minority Leader Peter Barca (D-Kenosha) that "Education is your seed corn." We have great schools in this state (just ask the Wisconsin Education Association Council, right?), we have two two-year college systems, and we have 13 four-year UW universities. And per capita personal income growth in Wisconsin has trailed the national average for more than 30 years. Either education is overrated for one's personal economics, or we're not getting our money's worth from the billions we spend every year on public education from 4K to the UWs.

The Post~Crescent interviewed Todd Berry, executive director of the Wisconsin Taxpayers Alliance, who pointed out how bad the state's structural deficit ($3.6 billion heading into the 2011–13 budget cycle) really is:

"We were less prepared than any other state in the country (to deal with the recession) with the possible exception of Arkansas," Berry said. "Relative to the size of our economy, we have had the largest or the second largest deficit next to Illinois (for the last five to 10 years). We really looked much worse than the average state."

Two measures neither story mentioned show that the state's finances are actually worse than even the Walker administration admits. Wisconsin measures its finances on a cash accounting basis, which seems ludicrous for an enterprise that spends more than $30-billion each fiscal year. Most states measure their finances on Generally Accepted Accounting Principles. On a cash basis, as of the end of the 2009–10 fiscal year June 30, the state had a general fund balance of $89.6 million. On a GAAP basis, as of the end of the 2009–10 fiscal year, the state had a general fund deficit of $2.94 billion.


On a GAAP basis, state finances are some of the worst in the country, and that is not hyperbole. In the 2008–09 fiscal year, Wisconsin’s GAAP deficit was $2.71 billion, better than only California, Illinois and New York. (Twelve states had GAAP deficits in 2008–09, according to the WTA.) The state’s GAAP deficit was $479.53 per capita and 1.11 percent of GDP, better than only Illinois. And if you go back to the previous paragraph, you’ll notice that the 2009–10 GAAP deficit is larger than the 2008–09 GAAP deficit.


According to the WTA, between 1999 and 2009 Wisconsin and Illinois were the only two states in the nation to have GAAP deficits in every fiscal year. The next worst was California, Maine and North Carolina, which had GAAP deficits in six of those 11 fiscal years, and 35 states had no GAAP deficits at all in that time. To get the budget in GAAP balance would require cutting more than 8 percent of state spending beyond eliminating the structural deficit.


To quote 1980s infomercials, wait! There's more! The state’s Unrestricted Net Assets (gross assets minus money owed on those assets) is a negative number, $9.46 billion, better than only seven states in dollar amounts and, at 3.7 percent of GDP, better than only five states. The WTA's report noted that “this means ‘no funds were available for discretionary purposes,’ such as paying off creditors.” Which would be one definition of "broke," wouldn't it?


Neither story also noted what has happened to the state's bond ratings over the past few years.
Governmental debt reached $15.21 billion in 2010. Moody’s Aa2 rating ranks Wisconsin 34th, S&P’s AA+ rating ranks Wisconsin 26th, and Fitch’s AA+ rating ranks Wisconsin 31st. Only Illinois, which has an Aa3 from Moody’s, has a lower bond rating than Wisconsin among Midwestern states.


I have written numerous times that this cannot be placed merely on the doorstep of the Doyle administration or the Legislature that voters voted out left and, well, left Nov. 2.  It is, however, on the doorstep of this governor and this Legislature to not only fix the state's current financial pit, but to make permanent changes in state law (for instance, supermajority tax increase requirements, spending limits on all levels of government, and how about an actual rainy day fund?) so that future governors and Legislatures are prevented from fouling up state finances. Otherwise, Reschovsky and Lee may someday find that the state can't afford to employ them anymore.


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