People I meet ask me “Do we have a deficit?” “Did the state really pay off all its debt?”
To understand the numbers, I recently spent time with the Legislature’s financial and auditing experts. I asked them to help explain the financial state of the state.
I learned ‘debt’ and ‘deficit’ are frequently confused.
Debt is money borrowed by the state and repaid over many years – like a home mortgage. A deficit occurs when expected current state revenues aren’t enough to cover expected current expenditures – will your paychecks cover everything you have to pay for this year.
“I thought the governor balanced the budget,” I can hear you say. Here’s the rest of the story.
Budgets look forward. They compare expected revenue with expected expenditures. To start the process, Governors ask agency directors what money they need to keep their agencies running. New spending is added to current spending. Often requests are ‘pie in the sky’. What agency directors ask for is compared to estimated revenue. If the mismatch is negative there is a “deficit”. This is the origin of the $3.6 billion deficit often cited at the beginning of 2011.
The budget gurus told me governors usually start the budget process with a deficit and then, by law, are required to bring the budget into balance – expected spending during the budget years can’t be more than expected dollars coming in.
There is another type of deficit – an accounting deficit. Unlike the budgetary deficit that just looks at cash in and cash out during the year, the accounting deficit looks at orders made over the year, bills paid, and bills due but postponed. It measures how far into the hole you are, even if your check book still balances. At the end of 2011 auditors reported the accounting deficit was nearly $3 billion - somewhat larger than at the end of last year. The accounting deficit has been growing for many years.
The state debt is not the accumulation of deficits. The debt is the money borrowed to pay for long-term projects. During the 1990s Governor Thompson authorized a large prison building program. This cost a lot of money and increased state debt. In 2003 the state took on new debt to pay off unfunded pension obligations. In just seven years, from the mid-nineties to 2003, the state’s debt doubled.
During the Doyle administration, old university buildings were replaced and money was added to the Stewardship Fund. This added to the state’s debt.
A troubling aspect of state finances is “kicking the can down the road” or debt payments due but not paid. When the state fails to make a payment and adds this payment to future debt it costs taxpayers more.
Financial staff called this practice “scoop and toss” as debt payments that are due are scooped up and tossed into the future.
Many governors have followed this practice and Governor Walker is no exception. In May of 2011 the state did not pay a $190 million debt payment3. In addition, under the current budget the state delays another $338 million debt payment. Together the over-half-a-billion in delayed debt payments will cost taxpayers nearly $150 million in additional interest.
Not making current debt payments that are due “kicks the can down the road,” increases interest obligations and leaves less money for schools, health care and roads.
Historically, Wisconsin’s annual debt payments as a percent of tax revenues are below four percent. Financial staff recommends that debt payments should not exceed three and a half percent.
Because of repeated delays in debt payments, including the over-half-a-billion delayed in 2011, the size of this important ratio grows to over five percent at the end of Governor Walker’s first budget; this places Wisconsin well in the danger-zone.
Complete memo to Senator Vinehout from Al Runde, Legislative Fiscal Bureau. January 25, 2012.
Complete State of Wisconsin Comprehensive Annual Financial Report for the Fiscal Year Ending June 30, 2011. Released December 23, 2011.