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| 11/17/2009 9:33:00 AM | Email this article • Print this article | Pew Center study shows Wisconsin in fiscal peril
Unemployment, budget gap cloud state’s future
A new study by the nonpartisan think tank, the Pew Center on the States, places Wisconsin in a fiscal situation very nearly as dire as that of California, and ranks the Badger state as one of the 10 worst states budget-wise in the nation.
While California may be the poster child for bad fiscal situations, Wisconsin and eight other states are facing similar catastrophes, according to the study, Beyond California, States in Fiscal Peril.
"California's problems are in a league of their own," the study stated. "But the same pressures that drove it toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country."
Those states include all of California's neighbors - Arizona, Nevada and Oregon - as well as a Midwestern cluster comprising Illinois, Michigan and Wisconsin, plus New Jersey, Florida and Rhode Island.
"These states' budget troubles can have dramatic consequences for their residents: higher taxes, layoffs or furloughs of state workers, longer waits for public services, more crowded classrooms, higher college tuition and less support for the poor or unemployed," the report states.
The problems in Wisconsin and the other states spell trouble for the entire country, too, the study asserted, not least because they account for more than a third of America's population and economic output. In addition, how each state handles its economic crisis - what policies they enact, such as tax increases or spending cuts - could impede the nation's recovery from the recession.
In making its assessments, the Pew Center looked at six factors in each of the 50 states that contributed substantially to California's downward slide - high foreclosure rates; increasing joblessness; loss of state revenues; the relative size of budget gaps; legal obstacles to balanced budgets, specifically, a supermajority requirement for some or all tax increases or budget bills; and poor money-management practices.
As bad as things are, they are likely to get worse, the Pew study asserted.
"States' fiscal situations are widely expected to worsen even when the national economy starts to recover," the study stated. "In fact, unemployment jumped nationally in the third quarter to 9.6 percent. Federal stimulus money that helped states cover some expenses starts running out at the end of 2010."
In addition, the report continued, states historically have their worst years shortly after a national recession ends, as they contend with higher Medicaid and other safety-net expenses at the same time revenues lag because of continued unemployment.
The deal in Wisconsin
While the fiscal crisis in Wisconsin has not captured the same kind of national headlines that California's has, the recession has nonetheless battered its state government more so than most others, the report asserted, especially in tax collections and the size of its budget gap.
In addition, the state's sputtering manufacturing economy is causing unemployment to climb ever higher.
"Wisconsin's history of budget shortfalls and pattern of borrowing frequently to cover operating expenses, among other measures, made it poorly positioned to weather the most recent severe economic downturn," the report stated.
The study observed that the recession has cost Wisconsin 140,000 jobs and one-eighth of its manufacturing workforce, according to the Center on Wisconsin Strategy, a nonprofit group based at UW-Madison. What's more, the report continued, Wisconsin's unemployment rate rose 4.4 percent from the second quarter of 2008 to the same point in 2009.
The fallout from the economic downturn - reduced revenues and more demand for state safety-net programs - left the state with a $6 billion shortfall in its 2009-11 budget, the report stated. That's a budget gap of 23.2 percent.
"The budget would have fallen short even without the national economic crisis, although the recession made the state deficit much larger than expected," the study observed, citing Andrew Reschovsky, a professor of public affairs and applied economics at UW-Madison. "Federal stimulus funds of $2.2 billion helped plug some budget shortfalls this year. For the rest, lawmakers raised taxes on the wealthy, hospitals and smokers, and cut spending by $3 billion, mostly by cutting salaries for state employees."
Still, the report continued, experts predict Wisconsin could face a $2 billion deficit during the next biennium, which starts July 1, 2011, after the federal stimulus runs out.
The study observes that Wisconsin has struggled for years to keep its promises to pay a higher share of school costs - in the 1990s the state committed to funding two-thirds of all school costs - while holding down property taxes.
"Often, lawmakers shifted money around, taking money from the state's transportation fund, for example, to pay for day-to-day operations - and then borrowed to cover the transportation budget," the report stated. "Legislators also failed to put money in reserve before the recession hit. The Pew Center on the States' Government Performance Project noted in 2008 that Wisconsin had a negative general fund balance for five straight years before the recession even started."
The study quoted Mordecai Lee, a former Democratic state legislator and professor of governmental affairs for UW-Milwaukee, as saying Wisconsin was practically a textbook case of how not to engage in fiscal policy and budget making.
"During better economic times, the state used revenue surpluses to pay for property tax relief and to pump up school aid," the report continued. "The legislature clamped down on fast-rising property taxes in 1993, but that slowed the money going to schools."
So four years later, Pew stated, the state agreed to increase its share of education funding from one-third to two-thirds, a $1.2 billion promise legislators have struggled to keep.
"Lawmakers also cut the income tax rate in 1998 and added a sales tax rebate in 1999, limiting the state's ability to sock away money in reserve," the report stated.
What does it all add up to?
According to Lee, structurally, the Badger state will be like California in the next budget cycle, the report states.
Not all the news was bad. The study cited David Schmiedicke, state budget director for the Wisconsin Department of Administration, who praised one aspect of the state's budget: The Legislature passed the current spending plan on time, before the biennium started, for the first time in 32 years.
"The legislature also has an unallocated surplus of approximately $270 million in the current budget in case revenues fall short of estimates," the report stated.
Late last week, the Doyle administration responded to the study, saying it contained factual errors and used a flawed methodology.
"In no way can Wisconsin be compared to the nation's most financially troubled states, especially California," Department of Administration secretary Michael Morgan said. "While Wisconsin has been affected, like all states, by the national economic downturn, we have balanced our budget by cutting spending and raising revenues as needed."
In addition, Morgan said, recent reports have shown that many other states have large revenue shortfalls in the current fiscal year, while Wisconsin does not.
"It is not true that the recession has hit Wisconsin harder than other states," he added. "While we have taken hits like everyone else, Wisconsin has fared much better than other states and manufacturing is doing better in Wisconsin compared to our neighboring states."
Morgan pointed to Wisconsin's unemployment rate to refute the study, saying it is more than two percentage points below the national average of 10.2 percent.
The Pew Center stood by its findings.
Other states
If Wisconsin is in economic peril, at least eight other states are in the same fiscal boat, the Pew Center study found.
In Arizona, for example, lawmakers have relied on single-year, short-term solutions to balance its budget, rather than engage in long-term problem-solving.
"In part, they were hamstrung by voter-imposed spending constraints, a tax structure highly reliant on a growing economy and a series of tax cuts, made in the 1990s, that has limited revenue," the report stated. "At this writing, policy makers still had not decided how to bridge a $1 billion gap in the current fiscal year's budget."
Another state in crisis, Rhode Island, was one of the first states to lapse into recession, primarily because of the housing slump, and might well be the last to emerge, the Pew study reported.
"Rhode Island consistently ranks near the top of states with the highest unemployment rates, and last year it had the highest home foreclosure rates in all of New England," the report stated. "State government has a poor record of managing its finances, and its economic recovery is hampered by high tax rates, persistent state budget deficits and a lack of high-tech jobs."
Two of Wisconsin's neighbors are also hurting. Michigan, the Pew study stated, never recovered from the last recession before the current one hit.
"Michigan never climbed out of the recession that started in 2001, and matters only became worse during the Great Recession," the report stated. "Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shock waves through a state that is on track to lose a quarter of its jobs this decade. The recession accelerated drops in state revenues and has left Michigan's government trying to deal with today's problems on a 1960s-sized budget."
Illinois, too, entered the nation's fiscal crisis in a precarious position, the study observed.
"Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations," the study stated. "Its problems grew worse once the Great Recession hit. The state's current budget still relies heavily on borrowing and paying bills late. The budget shortfall lawmakers confronted for fiscal year 2010 topped $13.2 billion, among the worst budget gaps in the country."
Two states - Florida and New Jersey - face more unique problems, Pew found. For Florida, it is a shrinking population base.
"For the first time since World War II, Florida's population is shrinking," the report stated. "This is a disturbing revelation for a state that has built its economy - and structured its budget - on the assumption that throngs of new residents will move to its sunny shores each year. Lawmakers tried to head off trouble by agreeing in 2009 to raise $2 billion in new revenue, but it already appears that legislators will face a similar-sized budget shortfall next year."
New Jersey was trying to regain its balance after years of mismanagement and a huge structural deficit, but its proximity to New York hampered its ability to get on its feet, the report found.
"The woes of nearby Wall Street-which supports approximately one-third of New Jersey's economy-only made matters worse," the report stated. "Growing debt payments and perennially underfunded pension systems will make the Garden State's road to recovery even rougher."
Richard Moore can be reached at rmmoore1@verizon.net.
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