State surplus: Now you see it, now you don’t

As Congress spends trillions and Wisconsin sees unemployment, election and health care costs mount, it might seem like years ago that the state Legislature and Gov. Tony Evers were at odds over how to best spend the projected state budget surplus.

The predicted amount was $861 million over the biennium, primarily from extra tax revenues, along with some lower-than-expected appropriations that the Legislative Fiscal Bureau  (LFB) put out in January.

It was actually less than one month ago that Evers vetoed a plan passed by Republicans in the Legislature to utilize $400 million of the projected surplus for an income-tax cut and paying down state debt. (Lawmakers were attempting to tap into a $620 million budget surplus projected to materialize by the middle of next year, at that point.) 

At the time Evers wrote in his veto message:  “I am vetoing the bill because I object to its unbalanced and unsustainable approach to state fiscal policy. Specifically, this bill would reduce the estimated budget stabilization fund balance by $123.8 million in fiscal year 2020-21 according to the Legislative Fiscal Bureau.”

Evers’ plan would have used a part of the projected surplus to put $122 million into schools, primarily in special education and mental health services, with the offset of a property tax cut. 

Evers indicated he was open to negotiations, which never amounted to anything that was  made public, if they ever took place at all.

That gridlock may be a blessing.

“We’re fortunate that the surplus debate ended the way it did,” says Assembly Democratic leader Gordon Hintz (D-Oshkosh). “It’s not like that money was sitting there in a pot … If we had spent that or cut taxes permanently, we would be in a much worse place.”

Coronavirus hits budgets

Enter the COVID-19 pandemic. Predictions on growth from J.P. Morgan and others have dropped by around 15% or more, says Hintz. “I’m not trying to get nerdy here, I’m just saying that is a pretty big tanking of the economy.” 

Speaker Robin Vos (R-Rochester) says he is not even thinking about those surplus projections any more: “We already know that the surplus is gone. And in the second year of the two-year budget, I’m not even sure if that budget is going to balance without even spending a nickel more than we already have. So we’ve got to be cautious.”

Vos says the state must make short and long-term plans. “I think we have to balance out the ability to be ready for this crisis and this huge onslaught of people to make sure they get the care that they are going to desperately need, but also not to do it in a way that bankrupts our country, bankrupts our state and has our economy so on its heels that we can’t get back to normal in a relatively short time.”

Hintz points out that while the first year of the biennial budget ended in decent financial shape, the second year, which starts next July, “relied on a pretty hefty carryover.” But he is also heartened by his belief that the money budgeted for Foxconn will apparently be largely unused due to the company altering its plans and hiring goals.

On Monday, the Wisconsin Policy Forum put out a report titled “Ready for a Recession? Recent financial gains will help but may not be enough.”

The report summary began on a high note, “As Wisconsin faces severe economic turmoil in the weeks and months ahead, the state is in a better position to confront the challenges than it was before the Great Recession. From handling long-term debt to immediate bills, the state established a sounder financial footing in 2019 than at any point in years.”

But it continued on a down note, predicting a prolonged period of deep economic disruption: “Despite the gains, however, Wisconsin remains no better than the average state on many measures and like other states will need federal aid to help cope with reduced tax collections and massive increases in emergency spending.”

“The state’s reserves will clearly be hit by recent events that will lower income and sales tax collections, corporate taxes, and more,” says Wisconsin Policy Forum research director Jason Stein. “In addition to these lost revenues, the state will start to see increased need to spend on human services, most notably on Medicaid health coverage for the needy.”

The big unknown — as local and state governments are only just beginning to comb through the $2 trillion federal spending bill — is how much help Wisconsin will get from the federal government.

Wisconsin, says Senate Majority Leader Scott Fitzgerald (R-Juneau), has $600 million in its rainy-day fund, but plans for the project surplus would have “bumped that up even higher.”

“Now, we have to pivot,” says Fitzgerald, agreeing the surplus is gone for now. “We don’t know what that day is going to be, but at both the nation and state level life, we have to pivot from life as we knew it before. And we just want to make sure we do that in a proper and smart way.”  

In odd years, the Fiscal Bureau does another projected revenue review in May — after tax filings and more receipts have begun to flow in to see if a revision should be made. While Fiscal Bureau Director Bob Lang says they have not done a May revision in an even-numbered year, “That doesn’t mean that we can’t or won’t.  If we do a revision this spring/summer, we would like to get as much collection information as we can — no set date on when, or if, we will make a revision.”

Lang says more information is needed before he can say how the state budget might be affected by the COVID-19 crisis, saying he will, “need to see a few more months of tax collections, additional economic forecasts, and the effect of federal stimulus legislation,” and adds that the initial look will be at “the federal money is that is being provided for expenditures related to the health emergency.” 

Vos notes that any future revenue estimates “are definitely going to be different than when we passed the budget this last summer.” 

Republican legislative leaders have asked the Fiscal Bureau  to report back on what is coming to Wisconsin from the federal government. Fitzgerald says that before the Legislature acts, leaders need to “digest the final package to come out of Washington D.C. in the bipartisan agreement.” 

“Once we get the details, we’ll sit down with Gov. Evers and decide what needs to be done,” Vos concludes.