UW-Madison: Economist estimates two-year $3.1 billion deficit for Wisconsin

Contact: Andrew Reschovsky, reschovsky@lafollette.wisc.edu, 608-263-0447

MADISON – A new analysis suggests Wisconsin faces a budget deficit of at least $3.1 billion in the state’s next two-year budget cycle – $400 million more than recently reported numbers.

News reports often cite the Wisconsin Legislative Fiscal Bureau’s latest determination of the state’s fiscal condition at the beginning of the upcoming biennium. The fiscal bureau estimates that the state will need about $2.5 billion to balance its budget. But its conclusions explicitly do not consider the rising costs of current public services or the expected increase in state tax revenues as the economy grows. This amount will climb to $2.7 billion if the state must repay the Injured Patients and Families Compensation Fund during the next biennium. The Wisconsin Supreme Court recently ordered the state to return $200 million transferred to the state’s general fund in October 2007.

However, the deficit is likely to top $3 billion, says University of Wisconsin-Madison La Follette School of Public Affairs economist Andrew Reschovsky. He adjusts the fiscal bureau number to account for increases in the costs of providing public services and the additional revenues that economic growth will generate. One reason more money will be needed to maintain services is that the number of beneficiaries of state programs continues to grow, Reschovsky says. “As the population of school-age children increases and the Baby Boom ages, the costs of public education and of medical assistance will rise.”

To determine by how much the state will need to cut spending and/or raise revenue to balance the next biennial budget, Reschovsky measures a “structural fiscal deficit,” the difference between the minimum amount of money the state government needs to maintain current public services and the amount of money it can raise with its current tax laws and tax rates.

Based on a set of assumptions and calculations, Reschovsky estimates that the state will face a structural deficit of nearly $1.4 billion for fiscal year 2012 and $1.5 billion for fiscal year 2013. Those figures plus the $200 million transfer from the patients compensation fund mean the two-year deficit could be as large as $3.1 billion, Reschovsky says.

“The cumulative gap for the 2011-13 biennium of nearly $2.9 billion is equivalent to 10.4 percent of the state’s $27.7 billion general fund budget for the 2009-11 biennium,” Reschovsky says.

To read the full report, visit http://www.lafollette.wisc.edu/publications/workingpapers/#2010-016.