Wisconsin’s Annus HorribilisTrying to understand 15 years offiscal and political dysfunction.

Wisconsin Economic Association � Nov. 5, 2011

“[This] is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an Annus Horribilis.”

Christmas Message, 1992 ▪ Elizabeth II

■ About WISTAX■ Annus horribilis? Fiscal baggage, budget/bargaining battles,

political dysfunction

■ Roots of fiscal dysfunction Structural-culture, political/historical

■ Cards dealt, cards played: 2011-13

■ Reason for optimism

■ Political economy: Curing fiscal/political dysfunction?

Overview

LocalsDeliver/Spend

Roots of fiscal dysfunction

StateTaxes

Implications?

Wisconsin’s different approach

LocalsDeliver/Spend

StateTaxes

■ Tension: Local-state, state-local■ Citizen confusion■ Political economy and implications?

‘Berry funnel theory’

+25%

Different approach, II (Money!)

Federal $

User fees

Taxes

- Sales

- Income

- PropertyInd. Income

Property

■ ‘Non-state’ budget

UW7.9%

Corr.8.0%

Medicaid12.7%

Rem.20.5% Sch. Aids/Cr's

43.9%

Sh. Rev.7.0%

Loc. Aid ~ 56%

Sch + MA 57%

FY08 GPR

■ Dominant programs

State budget reflects approach

80%

+

90 95 00 05 10

Med-arb /Tax run-upSchool $

lts;sch. $ pledge

$1b school tax ‘buy-down’ + +

(99-01): Sales tax rebate, inc. tax cut ▲

Welfare reform / Medicaid expansion

RR RRR

Roots II: History of boom, splurge . . .

Boom, overcommit

Deficits and denial

90 95 00 05 10

Med-arb /Tax run-upSchool $

lts;sch. $ pledge

Tob. bonds

1-time transfersacctg. tricks, debt

1-time fed.

stimulus

$1b school tax ‘buy-down’ + +

(99-01): Sales tax rebate, inc. tax cut ▲

Welfare reform / Medicaid expansion

RR RRR

. . . then deny and defer

Boom, overcommit

Deficits and denial

LFB

Result: Years of ‘structural deficits’

11 rev

1,232+200

First-yr. gaps (bars) and max/min new revenue (line) available

$570m 01-03-$287m 09-11

Example: 2011

2011 as example of last 15 years

■ New state tax money for 2011-13 (01/31)

$1.5 billion

■ Structural ‘deficit’, IOUs from 2009-11

$1.4 billion

■ Always running to catch up

■ Recession comes early: More deny, defer

■ Reserves? Wis. (poster child) vs. other states

■ Spending? Growth topped most states (NASBO)

■ Taxes? Among largest hikes in US ($3bn 08-11)

■ Federal stimulus pays for ongoing state programs

$7.0b - $7.5b, 05-08 � $12.2b, 10-11 � $9.5b, 12-13

■ A recession . . . and 10+% spending growth?

Roots III: Recession mischief

395.9

1,084.9

854.8

776.4

546.6

735

464

217350

313

179

0

250

500

750

1,000

98 99 00 01 02 03 04 05 06 07 08 09

Total

Family/BC

Other

Participants (000)

Medicaid (MA):

’98: 1/13’08: 1/5

Fed stimulus no more;now $1.8b bill to pay

Medicaid –- New budget tap root?

Wis. Fin. Stmts ($b), GAAP

-$0.

74

-$1.

08

-$1.

17

-$1.

13

-$1.

22

-$1.

13

-$0.

92

-$1.

47

-$1.

27 -$0.

91

-$0.

83

-$1.

21

-$1.

48

-$2.

24 -$1.

93

-$2.

12

-$2.

15

-$2.

44

-$2.

50

-$2.

71

-$2.

94

10.2%

8.8%

12.9%

5.9%

13.8%

11.3%

13.8%14.0%-$4.0

-$3.0

-$2.0

-$1.0

$0.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0%

4%

8%

12%

16%

GA

AP

Def

icit

in $

Bil

lions

Def

icit

as

% o

f S

pend

ing

% Spending

Don’t believe me. Ask bond raters & CPAs.

Playing the cards dealt

$3b+

2011-13: The cards dealt

■ $1.4b carryover of IOUs(backfilling MA, K12 for stimulus)

■ $1.8b Medicaid demand (10 yrs. growth)■ So . . . any new 11-13 est. rev’s committed■ Revenue growth from recovery?■ Tricks? Transfers?■ New tax revenue? ■ Remaining option? Pain and difficulty

Voter choices, political choices

. . . but all easy options used?

Little choice in ‘cards played’

■ New revenue for carryover IOUs■ Increased Medicaid ($1.4b+ vs. $1.8b)■ Cut all other major appropriations:

Schools, UW, local aids, prisons■ Fringes trimmed; modest comp. increase

[Aside: State vs. local; collective bargaining]

■ Some debt restructuring■ Winners? MA! Transportation.

Final score? Cut and spend.

Total Total Total and % Ch. vs.

Program 01-02 02-03 01-03 09-10 10-11 09-11 11-12 12-13 11-13 01-03 09-11

Tot. All-Funds 26.16 25.66 51.82 30.58 31.59 62.17 31.76 32.56 64.32 24.1 3.5

Tot. Gen. Fund 11.27 11.05 22.31 12.82 14.17 26.99 14.19 14.83 29.03 30.1 7.6

Medicaid 1.07 1.06 2.13 1.30 1.45 2.75 2.09 2.05 4.14 93.8 50.7Corrections 0.82 0.85 1.67 1.08 1.15 2.23 0.00 0.00 2.25 34.6 1.1K-12 Educ. 4.55 4.76 9.31 5.09 5.28 10.38 4.86 4.93 9.78 5.1 -5.7Shared Rev's 1.02 1.02 2.05 0.83 0.88 1.71 0.89 0.82 1.71 -16.4 0.0UW System 0.98 1.06 2.05 1.03 1.15 2.18 0.99 1.11 2.10 2.4 -3.8

Fisc. Years Fisc. Years Fisc. Years

2011-13 State Budget (Act 28)Comparisons to Prior Fiscal Years, All Dollars in Billions

Close-up: UW System

1959-60 1969-70 1979-80 1989-90 1999-00 2007-08

Wisconsin $9.03 $29.31 $23.84 $23.00 $21.89 $23.97 +/- U.S. Avg. 10.3% 75.1% 44.2% 42.3% 28.8% 27.5%

Illinois $5.51 $15.66 $12.48 $13.10 $13.35 $15.54

Iowa 10.26 20.57 22.89 26.36 27.27 29.02

Michigan 11.86 21.68 19.43 21.23 24.84 27.51

Minnesota 12.89 23.18 18.30 18.54 17.55 19.16

U.S. Average 8.19 16.74 16.53 16.16 16.99 18.80

State-Local Expenditures on Higher EducationAmount Per $1,000 of Personal Income

$569.0

1,047.0

1,109.8

1,304.4

$1,174.9

$400

$600

$800

$1,000

$1,200

$1,400

1985 1989 1993 1997 2001 2005 2009 2013

Actual

Real

UW System $mill GPR

Bud

Program 1980 1985 1990 1995 2000 2005 2010 2013

UW 18.0% 12.4% 12.0% 10.9% 8.5% 8.4% 8.0% 7.5%

K-12 33.0% 24.6% 27.9% 31.5% 37.0% 40.4% 39.7% 33.1%

Medicaid 9.4% 10.1% 10.8% 8.6% 13.6% 10.0% 13.2%

Corrections 3.2% 3.1% 4.3% 6.3% 7.6% 8.4% 6.9%

Sh. Rev's. 15.8% 13.9% 12.5% 8.9% 6.3% 6.3% 6.1%

AFR

na

Major Programs as Share of GPR Budget, 1980 -

37 58 53

Recap budget: Good and bad

Wis. Fin. Stmts ($b), GAAP

-$0.

74

-$1.

08

-$1.

17

-$1.

13

-$1.

22

-$1.

13

-$0.

92

-$1.

47

-$1.

27 -$0.

91

-$0.

83

-$1.

21

-$1.

48

-$2.

24 -$1.

93

-$2.

12

-$2.

15

-$2.

44

-$2.

50

-$2.

71

-$2.

94

10.2%

8.8%

12.9%

5.9%

13.8%

11.3%

13.8%14.0%-$4.0

-$3.0

-$2.0

-$1.0

$0.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0%

4%

8%

12%

16%

GA

AP

Def

icit

in $

Bil

lions

Def

icit

as

% o

f S

pend

ing

% Spending

■ Spending growth

■ Reserves

■ Fin. Statem’ts (‘real’ deficits)

■ Accounting tricks and transfers

■ Debt and debt “maneuvers”

■ Structural carryover (13-15)

■ Aid cuts inevitable (Doyle & Walker)■ Loc. gov’t reality: personnel, contracts■ More reality: WI vs. US: No’s? salaries? fringes?■ Cost relief with 3000 units of gov’t?■ Choice: Cut compensation vs. people■ Collective bargaining left to you . . .

Necessary tangent #1: Spring agony

Necessary tangent #2: Summer agony

■ Recalls: caveat prevalence, purpose

■ Nonpartisan analysis of summer results

■ Past the spin . . . voter message?

■ Hindsight: What was accomplished?

■ Looking forward, consequences?

■ Fundamental questions (later)

■ Irony: Some fiscal hope? Growing

political chaos?

Thinking about the future . . . finally

New opportunities, leftover problems

■ Fiscal maturity: reserves, GAAP

■ Ignored issues: Tax reform, school finance,hi. educ. (again), state-local relations

■ . . . and the economy, stupid.■ But . . . political dysfunction remains

Polarization and partisan overreach;end of healthy disagreement . . . and governing?

■ And now . . . more of the same?

■ Wisconsin one of 10 to 12; behavioral implic’s?

■ Short-term, longer-term fixes . . .

■ Budget: Revenue bill? GAAP? Spread power? Fixed deadline . . . and gov’t shut down?

■ Independent redistricting: foxes and crazies

■ Legislature: Session limits? Salary/staff cut?

■ One larger house?

■ One long term? Sup. Court? Senate? Gov?

Thinking about institutional problems

If the playing field matters, change the field?

A bigger problem?

Complaints are everywhere heard . . . that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties. . . These must be chiefly, if not wholly, effects of the unsteadiness and injustice with which a factious spirit has tainted our public administrations.

By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are . . . adversed to the rights of other citizens, or to the permanent and aggregate interests of the community . . .. . . an attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other descriptions whose fortunes have been interesting to the human passions, have, in turn, divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other than to co-operate for their common good.”

Madison, Federalist #10, and the ‘mischiefs of faction.’

“Can we cure the mischiefs of faction”

■ Career politics via two parties and interest allies(It’s not just the R’s or just the D’s)

■ Redistricting reform and partisan polarization

■ Nonpartisan? Unicameral? (Nebraska)

■ Ending the ‘fence-me-in’ oligopoly?Independent and third-party restrictions, e.g., filing dates,

fusion, party lines, guaranteed ballot status . . .

■ Instant run-off?

■ Three-member districts with minority assured?

Why this matters to economists (and us all)

-13.8%-12.8%-12.3%

-6.1%

-4.3%

-16%

-12%

-8%

-4%

0%

1970 1975 1980 1985 1990 1995 2000 2005 2010

If we can’t master the basics of governance and fiscal management . . .

How do we address this?!

Jobs Re-creation and . . . Avg. Wage/Job: WI vs US

Questions, critique, good jokes?

80 Years of Nonpartisan Research and Citizen Educationwww.wistax.org