Milwaukee Biz Blog

A week before Christmas, an important report appeared on a Wisconsin government website. There were no press releases from Madison politicians. No headline news stories.

Yet no public official, taxpayer or citizen can afford to ignore the report’s bottom line: According to its just-released financial statements, state government closed its 2008-09 books with a $2.71 billion deficit in its general fund.

To many readers, this might come as a surprise. By law, state government is supposed to balance its budget. On paper, it does. However, for more than a decade, governors and legislators of both parties have “balanced” budgets through use of accounting maneuvers, timing delays, borrowing, and billions in one-time money.

When the state controller, a CPA, prepares the state’s official financial statements, he must follow generally accepted accounting principles, or GAAP. That means he must reverse the budget gimmicks and accurately represent the state’s true financial condition. When he does this, the budget’s black ink turns red.

What does this mean in everyday terms?  Suppose you use your credit card to buy a new living room set. You take it home; the kids, their friends, and your pets make active use of it.

Credit card or no credit card, according to the state controller - who must follow accounting rules - you spent money. However, that is not the way the folks under Madison’s Capitol dome see it. The living room furniture might be well used, but they don’t budget the money until the credit card bill has to be paid.

Now, some state officials who have practiced politics full-time will try to reassure us by saying: “There’s no real problem; it’s just the recession.”

True, this year’s deficit is the largest ever reported. But it is the fifth consecutive year that the GAAP shortfall exceeded $2 billion and the ninth that it has topped $1 billion. We have not had a recession every year since the late 1990s. This recession didn’t really get underway until early 2008.

Even more troubling than the size of the deficit is its trend. Since 1999, the shortfall has grown in every year except one:  $830 million in fiscal 1999, $1.21 billion in 2000, $1.48 billion in 2001, $2.24 billion in 2002, $1.93 billion in 2004, $2.12 billion in 2005, $2.15 billion in 2006, $2.44 billion in 2007, $2.50 billion in 2008, and now, $2.71 billion in 2008-09.

“No need to worry. Other states are in worse shape,” career legislators will tell us.

Hmmm. We don’t yet know how other states’ 2008-09 deficits will compare with our $2.71 billion hole. But we do know what states reported in 2007-08. Wisconsin had a deficit of $2.50 billion. Three other states were in the red, according to their statements: California ($4.17 billion), Illinois ($3.93 billion), and Maine ($0.24 billion).

The problem with this comparison is that it ignores the relative size of states. California has 36.8 million people; Illinois, 12.9 million. Wisconsin has only 5.6 million residents. When 2007-08 deficits are compared on a per capita basis, the Badger State had the largest GAAP deficit in the nation ($445 per person), followed by Illinois ($305), Maine ($181), and California ($113).

Figures like these led the Pew Trusts recently to name Wisconsin one of 10 states most in “fiscal peril.” The news made headlines around the state. Of the states listed, however, only California, Illinois and Wisconsin reported GAAP deficits last year. Pew said California “was in a league of its own.” Yet it is worth noting that Wisconsin’s deficit per capita was four times larger than California’s.

Todd Berry, Ph.D., has been president of the Wisconsin Taxpayers Alliance (WISTAX) since 1994. Founded in 1932, WISTAX is a nonprofit, nonpartisan public policy research organization dedicated to teaching and informing Wisconsin citizens, public officials, and the press about our government.

As the proposed 2007-09 state budget has worked its way through the Legislature, it is readily apparent that our elected officials, regardless of title or party, have said little or nothing about the fundamental condition of state finances. By contrast, there have been countless press releases focusing on detail - specific tax increases, individual program changes and so on.

Nevertheless, the people have a right to know. According to Wisconsin's Comprehensive Annual Financial Report, or CAFR, the state ended the most recent fiscal year with a $2.15 billion deficit. Unlike state budgets that do not account for all future commitments, thus masking our true financial condition, the CAFR prepared by the state controller's office must follow generally accepted accounting principles (GAAP) from the nation's Governmental Accounting Standards Board and recognize these obligations.

This explains why state budget officials said the 2006 general fund balance was $49.6 million, while the controller put the deficit at $2.15 billion.  Last year, Wisconsin was one of only three states with a GAAP deficit and, relative to population, it had the largest deficit in the nation.

The state controller reported a second figure regarding the state's net assets that also merits attention. Accounting lingo can be confusing; but, in household terms, net assets are simply savings and investments, plus the value of cars, housing, and other property, less any loan debt.
According to the controller, the state's unrestricted net assets for governmental purposes were -$8.23 billion. According to the CAFR, "a positive balance in unrestricted net assets would represent the amount available to be used to meet a government's ongoing obligations to citizens and creditors." Wisconsin cannot now do that without selling roads, buildings, parks and campuses.

Much of the reason for the large negative asset amount is the state government's growing debt load.  In 2002, general obligation, revenue, tobacco and related bond debt for government activities equaled $4.13 billion. By 2006, the total was $8.99 billion, up 117 percent in four years.

These large negative numbers may not concern state officials, but they do impact Wisconsin's fiscal reputation. The simplest evidence comes from the nation's three leading bond-rating firms.  On average, 34 states have bond ratings higher than the Badger State; only three states have lower ratings. The figures from one firm, Standard and Poor's (S&P), are even worse, with 40 states rated higher than us and only two lower.

Wisconsin was settled mainly by Yankee, German and Scandinavian farmers who fervently believed in hard work, not in spending what they did not have. I don't think that today we are much different from our forebears.

Then why do the official financial reports tell us year after year that state government is running mounting deficits, as our bond ratings fail to improve and our debt continues to grow?

Certainly, governors and legislators of both parties, past and present, deserve much of the responsibility. But, as citizens, taxpayers and voters, we are not blameless. We have not done our homework. We have not insisted that our elected officials manage state finances like our forbears led their own lives.

The state budget has not yet been enacted. Whatever your individual opinion on these issues, you have a responsibility to communicate your expectations to your state officials. If you don't, your children and grandchildren will face even more troubling state finances in the years to come. And the hard-earned legacy of our Badger ancestors will be lost.

Todd Berry is president of the Wisconsin Taxpayers Alliance.