Thursday, December 1, 2016

$400m Deficit: See I Told You So!

Never bark at the Big Dog. The Big Dog is always right. 

Six months ago I testified before the Revenue and Appropriations committees, telling them that in Fiscal Year 2018 we could have a budget deficit of $350 million if nothing was done about it. Some committee members shook their heads, laughed and dismissed my forecast. 

Well, they are not laughing now, are they?

Wyoming government will not suffer a new round of state cuts if the Legislature accepts the fiscal plan that Gov. Matt Mead unveiled Wednesday. Mead’s proposal calls for balancing the state’s government operations budget, which has a $400 million shortfall, by spending up to $144 million of the state’s $1.6 billion rainy day fund. Mead is calling for the state to issue $80 million in bonds to fix the massive structural problems at the Rawlins prison. He wants the Legislature to use $49 million that the state unexpectedly received from a number of sources, such as investment income and money that agencies didn’t spend.
 Please note the comment about the $400-million budget gap. This is the shortfall in just one fiscal year, namely FY2018. It within the margin of error of my forecast half a year ago.

Here is what incoming House Speaker Steve Harshman said yesterday, with reference to the governor's budget:
In a telephone interview on Wednesday, Harshman said Wyoming faces a shortfall of roughly $400 million a year for education funding as a result of falling property taxes brought about by declining energy markets. Wyoming is on track to spend through more than $600 million in education reserve funds by the end of the 2017-2018 school year, Harshman said. After that money is gone, he said the state has no plan for addressing school funding. Harshman said he's drafting legislation calling for creating a committee of the state's most experienced legislators to address the issue. ... "Everything's got to be on the table when you have a problem this big — $400 million a year," Harshman said. "This is twice the size of the general fund budget issues we've been dealing with. I've been telling people this is too big to cut, and it's too big to tax."
I welcome Speaker-elect Harshman's new-found budget insights. Hopefully, having procrastinated for nearly half a year, he can now do something productive to turn around the runaway deficit.

There is some hope that he might. Echoing the governor's remarks, Harshman manages to concentrate the shortfall to the education part of the budget. That, of course, is just a tactical maneuver: the budget shortfall is not just from property taxes, but from severance, sales and excise taxes as well. The ability of Wyomingites to pay taxes is weakening across the board, and that means General Fund revenue as a whole is taking a beating. 

The purpose behind tying the $400 million to education spending is twofold:

1. Both the governor and Speaker-elect Harshman want Wyoming to continue to have a strong education system - a laudable ambition; 
2. At the same time, Wyoming public schools are among the costliest in the country, per student, raising questions about what we get that other states have to live without.

To the second point, a fun little factoid:
The state of Wyoming is willing to pay a great deal for its public education system. The 2010 census found that Wyoming spends $15,169 per student on education. $15,169 is a lot of money, and it has not earned Wyoming a better-than-average ranking on measures of educational quality compared to other states. For example, Wisconsin students consistently do better in measures of achievement than Wyoming students. A feature of their system is that the state funds both public and private schools.
The same blog article also reports that Wisconsin public schools cost 25 percent less than Wyoming schools - not to mention the voucher-based system in Milwaukee where per-student cost is 42 cents per dollar we spend per student here in Wyoming.

Adjusting for the extra fixed costs that come with a predominantly rural state, we still have an expensive education system. In times of a budget crisis, it is therefore natural that people focus attention on such a costly item in the state budget. 

At the same time, referring to point one above, we all want our kids to get a good education. Our elected officials are well aware of this. By tying the budget shortfall to education, Speaker-elect Harshman - a big fan of education spending - probably hopes to rally support for more taxes in order to avoid spending cuts. If we don't agree to pay more taxes, the implication is that our schools will have to eat the entire $400-million budget shortfall.

That is not the case, of course. The $400 million could easily be spread out across all items in the state budget. But the fact that Speaker-elect Harshman and Governor Mead have made this budget situation a fight about education spending is actually good. It opens for an honest discussion about structural reforms to our K-12 school system. For example, a voucher program of the Wisconsin model could save enormous amounts of money here in Wyoming. If only ten percent of the kids in our K-12 schools went into such a program, it would cut the education budget by $85-90 million - and that is an an estimate on the conservative side. 

Again, the $400 million budget shortfall is not an education-only issue. It is a general shortfall that is being tied to education for political purposes. School-choice reform is not part of that purpose, but that does not mean parents around Wyoming cannot make that connection. When the state legislature comes asking for more taxes "to save education funding", perhaps one or two parents will respond by demanding cost-saving, choice-boosting, quality-securing education choice reforms. 

Other than the political magic trick of turning a decline in general revenue into an education issue, it is good to see that our elected officials have admitted just how bad the budget situation is. In fact, Governor Mead made one comment that shows that he is beginning to realize just how serious the budget crisis has become:
“As we look at revenue forecasts, we look at estimates of spending, I would say that it has gotten worse,” Mead added. “Whether it’s $600-$700 million or some have even suggested in six years a $1.5 million shortfall, we have to make some changes.”

That is $1.5 billion, of course. I have provided Governor Mead with my projections which show a $1-billion deficit around 2020 - and growing beyond that. To the best of my knowledge, nobody else has made any such predictions; it is good to see that the governor is listening. Hopefully, he can now take the next step and start looking at structural spending cuts as the way out of this crisis. 

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