Monday, December 12, 2016

Governor Admits Deficit at $720m

This morning Governor Mead gave his budget address to the Joint Appropriations Committee (JAC). Overall, it was an encouraging performance by our state's chief executive, in particular because he invited all Wyomingites to a discussion about the state's fiscal future. And the governor updated the budget forecast with a new outlook that deserves more attention than he gave it.

More on that in a moment. First, we need to straighten out what Governor Mead really thinks about the state's fiscal problems, and in particular how big - or small - those problems are. As a lead-up to handing over the document, the governor announced his main intentions to the Casper Star Tribune:

Gov. Matt Mead says his new $2.5 million initiative to develop a comprehensive plan to diversify the economy is critical to the future stability of the state. The Economically Needed Diversity Options for Wyoming (ENDOW) program was one of only three exception funding requests the governor put in his interim budget plan released last week, as the state faces revenue shortfalls totaling some $157 million in the coming year. 
So are we back to $157 million now? Apparently: in his address to the Joint Appropriations Committee this morning (Dec. 12), the governor once again talked about the budget deficit in such terms that the $157 million seems to be everything we have to worry about. In fact, he said: "I do not think we need to cut further." 

Quite frankly, the message from the governor regarding the budget deficit, is getting a bit confusing. Less than two weeks ago Governor Mead sounded the alarm bells, declaring that the expected deficit for 2018 is $400 million

But the alarm bells did not stop ringing at $400 million. In today's JAC address, Governor Mead admitted that the deficit will be as big as $720 million in 2020.

Yes, you heard right. Almost three quarters of a billion dollars. The governor referred to predictions by the Legislative Service Office (LSO), which apparently puts the deficit at $720 million in 2020. 

In my predictions six months ago, shared with the Appropriations and Revenue committees, I forecasted a deficit of "at least" $700 million in 2020.

Never bark at the Big Dog. The Big Dog is always right. I am, of course, glad to hear that the LSO made the correct forecast, although it would have helped if they had applied my forecasting methods and reached this same conclusion six months ago. That would have helped greatly in bringing about permanent solutions to this permanent, and escalating, budget crisis. 

It still baffles me, though, that the governor, and leading legislators like House Speaker-elect Harshman, keep stashing away this deficit in the education section of the budget. As members of the JAC openly admitted during the question time after the governor's budget presentation, the $400-million deficit is an operational-cost deficit - in other words a deficit in funding ongoing government operations. It comes from a decline in general tax revenue, in other words revenue designated to pay for government in general, not just for education. 

That said, I want to give Governor Mead a thumbs-up. During his JAC address he called for a conversation involving the entire state about how to solve the state budget problem. I agree with him - we really do need that conversation - but in order to have that conversation we first need to agree on the facts of the problem, and include all relevant aspects on it. This means:

1. Admit that this is a general budget problem. Stop talking about it as a deficit only for the funding of education. I know that the deficit is being pinned on education because that makes it easier for those who want to raise taxes to win over skeptical taxpayers. However, if the purpose, already from the start, is to skew the discussion in favor of tax hikes, then this will not be an honest conversation. It will be an exercise in political tomfoolery. 

2. Recognize that the budget problem is permanent. In continuing to talk about the budget as a whole as being in balance, Governor Mead does the state a disservice. It is balanced only because of spending cuts that the executive branch reluctantly agreed to. I applaud Governor Mead for having made those cuts, but with the $400-million deficit ahead of us, any talk about a balanced budget comes across as little more than creative semantics. We don't need that. We need the conversation about the budget to be conducted on terms that recognize the deficit problem for what it is, not what might come across as - with all due respect - politically convenient. 

3. Add the macroeconomic perspective. If we are going to have the governor's conversation about the budget, we need to conduct it based on more than just fiscal analysis. The tax base that government lives off is produced and reproduced on a daily basis by the private sector; in order to secure a fiscally sustainable government, we need reforms to the state budget that puts it in sync with private-sector economic activity. That, in turn, means shifting focus from tax revenue to spending: the first order of business in the state budgeting process should be to cap growth in total state spending to the amount by which private-sector activity is growing, adjusted for inflation. If the ties from that growth rate to government spending are designed appropriately, this growth cap on the state budget would be the beginning of a new era of fiscal sustainability in Wyoming. 

4. A plan for growth. The governor's ENDOW initiative is an expression of the right kind of thinking, namely that Wyoming needs more private-sector growth to thrive. It remains to be seen what it can accomplish; some of the things the governor said about his plan during his JAC address made me a bit worried. At the same time, his thinking in terms of economic diversification is good, as is his desire to find out more about what the state can to to help foster a thriving private sector. So long as the governor is focused on removing obstacles to private investments, and not on expanding corporate welfare (which would take him into a peeing contest with the Democrats), he is on the right track. Let's include the growth issue in the conversation about the state budget.

If we can have the governor's budget conversation on these terms, there is a really good chance that it will lead to good, sustainable solutions both to our state's chronically poor private-sector performance, and to the state's fiscal problems. 

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