Friday, February 9, 2018

Fiscal Panic in Wyoming

We are now ready to look at the state budget through the prism of fiscal panic.

The point here, of course, is not to endorse panic-driven budget cuts, but to explain in what situation our legislature will find itself if it does not take appropriate measures here and now to permanently, thoughtfully and predictably reduce the size of our state government.

If and only if we have a government that taxpayers can afford even in tough times, we will be able to shield ourselves from future episodes of fiscal panic.

With that said, here is the fiscal panic scenario. The premises are as follows:

1. The Wyoming economy has gone into a recession. Tax revenue has plummeted substantially and there is no credible forecast predicting an upturn.
2. The deficit is currently at $400m per fiscal year, with credible forecasts pointing to $1bn per year in 3-4 years.  
3. The legislature has spent down the LSRA to a point where credit rating agencies are flagging for downgrades, unless the legislature stops the fiscal bleeding. 
4. A big tax package, proposed by a majority in the Revenue Committee is meeting fierce resistance from voters and taxpayers. At the same time, several government agencies are lobbying for more money to their turf of the budget.
5. At the prospect of a billion-dollar deficit, the governor is desperately pushing the legislature to cut "half way" between the current $400m deficit and the looming $1bn.

Using the 2017-18 budget, here is what we could expect would happen. All numbers are biennial unless otherwise specified.

 Under K-12 Education, the current budget appropriates as follows:

  • $228 million for school facilities;
  • $1,793 million for school finance, i.e., operations;
  • $274 million for the Department of Education;
  • A total of 155 positions.

At a total of $2,294.5 million, K-12 Education is the largest piece of the budget. Therefore, it is going to have to take the biggest hit when the legislature panic-cuts appropriations. 

With 24.7 percent of all appropriations going to K-12 Education, a cheese-slicer style budget reduction would take 24.7 percent of the total budget cuts out of this section of the budget. With the "half way" cut being a total of $700 million, the legislature will therefore have to cut the K-12 budget by $173 million. 

Where do you cut? Setting aside constitutional restrictions, from a strict fiscal viewpoint there are only two areas where any meaningful cuts could be made. The $274 million going into the Department of Education is almost entirely federal funds ($244m) which elevates them above the budget slashing. Sticking strictly to proportionality, school facilities should take eleven percent of the cuts and school finance the rest. However, school construction does not work that way; you can't build 90 percent of a school. Since we are talking upfront cost cuts, the logical solution is to either cut away entire construction projects, or to leave school construction untouched. 

Under the reasonable assumption that projects cannot be canceled on a dime, the only quick-fix cut is to slash $173 million out of school finance/operations. A 9.6-percent reduction of school operations funds, executed immediately, will be a significant change for the school districts, with no time to make planned reductions. The most likely solution is that administrators will put their own, and favored, positions cuts and pass them on down to the classrooms and curricula.

The second largest section in the budget is Department of Health:

  • $7.8 million for Miners' Hospital Board;
  • $2,078.8 million for Department of Health,

for a total $2,086.6 million. Here, the problem is that we receive $886.2 million in federal Medicaid funds, reducing the in-state sourced appropriations to almost exactly $1,200 million. However, approximately $785 million would have to be excluded, as we need to spend in-state sourced money as maintenance of effort to keep the federal funds coming.* All we have left, then, is $414.9 million, from which to cut the Department of Health share of the total budget reduction. That share is $157.3 million.

Can the Department scramble a 38-percent cut from that portion of their appropriations, to go into effect immediately?

Number three on the list is General Government. This is a section of the budget that funds the operations of government, including but not limited to Departments of Revenue, Audit and A & I. Of the $1,651.3 million appropriated for General Government, it is reasonable that the Adjutant General and the Wyoming Retirement System are excluded from immediate, panic-driven cuts. This reduced the appropriations open to cuts by $91.5 million.

I will leave it to the creative minds to figure out how to take eight percent away from the remaining parts of General Government. Go to the Budget Databook, scroll down to page 103, and be creative.

Number four on our list is the University of Wyoming and the community colleges. They get $913.1 million, of which $1.8 million is federal funds. All of the federal funds go toward community colleges, reducing their in-state appropriations to $274.1 million. Disregarding any maintenance of effort spending out of this money, the legislature would - under the cheese-slice principle - have to reduce their appropriations by $20.7 million. 

Since the total budget-reduction requirement for Higher Education is $68.8 million, the remaining $48.1 million would have to be taken from the $531.7 million designated for the University of Wyoming.

Fifth on our list is Justice, Public Safety and Corrections. Under normal circumstances, we should exclude this department from spending cuts, as it is an essential government function. However, given that it is the fourth largest section of the budget, and given that these are panic-driven cuts, they will not be spared.

Of the $525.3 million for this section, $20.2 million is federal funding, reducing the in-state share to $505.1 million. Where do we cut 7.8 percent out of those appropriations? Since the Attorney General received almost all those federal funds, his office will take less of a beating than, for example, the judicial districts of the Supreme Court. 

The remaining departments are:

Natural Resources, $424.8 million;
Employment Services, $412.8 million;
WYDOT, $392.1 million;
Long Term Saving, $315 million; and
Family Services, $270.8 million.

If we reduce these by deducting federal funds, here is what remains and what would have to be cut:

Natural Resources, $208.4 million, out of which the legislature would have to cut $32.2 million;
Employment Services, $323.8 million, cut 31.1 million;
WYDOT, 175 million, cut 29.6 million;
Long Term Saving, 315 million, cut 23.7 million; and
Family Services, $155.7 million, cut 20.4 million.

Again, under the fiscal-panic scenario that I have outlined this week, these cuts would have to be executed in one legislative session to go into effect as soon as the next fiscal year starts. This is a realistic scenario, based on how fiscal panic usually unfolds. 

The point here, of course, is not to endorse such budget cuts, but to explain in what situation our legislature will find itself if it does not take appropriate measures here and now to permanently, thoughtfully and predictably reduce the size of our state government. 

If and only if we have a government that taxpayers can afford even in tough times, we will be able to shield ourselves from future episodes of fiscal panic. 

With that, I wish you all a great weekend.
*) This in-state amount is estimated based on a 53/47 split between federal and in-state sourced funds. This share is based on the Wyoming State Budget Officer's reports to the National Association of State Budget Officers of Medicaid spending for one year, 2017. 

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