Budget Example Analysis

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-In the wake of the dot-com industry’s collapse, the steep stock market drop, the rise of the dollar against foreign currencies, increased unemployment, and other economic factors, March 2001 officially began a nationwide recession that triggered budget problems in at least forty-five states. -The 2001 recession was the fourth recession in 30 years. After past recessions budget experts recommended establishing a “rainy-day fund” (saving funds during boom times in order to cushion the shocks of economic busts). Wisconsin established the fund but never put money into it. -During the 1990-1991 recession Wisconsin’s fiscal stress was ranked the lowest among the 50 states. During the 2001 recession Wisconsin was among the states that were experiencing the highest levels of fiscal stress. -This stress was due to both structural and cyclical causes. Wisconsin’s Budget and Balanced Budget Requirements

-Wisconsin’s biennial budget is passed in odd-numbered years. -During even-numbered years the legislature holds a “budget review” or “budget adjustment” to make adjustments if necessary. -Wisconsin’s General Fund budget must be balanced each year. This requirement is contained in state statutes, rather than in the state’s constitution. -Wisconsin’s constitution allows the state to run a deficit in a given year, as long as a tax is levied “for the ensuing year, sufficient, with other sources of income, to pay the deficiency as well as the estimated expenses of the ensuing year.” Coping with Fiscal Stress: The FY 2001-2003 Budget (Act 16) -In formulating the 2001-2003 budget legislators had to deal with a budget gap that had both cyclical and structural causes. -Governor McCallum was against income and sales tax increases to address the state’s budget problems, and legislators didn’t question this. -The size of the budget problem continued to grow despite remedies that were attempted. -The Rainy Day fund existed in name only (there was no money in it). -Because Republicans controlled the governorship and the Assembly and Democrats controlled the Senate, partisan differences contributed to the conflict. -In order to cope with the deficit they borrowed heavily from the state’s future Tobacco fund revenues. A Growing Deficit, the “Budget Reform” Bill, and Act 109 -Seven months after Act 16, the Budget Reform Act, Act 109, was signed into law on July 26, 2002. The bill was designed to address a $1.1 billion deficit, rather than the $1.3 billion figure that Governor McCallum reported in his “Budget Reform Summary”. -Even the most optimistic forecasts in July of 2002 showed an estimated deficit for FY 2003-2005 of at least $1.3 billion, unless taxes were raised or additional cuts in spending were made. Structural Factors: Expenditure Decisions

-Republican governor Tommy Thompson and the state legislators increased spending and cut taxes. -Statutory provisions included in the 1994 budget adjustment bill (Act 437) required that state support to K-12 be increased from 48.4 percent to 66.6 percent by fiscal year 1996-1997. State aid to K-12 schools was already the state’s largest expenditure of General Purpose Revenue, costing approximately $2.2 billion. -In 1994 Democrats proposed cutting the costs of K-12 schools from property tax. Thompson in his reelection campaign promised to dramatically increase state aid for K-12 schools without raising state general taxes. Structural Factors: Tax Cuts

-In FY 1999-2000 the main source of the lost tax revenue was a sales tax rebate of $654.6 million. -There were differences of opinion about the appropriate size of a one-time tax rebate, along with debates about whether the rebate should be paid as an income or sales tax rebate. There was no opposition that was reported to the tax cuts. -Main reason for these thoughts stemmed from “Fiscal Brinkmanship” (revenue should be cut during good times and expenditures cut during recessions. Cyclical Factors...
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