WI BudgetBudget reserves have been in the news recently, with the legislature sharply rebuking the University of Wisconsin System for maintaining a sizable reserve. The irony is that the state itself has a fiscal cushion that is far too small, according to a new analysis from the Wisconsin Budget Project.

In general, budget reserves are a good thing, as the new Wisconsin Budget Project analysis points out. If the state had a more substantial budget reserve, it could use the reserve to cover small or moderate-sized budget gaps that occur between budgets when an economic downturn causes revenues to be less than expected, or spending to be higher. Currently, the state usually addresses these gaps by requiring agencies to lapse funds — often with short notice — or by passing a budget repair bill that cuts spending or increases revenues.

Legislators clearly think the UW’s budget reserve is too big, although the actual size of UW’s reserve is up for debate. The review by the Legislative Fiscal Bureau and Legislative Audit Bureau that sparked this debate suggest excluding certain federal aid when determining the size of UW’s reserve, since that aid must be spent in compliance with federal rules. Likewise, the review suggests that it makes sense to exclude gifts, grants, and contracts when calculating the reserve, since that money has usually been provided for a specific purpose.

Calculated this way, the UW System had a reserve of $648 million at the end of fiscal year 2012. UW System Administration has identified expenditure purposes that would use $441 million of the balance. That leaves $207 million in uncommitted funds in the reserve, or 8.4% of the UW System’s budget excluding federal aid, gifts, grants, and contracts.

Granted, the UW System could have done a better job communicating with the Legislature about the size of its reserve. But the state could do worse than take a page from the University’s book in setting aside money for hard financial times. A good rule of thumb is that a state should set aside, at a minimum, 5% of total expenditures as a fiscal cushion. The proposed state budget dips Wisconsin’s budget reserves to a fraction of the recommended 5% minimum, as shown in the table below.

Table 1: General Fund Balance Levels, in Millions
Fiscal Year Projected Balance of General Fund 2% Minimum Balance
2013* $484.7 $296.3
2014** $286.9 $300.5
2015** $88.1 $311.7
*Source: January 2013 LFB memo **Based on proposed executive budget

About a decade ago, Wisconsin lawmakers passed legislation to increase the size of the state’s budget reserve. However, the Legislature has postponed that requirement four times since its original passage. Last week, Wisconsin’s Joint Finance Committee voted to postpone that requirement once again, meaning an increased budget reserve wouldn’t be required until 2018 at the earliest.

This year’s budget surplus offers a rare opportunity to get the state budget on a sounder fiscal footing. Rather than using the one-time surplus to fund the ongoing income tax cut, policymakers could use the surplus to fully fund Wisconsin’s reserves – something legislators from both parties agreed should have happened years ago. Instead, legislators are pointing fingers at the UW System while postponing, yet again, the fiscally responsible move of increasing the state’s budget reserve.

Click here to read the full analysis by the Wisconsin Budget Project.

For more, go to www.wisconsinbudgetproject.org.