For more, go to www.wisconsinbudgetproject.org

A broken piggy bank with an IOU note inside

The Wisconsin rainy day fund remains underfunded despite a budget surplus.

In their eagerness to provide tax cuts, Wisconsin lawmakers have pushed aside a law aimed at encouraging fiscal responsibility that requires half of state surplus revenue be set aside for a rainy day.

When the budget surplus of nearly $1 billion over two years was announced earlier this year, it seemed likely that Wisconsin’s rainy day fund would get a much needed boost. State law requires that when revenues exceed budgeted amounts, half the additional revenue must be deposited into the state’s rainy day fund, which is used to cushion against future economic downturns. In the absence of a tax cut package, the projected level of surplus would result in an additional $443 million transferred to Wisconsin’s rainy day fund over the next two years.

Wisconsin’s rainy day fund has long been underfunded. In fact, for years that fund was nearly completely empty. Since the end of the recession, the state has been regularly depositing money into the rainy day fund when revenues have exceeded projected amounts, and Wisconsin’s rainy day fund currently has a balance of $279 million.

It is encouraging that lawmakers are finally setting aside money in this reserve fund. However, the balance in the fund is still too low to provide much of a budget cushion. There are no hard and fast standards for how much a state should have set aside in its rainy day fund, but the Government Finance Officers Association recommends that states have at a minimum of 5% to 15% of annual general revenues set aside. For Wisconsin, those guidelines mean that we should have somewhere between $750 million and $2.25 billion set aside in budget reserves – several times the amount that Wisconsin has set aside currently.

Plans for the surplus have proposed diverting most of the money that would have otherwise been deposited into the rainy day fund, and using that money for tax cuts instead. The Governor’s tax cut proposal did include a $117 million deposit in the rainy day fund over two years, but the Legislature has proposed eliminating that deposit and inserting language into the bill to exempt itself from the statutory requirement to make such a deposit. The newest version of the tax cut package, which has been passed by the Legislature’s budget committee and seems likely to be agreed upon by both houses of the Legislature, does not put any money into Wisconsin’s rainy day fund at all. Instead, lawmakers want to keep that $117 million in the state’s main account. Keeping the money in the state’s main account reduces the size of the hole in the state’s upcoming budget, because of the way that budget hole is calculated.

Keeping that $117 million in the state’s main account rather than depositing it into the state’s rainy day fund does still provide some protection against an unexpected drop in revenues. It also has the advantage of giving lawmakers an easier option for plugging a $93 million hole in the Medicaid budget, if state officials don’t find another way to close that budget gap. But it would be more fiscally responsible for lawmakers to reduce the size of the tax cuts so they don’t have to choose between adding to the rainy day fund and providing a healthier budget balance to carry into the next biennium. (Read more here about the state’s continued delays in building up the required budget balance.)

The budget surplus represents an opportunity for lawmakers to build on the progress Wisconsin has made in recent years in building up the rainy day fund. Setting aside money now, when revenues are higher than anticipated, could help the state avoid painful spending cuts or tax increases during the next recession. Instead, policymakers seem set on a course of cutting taxes without heed to setting aside money for future needs.

Photo by Images of Money released under a Creative Commons license.