The number of Wisconsin children who are from low-income families has climbed for the ninth straight year, according to a new report from the state’s Department of Public Instruction.

In the 2012-13 school year, 42% of Wisconsin children were eligible for free or reduced-price school lunches. In the 2003-04 school year, just 30% of students qualified for free or reduced-price school lunches. The share of students qualifying has climbed every year since then. This video shows how the share of low-income schoolchildren has changed over time in each school district.

The criteria for qualifying for free or reduced-price lunches have stayed the same during the time period described. Students in families earning less than 130% of the federal poverty level qualify for free school lunches. For the 2013-12 school year, students from a family of four earning less than about $30,000 would qualify for free lunches. A much smaller number of students in families earning between 130% and 185% of the poverty level qualify for reduced-price lunches.

In Wisconsin’s five largest school districts, more than half the students are from low-income families. Eighty-four percent of the students in Milwaukee Public Schools are from low-income families.

The rising number of low-income students presents challenges for Wisconsin schools. Children from low-income families have poorer educational outcomes and lag their peers in educational achievement. They also are less likely to graduate from high school and become well-educated, healthy members of Wisconsin’s skilled workforce.

New policies proposed by state lawmakers may pose additional challenges to schools that serve largely low-income students. In his budget proposal, Governor Walker has recommended setting aside funding for schools that are rated the highest on DPI’s report card system. Schools that score in the lowest category would receive much less money, with the result that schools with relatively small numbers of students from low-income families would receive the most benefit. For more on that proposal, which is scheduled to be voted on next week by the legislature’s budget committee, read this blog post.

For more information, go to www.wisconsinbudgetproject.org.

#1: The tax cut leaves out low-income taxpayers.

More than three-quarters of a million Wisconsin tax filers would not receive any benefit from the tax cut proposed by the Governor, including most people earning $30,000 a year or less.

Low-income Wisconsinites typically pay a higher share of their income in state and local taxes than do those with the highest incomes. Yet low-income taxpayers would receive little or no benefit from the income tax cut.

#2: Rolling back recent tax increases should be a higher priority.

The last state budget included two tax increases for low-income people:

• A cut in the state’s Earned Income Tax Credit, which resulted in higher taxes for modest-income working families with children; and
• A cut to the Homestead Credit, which helps make sure that seniors on fixed incomes and other people of modest means aren’t taxed out of their homes.

Before approving new tax cuts, the first priority of state policymakers should be to revisit recent tax increases, especially because those tax increases hit working families and seniors the hardest.

#3: The so-called “middle class” tax cut winds up mostly in the pockets of the most well-off.

Some policymakers have described this tax cut as being aimed at the middle class, but most of the benefit of the proposed cut goes to the highest earners. Half the benefit of the tax cut would go to the top 14% of tax filers.

#4: The tax cut would be likely to hurt, rather than help, the state economy.

Proponents of the tax cut say that it will boost the Wisconsin economy, but recent history in other states shows the opposite is more likely to be true. States that cut personal income taxes in the 1990s and 2000s lagged the rest of the country in economic growth. Cutting taxes is no substitute for public investments in high-quality schools, roads, and communities that attract business.

#5: It may create a large hole in the next budget.

The estimated cost of the tax cut is about $170 million a year. To put that amount in context, that is more than the state spends on the entire Wisconsin Technical College System per year.

In a March 28 paper, the Legislative Fiscal Bureau (LFB) pointed out the proposed budget bill would put the state in a substantial hole at the start of the 2015-17 biennium. The good news is that the LFB recently raised its revenue projections, and that increase could be used to avoid the budget hole in the following biennium. The bad news is that much of that revenue growth is one-time money, so great care needs to be taken that it isn’t used for ongoing, unsustainable tax cuts. Using a short-term surplus for permanent tax cuts is a recipe for big fiscal problems in future years.

In his proposed budget, Governor Walker recommends setting aside a portion of education funding to distribute to schools based on their performance. While this proposal might sound attractive on the surface, it will result in significant funding increases for schools with few low-income students, disabled students, or English language learners. Schools with larger percentages of those students would be allocated a much smaller share of funding.

Scott Walker's new education plan hurts the poor and disadvantaged.

The Governor is advocating allocating the following amounts for schools over the coming two-year budget period, based on a school report card accountability measure developed by the Wisconsin Department of Public Instruction:

• $24 million for schools that score in the highest category in DPI’s school report cards;
• $30 million for schools that improve their score on the school report cards by at least three points over the previous year; and
• $10 million for schools that score in the category of “fails to meet expectations,” if the school submits an improvement plan that is approved by DPI.

The disparities in the student population in the schools, and the higher dollar amount allocated for high-rated schools means that low-income students get relatively little out of this deal. Only one year of school report card data has been published so far, so it’s hard to know what kind of schools would be eligible for the money allocated for schools that improve their score. But we can make some generalizations on how the money would be distributed among the best- and worst-rated schools based using 2011-12 school report cards.

It’s clear that the schools with the highest scores on the school report card educate a very different population than the schools that score the lowest. Students attending the lowest-rated schools are four times as likely as students in high-performing schools to be economically disadvantaged, twice as likely to be disabled, and more than twice as likely to have limited English proficiency.

In Wisconsin, one out of every 9 low-income students attends a struggling school. For students that are not low-income, one out of every 67 students attends a struggling school. Twice as many students are enrolled in the lowest-rated schools than in the highest-rated schools.

High-rated schools are also located in different geographical areas than low-performing schools. About one out of every five high-performing schools is located in a city, while nine out of ten low-performing schools are located in a city.

It’s not likely the Governor’s budget plan will do much to encourage excellence in schools. After all, the highest-rated schools, which get the most money per student, achieved that rating without any monetary incentive from the state. One thing the plan could do, though, is widen the achievement gap between schools in well-off suburban or rural districts and struggling schools in urban areas. By focusing resources on schools that already have already achieved the highest rating, we make equality of opportunity that much harder to achieve in our schools.

The Governor’s plan to reward the highest-rated districts and provide much lower levels of assistance to struggling schools would weaken Wisconsin’s commitment to ensuring that school districts have access to relatively equal resources. The bulk of the money will go to the schools that need it the least, and schools that educate the most challenging students will receive relatively little. Concentrating our resources on the highest-rated schools and giving relatively little to struggling schools is likely to worsen the achievement gap rather than improve it.

For more, go to www.wisconsinbudgetproject.org.

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Will Lawmakers Use the Increased Revenue in Ways that Reduce the Structural Deficit or Exacerbate It?

How will Wisconsin lawmakers handle unexpected revenue?

State legislators working on the 2013-15 budget got some very good news today. A new paper from the Legislative Fiscal Bureau estimates that tax collections in the current fiscal year (which ends on June 30) will be $215 million more than previously anticipated. That stronger base of revenue is pushing up the amount anticipated in each of the next two years by $180 million, for a total (three-year) increase by the end of the 2013-15 biennium of $575 million.

Although today’s news could trigger fights about the best ways to use the increased revenue, the rosier revenue picture should nonetheless make it easier for the majority party to fashion a compromise that addresses the competing priorities of various Republicans, including adding to the meager K-12 education funding increase recommended by the Governor.

The biggest question in my mind is whether lawmakers use the added revenue in ways that reduce the $664 million budget hole (“structural imbalance”) that the Legislative Fiscal Bureau said the Governor’s budget would create for the 2015-17 biennium. Closing that gap is certainly a possibility and is a course that I would strongly recommend, but based on past history it’s not what I expect. When they have a balance at their disposal, legislators of both parties typically opt for short-term gratification rather than long-term fiscal responsibility. In other words, I think lawmakers will use the carry-over from this fiscal year for a combination of permanent tax cuts and spending increases that isn’t fiscally sustainable – thereby setting the stage for another round of spending cuts in the 2015-17 budget.

The simplest way to use the increased revenue in a way that creates a stronger foundation for future budgets is to increase the meager balance that the state is statutorily required to set aside. As we explained in a short issue brief released on May 6th, the Legislature decided about ten years ago to increase the statutory balance requirement to a modest 2% of General Fund spending. But this biennial budget bill, like each of the last four, postpones that fiscally responsible action.

The state’s current reserve requirement – $65 million – is less than 0.5% of spending, which is totally inadequate, and the budget bill proposes delaying an increase until the 2017-18 fiscal year. The new revenue announced today eliminates any excuses for not acting now to raise the budget balance to a much more reasonable level.

Taking a broader view of budget reserves – by looking at balances and rainy day funds together – most states set aside an amount equal to at least 5% of state spending, and that’s generally considered the minimum amount a state should have in reserve in normal economic times. Fortunately, Wisconsin’s small rainy day fund has been growing, and current statutes require half of this year’s $215 million tax growth to be set aside in that fund. That will bring the rainy day fund up to a somewhat more respectable level – $243 million at the end of the current fiscal year. However, if the Legislature approves the 2014-15 closing balance recommended by the Governor ($88 million), the combined funding in the budget balance and the rainy day fund will amount to only about 2% of annual spending, instead of the far more prudent target of 5%.

The higher revenue estimates announced today provide a golden opportunity for state policymakers to pass a budget that addresses important needs in areas like K-12 education, early education, and health care, without creating a substantial structural deficit in future years. Let’s not squander that opportunity.

For more, go to www.wisconsinbudgetproject.org

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Budget 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.

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.

For more, go to www.wisconsinbudgetproject.org.

Wisconsin Capitol dome

It’s clear that the Wisconsin Economic Development Corporation faces challenges in properly administering the state’s economic development programs. What’s less clear is what, if anything, state policymakers are going to do about that.

Numerous problems at WEDC came to light this week, with the publication of a scathing new audit of WEDC. The WEDC is a public-private corporation that replaced the state’s Department of Commerce. The Milwaukee Journal Sentinel’s article summed up the audit’s findings:

The Wisconsin Economic Development Corp. didn’t require financial statements from companies receiving incentives; gave awards to ineligible businesses and ineligible projects; and awarded nearly $1 million in tax credits to companies for actions taken before they had signed their contracts with the state. The agency lacked strong policies and oversight on awarding taxpayer money and then did a poor job following up to see if jobs were truly being created and other goals met, the audit found.

Staff used agency credit cards to buy alcohol and football tickets, and WEDC had to be reimbursed for travel and meals for family of the agency’s head. In addition, WEDC did not always engage in competitive bidding on contracts and in two cases hired firms with conflicts of interest.

This description of WEDC’s shortcomings comes on the heels of a fall 2012 audit, which determined that WEDC had lost track of $8 million in past due loans.

Legislators from both parties have voiced frustrations this week with WEDC’s missteps. Sen. Robert Cowles (R-Allouez) called WEDC’s performance “pretty darn bad.” Sen. Peter Barca (D-Kenosha), had stronger words for WEDC, calling the organization “a complete failure.”

Policymakers may be dissatisfied with WEDC’s performance, but that hasn’t translated into big budget cuts for the troubled agency. In fact, just the opposite. The Governor’s proposed budget boosts the amount of General Purpose Revenue (GPR) devoted to WEDC by $8.0 million over two years, or 12.3%. Most of the additional funding would go towards marketing Wisconsin as a favorable place to start or expand a business, and towards a “seed accelerator” program that provides grants to communities and organizations to provide mentoring and financial assistance to entrepreneurs.

Although the Governor proposes shifting to the Department of Revenue the responsibility WEDC now has for administering one investment tax break, Walker has also recommended expanding or extending two tax credit programs under WEDC, including:

• Lifting the current cap on the total amounts of credits available under the angel investment tax credit program, a move that would reduce state tax revenue by $5 million in 2015. Individuals may receive these credits for investing in certain new business ventures.
• Providing an additional $75 million in available credits under the economic development tax credit program. This move would reduce tax revenue by $9.9 million over the two-year budget period.

Given the wide range of problems that has been revealed at WEDC, legislators might want to think twice about approving the expanded role for the agency that is included in the Governor’s proposed budget. The WEDC has potential to help Wisconsin businesses grow and create jobs — an especially important role for the agency given how poorly Wisconsin has fared in job growth compared to other states. But until the performance issues at WEDC are adequately addressed, we should be cautious about devoting additional dollars to programs administered by that agency.

Wisconsin’s Joint Finance Committee will be meeting on May 9th to vote on budget issues related to the WEDC as well as other state agencies.

For more, go to www.wisconsinbudgetproject.org.
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The budget will hurt low income families the most.

Several important aspects of the budget bill’s funding for public assistance programs have received little or no attention:

• The bill siphons off funding intended for low-income families and uses it for other purposes, such as tax cuts.
• The proposed budget eliminates the current $84 million balance in federal funds from the block grant known as Temporary Assistance to Needy Families (TANF), even though spending is being cut significantly for the three major programs financed with the TANF funds.
• The budget may significantly underfund Wisconsin Works (W-2), because participation in the program has grown sharply over the past three months, and the proposed W-2 spending assumes a substantial drop in participation.

A new issue brief released today by the Wisconsin Budget Project explains how the budget has the paradoxical effect of eliminating the TANF balance, even as it makes cuts to the following programs:

• It cuts W-2 funding by $34 million over the next two years;
• It reduces funding for child care subsidies (Wisconsin Shares) by about $35 million; and
• It decreases total spending for the state Earned Income Tax Credit (EITC) by about $16 million.

In light of those substantial spending reductions, how is it that the budget wipes out a sizable TANF balance over the space of two years? The answer is that the 2013-15 budget bill adds to a funding shift initiated two years ago. Specifically, the Governor’s proposal does the following:

• Increases by $27 million per year the amount of TANF used to pay for the EITC, in place of state General Purpose Revenue (GPR), which is on top of the $37 million per year increase in supplantation contained in the 2011 budget adjustment bill and the 2011-13 biennial budget.
• Uses $91 million more from TANF funding to pay for the EITC over the next two years than the Dept. of Children and Families (DCF) proposed in its 2013-15 budget request.

Prior to passage of the 2011 budget adjustment bill (Act 10), the state had been planning to use just $6 million per year of TANF funds to pay for the EITC. There was a sharp increase in the TANF share of EITC funding in the last biennium and the proposed budget, even as total spending for the EITC was being reduced. The proposed transfer of TANF funds for that purpose frees up $140 million of GPR funding in 2013-15 to be used for other purposes, such as helping make possible the proposed income tax cuts.

As a result of the sharp increase in supplantation of state EITC funding, the proposed budget continues to reduce the funding set aside for the Wisconsin Shares child care subsidies, which will drop by $35 million over the next two years. DCF projects that the proposed funding level for those subsidies is enough to meet the anticipated demand, but the spending reductions are achieved by continuing policies that have severely squeezed reimbursement rates for child care providers who are still willing to take children in the Wisconsin Shares program. Over the past four years those rates have declined by about 17% in nominal dollars and by 23.4% when adjusted for inflation. (See our short summary of the early education provisions in the budget bill.)

The funding for paid work placements in the W-2 program is being cut by $34 million, based on the assumption that the number of placements will fall by 1% each month from the December 2012 level. Yet the actual number has increased sharply over the past three months. Our analysis found that if the growth stops for the next three months, and the caseload begins dropping by 1% each month in July, W-2 spending would be $18 million higher than the level proposed by the Governor.

The new report explains that because the increased supplantation of EITC funding eliminates the $84 million TANF balance, it creates a significant TANF structural deficit. As a result, the cuts in W-2 and Wisconsin Shares will need to be even deeper in future years unless the state sharply reduces the use of TANF dollars to replace state funding for the EITC.

Read the full report here.

For more, go to www.wisconsinbudgetproject.org
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Legislative Proposals Squeeze Local Governments from Many Directions

For more, go to www.wisconsinbudgetproject.org.

Wisconsin Protests 03-10-2012 024

In Wisconsin and across the country, most government bodies finance the cost of post-retirement health benefits for their former employees on a pay-as-you-go basis. A number of Republicans in the legislature want to change that and begin requiring local governments, including school districts, to pre-pay those benefits for any public employees hired after 2014.

Evidently, the proponents of the change decided that converting to up-front financing of those benefits is working so well for the U.S. Postal Service that it’s time to do much the same thing for local governments. Okay, that’s probably not their reasoning, and I have to confess that I’m not sure what their primary argument is. However, a good State Journal article by Steven Verburg about the debate over the proposed legislation says that the bill’s proponents contend their intent is to protect workers from being cheated out benefits they have been promised.

Perhaps that’s what some of measure’s backers want to achieve, but the broader fiscal context strongly suggests that the proposed legislation would hurt far more public sector employees than it would help. Local officials would be squeezed from all directions because the new cost would be applied as the state continues to freeze the major sources of aid to municipalities and counties, freezes the revenue cap for schools, and applies a very tight cap on growth in local property tax levies. (Read more about those budget recommendations in our March 26th issue brief.)

I actually think there’s something to be said for pre-paying a significant portion of retirement benefits, which our state does very well for pension benefits for public employees. However, I don’t think the right question to debate is whether local governments should switch to up-front financing. Instead, I think the key question is whether the state should tell local governments how they must finance the employee benefits they provide.

There was a time when the Republican Party considered itself to be the party of small government and local control, but perhaps I’m dating myself when I say that. Proposals like the mandate for prepaying health benefits for retirees make it increasingly difficult to think back to the days when legislators in both parties seemed genuinely committed to local control.

For more, go to www.wisconsinbudgetproject.org.
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Senate Expected to Level Playing Field for Main Street Businesses

Legislation that would allow states to compel internet retailers to collect sales taxes is expected to pass the U.S. Senate in the next couple days. Passage of the Marketplace Fairness Act would be a first step towards leveling the playing field between internet retailers and bricks-and-mortar businesses.

Under current law, internet retailers are not required to charge customers sales tax unless the retailer has a physical presence in the state where the customer lives. Customers are still required to pay sales tax on on-line purchases, by declaring purchases on their income tax forms. Few customers do this, though. By not charging customers sales tax, online retailers can undercut bricks-and-mortar retailers on price.

Some states have undertaken their own efforts to compel internet retailers to collect the sales tax, with varying success. It seems clear that a federal approach to this challenge would ensure a more consistent approach among the states, but until now Congress has been slow to take action on this issue.

Opponents of the Marketplace Fairness Act point to the difficulty that small businesses will have complying with the thousands of different sales tax jurisdictions across the country. There are a number of provisions in the bill that address those concerns, including an exemption for businesses with less than $1 million in out of state revenue. (EBay has asked Congress to raise that exemption level to $10 million.)

It’s not clear how the bill will fare in the House of Representatives. Many House Republicans are fiercely anti-tax, which could lead them to oppose this bill. On the other hand, the bill does not actually levy any new taxes, but instead changes the collection method for the sales tax already due on online purchases. Approaching the issue from this direction may allow some anti-tax advocates to justify voting for the bill. President Obama has said he supports the bill.

Wisconsin loses upward of $150 million per year in state and local tax revenue from internet sales, according to a University of Tennessee study.

For more, go to www.wisconsinbudgetproject.org

Should We Wear Blue or Sing the Blues to Support Abused and Neglected Children?

Can Governor Walker offer more than blue clothes to child abuse victims?

Governor Walker recently declared April to be Child Abuse Prevention and Awareness Month, and he encouraged all Wisconsin citizens to “Wear Blue to Work” on April 18 to promote awareness of child abuse prevention. I have nothing against this kind of symbolic gesture; I think “awareness days” sometimes play a useful role in promoting increased public understanding or appreciation of issues like child abuse. However, I wish we had more to applaud than the symbolism.

In particular, I wish that this Child Abuse and Neglect Prevention and Awareness Month was a time to celebrate an increase in funding of abuse and neglect prevention in the state budget, rather than a time when counties are confronted with shrinking support for their efforts to protect children.

In Wisconsin, child abuse and neglect prevention services are primarily the responsibility of county human service departments (with the exception of Milwaukee County, where the state administers the Child Protective Services program). Unfortunately, the 2013-15 budget bill freezes all the major sources of state funding for county-level child protective services. Those frozen appropriations, coupled with the state’s tight controls on local property taxes, mean that cost increases will continue to undercut the ability of counties to fulfill their obligations.

To be fair, the state budget does contain a few small, but positive improvements in the general area of child welfare, such as a 2.5% per year increase in foster care reimbursement rates. Although that is a welcome development, it will nonetheless leave Wisconsin near the bottom among the states in reimbursing foster families.

The disappointing budget bill is just the start of the bad news for counties and for kids in need of protection and services; federal budget cuts make the situation considerably worse. The major source of federal support for abuse and neglect prevention services is the Social Services Block Grant (SSBG), and federal officials recently informed states that their SSBG funding for the second half of the current federal fiscal year (April through September) would be cut by 10.2%, to achieve a 5.1% cut for the full year.

The SSBG cut will cost Wisconsin close to $1.6 million over that six-month period, and the likely continuation of those cuts in federal fiscal year 2014 and beyond could reduce our state’s SSBG funding by nearly $3 million more over the rest of the 2013-15 biennium. The funding for child protective services will also be reduced by federal cuts in two somewhat smaller sources of state and local aid: Child Welfare Services, and the Promoting Safe and Stable Families Program.

I am guardedly optimistic that state lawmakers will find a way to move money around to protect Milwaukee Child Welfare from the cuts in federal funding. However, based on past experience, I am not optimistic that they will protect child welfare services in the rest of the state from the adverse consequences of federal cuts, coupled with state aid that isn’t keeping up with inflation and state-imposed caps on property taxes.

I confess that on April 18^th I neglected to heed the Governor’s recommendation to wear blue, but I’m doing my part by singing the blues – as long as state and federal policymakers aren’t backing up their supportive rhetoric with the fiscal support necessary to protect vulnerable children from abuse and neglect.

For more, go to www.wisconsinbudgetproject.org

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