In light of some recent comments in the UW student blogging community with regards to our state’s structural deficits for the 2009-11 budget, I just wanted to echo a couple of thoughts on the state budget process that I heard our Vice Chancellor for Administration, Darrell Bazzell, speak about back in March.
(Just a side note before I continue with this next part. I am recalling from memory something that happened multiple months ago. Hearing him speak had a pretty profound impact on how I viewed the budget, so I think I’m going to pretty accurately portray his thoughts, but I’d like to apologize if I don’t)
In his view there are 3 basic reasons that there are structural deficits that result in actual deficits that in turn force the need for budget cuts or increases that are below what had been anticipated.
1. Poor Economic Forecasting – Having the actual tax revenues come in below the predicted totals can create unforeseen deficits.
2. Back-loading New Spending – Some increases in spending, such as the beginning of construction on new buildings or pay raises, are slated to begin in the 24th month of the budget. This practice essentially means that legislators can claim to have included the new spending in the budget while only having to find the money to cover one month’s worth of expenses and allows them to delay actually having to come up with the money until the next budget.
3. One Time Sources of Revenue – Basically amounts to raids on various state funds including the medical malpractice fund or, in a more relevant example, the UW-System’s reserve accounts.
While poor economic forecasting is something that very little can be done about, the second two practices are just poor budgetting. When we pay for things using these two methods, in the long run the actual money to pay for them isn’t really there and the odds that they will be cut in future budgets increase dramatically.
“Poor Economic Forecasting.”
Theoretically, that shouldn’t lead to structural deficits since sd’s are supposed to be estimated under the assumption that the economy is at it’s “potential.”
Obviously it’s hard to determine what the potential is, and what time period to use for the estimation, which is why I’m skeptical of discussing structural deficits in the first place. At least considering the little I know of them.
I think you need to do a bit more reading up on how our governments use economic forecasting to calculate projected deficits.
I recommend for starters “this excerpt from a letter written by Wisconsin’s own Legislative Fiscal Bureau’s Director, Bob Lang.”
Also, regardless of how you feel about economic forecasting, the latter two budgeting practices are a little bit more straightforward in how they cause structural deficits. Implementing spending programs that are designed to be permanent expenditures, such as increased financial aid or spending on UW professors, with one time sources of revenue, such as reserve fund raids, create an environment that isn’t very conducive to continuing those types of spending in the future.
This Politico article also has a good explanation of poor economic forecasting resulting increased deficits as it applies to the Obama administration.