May 16, 2012
“Please tell me what’s really happening with the state budget,” the man asked me. “It’s so hard to know what’s going on.”
Welcome to the murky world of state finances. Digging deep into state finances is not for the faint of heart. The numbers are big and the problems even bigger.
The past several budget years started in the red. State law requires every Governor to submit a balanced budget. If things stray too far into the red, the Governor and Legislature must then craft a ‘budget repair’ bill. February estimates necessitate the state take action on repairing the budget.
But recently, the administration announced things look better. In a recent Department of Administration memo, the numbers show a better than expected balance at the end of this budget. Legislators are scrambling to see what numbers are real.
Reports suggest the national economy is improving. This is good news. I certainly hope this translates to improvements for Wisconsin. But it’s too soon to verify if this actually happened.
What I can verify is the numbers released by the administration include several actions that raise cash by ‘refinancing and restructuring’ debt. This includes delaying – or not paying – debt payments coming due. Not paying bills can free up cash but costs all of us more down the road.
Imagine your mortgage is coming due but you need cash. You ask your banker if you can delay making the mortgage payment. He says OK – but it will cost you in additional interest and principal payments over the life of your mortgage.
The same thing happened in state government. Instead of a mortgage, the state sells bonds to finance debt. The bonds are paid off usually over 20 years.
The Walker administration delayed paying over $500 million in debt payments. The consequence is increased principal and interest payments over the next 20 years.
Delaying debt payments was only part of the strategy to improve immediate cash flow by increasing long-term debt.
There are other actions to gain cash up-front that cause the state to pay more down the road. The administration sold bonds at a ‘premium’ – meaning bonds were sold for more than they are worth. The state pays higher than market interest rates to gain cash up-front to finance current expenses. This premium long-term interest rate means a higher debt payment.
This action helps raise immediate cash – and makes the check book look a little better – but costs us all more in the long run and puts the state in worse financial shape by adding to the long-term debt.
Some debt ‘refinanced’ by the administration was taken to lower interest rates – in the way you might refinance a mortgage to capture a lower interest rate and, hence, a lower monthly mortgage payment.
But even this action was done for only short-term gain. The refinancing brought in a little over $10 million in savings. Rather than reduce the debt payments – spreading the new lower interest rate over the life of the loan – the administration decided to take all the cash up-front. This kept the debt at the higher interest rate.
Delaying payments has been used by governors when the state faced a financial crisis. But the accumulation of techniques used to raise cash at the expense of increased long- term debt is unusual. As is the size of the debt delayed and the speed at which it was delayed.
The timing of the action is also suspect. Not in 30 years has the administration released new revenue numbers before the usual pre-budget action in November.
Without the help of experts in the non-partisan Legislative Fiscal Bureau, it would be virtually impossible to track the debt delayed and bonds refinanced. The difficulty in verifying numbers and ‘unspinning’ the spin highlights a critical problem in state government – the lack of transparency in state finances.
If we want to have an honest discussion about how to move our state forward and cure our financial woes, we must have an honest discussion of what’s happening right now and how this action will affect our state’s future financial health.