Contrary to pronouncements from Wisconsin Gov. Jim Doyle (D) and the state’s legislature that they had “fixed” the budget deficit in the summer of 2003, the state’s official fiscal report reveals a balance sheet awash in red ink.
The state government actually keeps two sets of books, in the hands of the state controller. A cash-based report, which is given to the public and used to satisfy state statute, shows the state’s finances as being in balance. The more accurate accrual report, which is given to bonding agencies, shows Wisconsin finances to be $1.9 billion in the red. The deficit exceeds revenues by 18 percent, a greater percentage than in any other state.
Wisconsin’s bond rating is among the lowest in the nation.
Dual Books Mask Deficit
The differences between the two reports are substantial. The most recent Comprehensive Annual Fiscal Report, issued by the state controller, said the state’s cash report understated its spending obligations and overstated its revenues, accounting for the $1.9 billion deficit in 2004.
Private industry and most government agencies long ago converted to accrual accounting. Under accrual accounting, items are brought to account and included in the financial statements as they are earned or incurred, rather than as they are received or paid. Accrual accounting more accurately reflects an organization’s true financial condition.
Wisconsin’s use of cash accounting for budgeting purposes allows the creation of financial loopholes that make the state’s budget appear to be in balance when it isn’t.
Accounting Standards Bypassed
To reconcile the differences in financial reporting among states and among the thousands of local jurisdictions, the Government Accounting Standards Board (GASB) in 1984 developed a standard protocol of accounting for public revenues and spending.
The GASB standards were developed to provide an external report done in a uniform way by every state and local government. Wisconsin state law, however, was never changed to reflect the new standards. The state government continues to maintain its internal report in a way that principally tracks cash.
Each year the Wisconsin controller, in compliance with state statutes, issues the same type of cash-based report that has been prepared since the Wisconsin Constitution was written in 1848. Wisconsin is one of only a handful of states that uses its original constitution. It is the oldest state constitution outside of New England.
The state’s cash-based report is exactly the type of report the GASB standards were intended to replace.
Problems Likely to Persist
Sixteen states prepare their budgets according to generally accepted accounting principles (GAAP). A GAAP report is needed to satisfy bonding agencies concerned about the state’s finances.
Wisconsin has a long way to go before it can join them. A number of factors will make it difficult for the state to do so:
- The size of the deficit, representing 18 percent of revenues, is daunting. Even the most determined policymakers find eliminating the deficit to be almost overwhelming.
- Reducing and eventually eliminating the deficit will require support from state policymakers. Yet the track record since the deficit was first documented in 1990 suggests little interest in reducing it.
- Elected officials are being asked to solve a problem that is not of their making. The current $1.9 billion deficit is the result of budget decisions made over decades.
George Lightbourn ([email protected]) is senior fellow at the Wisconsin Policy Research Institute and former secretary of the Wisconsin Department of Administration, which supports other state agencies with purchasing and financial management and helps the governor develop and implement the state budget.