State’s Budget Challenges Come into Focus

When Gov. Tony Evers unveils his proposed 2021-23 budget early next year, he will do so amid elevated unemployment, slowing state tax collections, and the spending pressures created by an ongoing pandemic and increased demand for social services. How well will the state’s finances hold up to the strain?

To examine this question, the Wisconsin Policy Forum started with the state’s projected increases in tax collections along with its base spending levels. After including routine adjustments for debt payments and employee compensation but excluding all new spending requests by state agencies, we find general fund spending is currently projected to exceed revenues by $373.1 million in the two-year budget running from July 2021 to June 2023. To make up the difference – equal to about 1% of spending over the two years – the state would have to spend down reserves, adopt spending cuts or tax increases, delay payments for certain obligations, or draw on some other new source such as additional federal aid.

Our bare-bones tally did not factor in the projected expense of maintaining current services within Medicaid health programs – more than $1.1 billion over the next two years – or include additional spending on pandemic response, state aid to K-12 schools or local governments, prisons, or the University of Wisconsin System. New spending in at least some of these areas appears inevitable, particularly in the case of Medicaid, and will add to the challenge substantially.

In one bright spot, the state expects to finish the current 2021 fiscal year with reserves of roughly $2 billion – much more than was expected a year ago or was available in the past two recessions. However, Evers has proposed spending $541 million on pandemic response in the coming months and GOP lawmakers have proposed up to $100 million, which if approved in either case would reduce that total.

For now, these are mere projections and all forecasts should be taken with great caution in this volatile time. Further action by the federal government might improve the state’s position specifically or the economy more broadly while federal inaction and a spike in coronavirus cases could cause the economy – and state budget – to deteriorate even more.