Connecting the Dots Federal Policies Are Worsening Wisconsin’s State and Local Budget Problems
October 6, 2004
At a time when state and local governments around the country struggle to overcome continuing budget shortfalls, the federal government is only making their jobs harder. Federal policies have contributed significantly to the fiscal crises in many states, including Wisconsin, by reducing state revenues and imposing additional costs. These policies - primarily unfunded mandates and federal health care and tax policies - have cost Wisconsin $2.4 billion since fiscal year 2002, according to a recent report by the Center on Budget and Policy Priorities (CBPP) in Washington, D.C. [ii]
The additional costs and lost revenue have significantly hampered state and local governments' ability to recover from the recent economic downturn. Elected officials throughout Wisconsin have been forced to deal with these costs and the slow pace of the economic recovery by making budget cuts and raising other revenue sources. The resulting impact on families throughout the state is just beginning to be felt in the form of higher costs and reduced public services. What's worse, the cost to Wisconsin from these federal policies is rising, with little relief in sight.
The federal policies noted by the Center on Budget and Policy Priorities that have significantly impacted Wisconsin since fiscal year 2002 and the corresponding cost or benefit are:
- Unfunded Mandates - Unfunded federal mandates have cost Wisconsin $1.2 billion between fiscal years 2002 and 2005, most significantly in the areas of education and election reform.
- Medicare/Medicaid Dual Eligibles - The increased use of prescription drugs shifts costs of health care for low-income elderly from the federal Medicare program to state Medicaid programs, and has cost Wisconsin $564 million during this time.
- Remote Sales - States cannot collect sales taxes on goods and services purchased over the Internet from a firm outside the state due to federal restrictions, costing Wisconsin $975 million from 2002 to 2005.
- Federal Fiscal Relief - Congress approved temporary grants in 2003 totaling $20 billion. Wisconsin's share of this aid was $352 million.
Figure 1 shows the costs of federal policy relative to Wisconsin's total general fund budget. The net cost figures for fiscal years 2003 and 2004 include the short-term fiscal relief that was provided to the states in those two years.
Source: Center on Budget and Policy Priorities
To be sure, Wisconsin has not been the hardest hit state. The net cost of $2.4 billion from 2002-2005 amounts to 5.3 percent of Wisconsin's general fund budgets during that time (40th nationally). By comparison, the costs to Florida - the hardest hit - total $11.2 billion and amount to 13.3 percent of its general fund budget for the same time period. Wisconsin, because it is not heavily dependent on federal funding, not one of the poorest states, and because it decoupled from federal tax changes to the estate tax and bonus depreciation provisions, avoided even higher costs.
Nevertheless, federal policies have had a significant effect on Wisconsin state and local budgets. Unlike the federal government, state and local governments cannot run deficits even in difficult financial times. Wisconsin has had to make numerous cuts that are adversely affecting access to government services, the quality of those services, and the costs borne by state residents. For example:
- Students at the two largest University campuses must now pay $1,400 per year more than they did in 2002-03, and resident tuition at the other campuses has increased by $1,000 per year.
- Total state fee changes enacted from fiscal years 2002 through 2005 are costing Wisconsin residents an additional $252 million this year and $533 million over the four-year period. In addition to higher tuition, other examples include increases in vehicle registration fees and in the SeniorCare program, which subsidizes the cost of drugs for the elderly.
- Premiums in the BadgerCare program, which provides health insurance to low-income families were boosted by 60 percent - from 3 percent of income to 5 percent - causing an increase in the range of $480 to $720 per year for a family of four.
- Policy changes to BadgerCare (including the premium increases) reduced enrollment by more than 17,000 people (15 percent) in the first 9 months of 2004 -- likely boosting the number of children in the state that lack health insurance.
- The state repealed its commitment to pay two-thirds of school costs and has reduced state aid to schools by about $375 million in 2004-05, relative to the amount required under prior law.
- State aid to counties and municipal governments under Shared Revenue and related programs, which had been effectively frozen since 1995, was cut by $40 million in 2004.
Local governments have also had to cut programs deeply and raise revenues. The reductions in Shared Revenue payments and other state aid are particularly ill-timed because local governments' budgets are being hit with significantly increasing costs in several areas. Health insurance coverage for employees, fuel, pension fund contribution increases, and other costs have risen dramatically in recent years. In response, local governments have had to trim back basic services, lay off employees, increase property taxes, increase existing fees and implement new ones.
We examined the local budget choices made in four areas of the state: Eau Claire, Kenosha, La Crosse, and Milwaukee. The following are just a few of the local impacts:
- School districts, caught between declining state revenue and unfunded federal mandates, have been raising fees, reducing instructional staff, and cutting summer and extracurricular programming. As a result, class sizes are increasing in many schools, access to extracurricular activities is diminished, and the quality of education for Wisconsin's children is likely to suffer.
- Reduced aid for counties and municipalities is diminishing access to services and the quality of local services. For example, there are long and growing waiting lists for services needed by people with disabilities; many municipalities have cut back on snow plowing, law enforcement and fire protection; and counties have fewer staff to handle child abuse and neglect cases.
- In MilwaukeeCounty, a recent report found that an under-funded mental health system has resulted in people with acute mental illness being warehoused in jail cells or left unattended in hospital emergency rooms.
- Even as local governments are cutting staff and services, they have had to increase property taxes, in some instances quite substantially. For example, Milwaukee Public Schools is increasing its property tax levy by 15.4 percent in 2004-05, notwithstanding the elimination of more than 600 teachers and 400 other positions over a two-year period.
- In response to the rising costs and the fiscal squeeze caused by federal policies and state aid cuts, total residential property taxes payable in 2004 are $838 million higher across Wisconsin than in 2001 [iii], an average increase of $322 per household, or 16.5 percent. In inflation-adjusted terms, the increase over the last three years has been $185 per household, or 8.8 percent.
At a time when the federal government could have been ameliorating states' fiscal problems, it instead has been cutting federal income taxes, with most of the tax cuts targeted to high-income households. For a small number of very-high-income Wisconsin residents, the benefits of the federal tax cuts have probably outweighed the direct costs of state and local budget difficulties. For a large number of lower- and middle-income Wisconsinites, however, the benefit of the tax cuts is likely to be outweighed by the harm done by state and local budget cuts. For instance:
- In 2004, the average federal tax cut for a Wisconsin taxpayer in the middle fifth of the income spectrum is $971. [iv] That is nearly one-third less than the increase in annual tuition costs over the last two years for students at UW-Madison and UW-Milwaukee, and slightly less than the tuition increases at the other UW campuses.
- In 2004, the average federal tax cut for Wisconsin taxpayers in the poorest 60 percent of households is $529. That is less than the premium increase for many of the families participating in BadgerCare.
The end result of the federal policies affecting state budgets is becoming clearer as families throughout Wisconsin are now paying more for everything from car registration to college tuition, from health insurance premiums to school fees. These costs, along with the reduction in services offered, while individually manageable for most, add up to a higher cost of living and a decreased quality of life in Wisconsin.
Unfunded mandates from the federal government to state and local governments are nothing new. Indeed, this "devolution without support" has been going on for several years. What is different about the recent past is the level of the costs associated with these policies combined with their timing. In other words, just when state and local governments find themselves in significant fiscal distress - from the recent recession, the stock market declines, and rising costs associated with health care and other areas of public expenditure - the federal government is making it more difficult for them to work their way out.
Even greater impacts lie ahead. Wisconsin's budget writers have employed many short-term solutions and accounting gimmicks that have delayed the necessity of making hard choices between cutting services or raising taxes. As a result of that approach, the state must still grapple with a substantial Medicaid deficit (estimated at $224 million) in the current biennium, and with a projected "structural imbalance" of nearly $1.6 billion in the 2005-07 biennial budget. Since the state has already employed so many one-time remedies and has made several rounds of cuts, even harder choices await in the next budget - exacerbated by the continuing cost of the federal policies enumerated in this report.
[i] Iris J. Lav is Deputy Director of the Center on Budget and Policy Priorities (CBPP); John Keckhaver is a Policy Analyst at the Wisconsin Council on Children and Families; and Jon Peacock is Director of the Wisconsin Budget Project, which is part of WCCF. Nick Johnson, who is the Director of the State Fiscal Project at CBPP, also made numerous contributions to this report. The authors wish to thank numerous staff of local governments and the Legislative Fiscal Bureau who provided data and responded to inquiries. The authors are solely responsible for any errors.
[ii] See Andew Brecher and Iris J. Lav, Passing Down the Deficit: Federal Policies Contribute to the Severity of the State Fiscal Crisis, August 18, 2004.
[iii] The property tax growth is calculated from net figures (after subtracting state tax credits) produced by the Legislative Fiscal Bureau (LFB) in Information Paper #13 (January 2003) and in a September 20, 2004, memo to Senator Jon Erpenbach.
[iv] State-specific data on the distribution of the federal tax cut come from the microsimulation model developed by the Institute on Taxation and Economic Policy from U.S. Treasury tax data.