Christian Schneider

Author, Columnist

Category: WI Magazine (page 2 of 2)

Wisconsin’s Third Party Animals

On the evening of November 5, 2002, the election results began to roll in. A rainy election day had come to wash away the grime from an often-brutal gubernatorial race in Wisconsin, which had seen the candidates refer to each other as “crooked” and “absolutely disreputable.” Incumbent Republican Governor Scott McCallum, who had been in office scarcely two years, faced a strong challenge from long-time Democratic Attorney General Jim Doyle. The race was a crucial turning point for Wisconsin, as it represented the first time in sixteen years iconic Governor Tommy Thompson was not on the ballot.

Merely a year earlier, Republican officials could only have dreamed about Doyle pulling a paltry 45% of the vote on election night. McCallum had suffered in Thompson’s shadow after Tommy had left to be Secretary of Health and Human Services in the Bush Administration. McCallum, saddled with a large budget deficit, sought to cut spending to local governments to make up the difference. Naturally, local officials, many of them Republicans, appeared all too willing to defenestrate McCallum in favor of the Democrat.

Yet on election night, Doyle’s poor showing did little to cheer up the GOP faithful. While the Democrat had fallen well short of the magic 50% mark, McCallum had pulled in a woeful 41%, losing to Doyle by nearly 66,000 votes. For the first time in sixteen years, Wisconsin would be led by a Democrat – and a long time bitter Thompson foe, at that.

The reason both major candidates together could only muster 86% of the total vote could be found in bucolic Tomah, Wisconsin (pop. 8,400). Former boxer, professional card player, tavern owner, and Tomah Mayor Ed Thompson had decided a year earlier to run for Governor in 2002. Thompson, a short, stout man with glasses so thick they looked like they could plausibly protect him from a bullet, had signed on with the Libertarian Party of Wisconsin in order to make his third party charge toward the state’s highest office. His sole qualification for the office of governor appeared to be that he once emerged from the same womb as his brother, Governor Tommy Thompson.

Thompson’s 2002 run for governor represented a perfect storm for a third party candidacy in Wisconsin. The Legislature was in the midst of a scandal that eventually led to leaders of both houses being convicted of felonies for crimes such as extortion, bribery, and using state offices for fundraising. The economic downturn of 2001 left voters skeptical of either party’s ability to deal with their financial troubles. By September 2002, 45 percent of Wisconsin residents felt the state was on the wrong track, up from 20 percent only three years earlier. Seventy-five percent of citizens believed lobbyists had more say in how the government spent money than voters did.

Of course, Thompson’s last name didn’t hurt either. As the brother of the state’s most beloved political figure, Ed Thompson had immediate name recognition throughout the state. Plus, it’s not entirely impossible that some voters may have actually confused Ed Thompson with his famous brother. Confusion over names at the polls isn’t exactly unprecedented—it is believed by some historians that Wisconsin’s first African-American legislator, Lucien Palmer, was elected in 1906 because voters confused him with another political Palmer, who was white. Lucien Palmer only lasted one two-year term, which may have been just enough time for voters to figure out their “mistake.”

Perhaps the most famous example of mistaken identity in Wisconsin politics occurred in 1970, when a Sheboygan gas station attendant Robert A. Zimmerman ran as a Democrat for the position of secretary of state. At the time, the incumbent secretary of state happened to be a popular Republican, Robert C. Zimmerman. Robert A. Zimmerman, who wasn’t allowed to speak during the campaign by his mentor Edmond Hou-Seye, won the Democratic primary against up-and-comer Tom Fox, presumably because voters confused him with the incumbent secretary. (Fox went on to become commissioner of insurance in Wisconsin.) Zimmerman, the mute gas station attendant, went on to lose to Zimmerman the secretary of state. Hou-Seye went on to run several ill-fated races for statewide office himself, coining the phrase “journalism is the science of distortion” along the way.

Wisconsin historically has been a sanctuary for third parties. It was in Wisconsin where Robert M. LaFollette, Jr. split the Progressive Party off from the GOP in 1934. That year, the Progressives won a landslide of state offices, including Philip LaFollette winning the governor’s office for the first time as a Progressive candidate. Milwaukee famously elected three Socialist mayors in the first half of the twentieth century, the only major city in the U.S. to have done so.

In recent years, third parties in Wisconsin have continued to affect statewide elections. In 2000, Vice President Al Gore defeated Texas Governor George W. Bush by 5,708 votes in Wisconsin. Gore’s margin of victory was actually less than the 6,640 Wisconsin votes cast for Libertarian Harry Browne for president in that same election. In the 2000 election, third party presidential votes numbered 116,445 in Wisconsin—nearly 20 times the size of Gore’s margin of victory. Everyone remembers the vote count debacle and subsequent court action in Florida following that presidential election, yet that charade would not have occurred had a small fraction of third party voters in Wisconsin shifted their votes to George W. Bush.

Strong third party voting in Wisconsin held true to form in 2004, when Senator John Kerry beat Bush by 11,384 votes. In that election, Wisconsin saw 26,397 votes cast for third party candidates. While well below the 2000 third party vote (due mostly to a drastically diminished Ralph Nader effort), the third party total still greatly exceeded the final margin of victory for Kerry.

Naturally, Ed Thompson wasn’t the only third party candidate in the field in 2002. Thompson was joined by 34-year-old Aneb Jah Rasta Sensas-Utcha Nefer-I, who insisted that he was already governor of Wisconsin. “I was born to rule, because God’s judgment will judge all unrighteousness,” said Sensas-Utcha, a native of Milwaukee. “I’m the damn governor of the State of Wisconsin.” To back up this claim, Sensas-Utcha pointed to several bills regarding E Coli that he had passed earlier. Unfortunately, he was unable to describe the details of this important legislation, claiming the press might be able to use it against him. Despite his previous hypothetical electoral success, Sensas-Utcha was only able to muster 929 votes statewide in November.

Thompson was also joined as a third party gubernatorial candidate by Mike Mangan, who campaigned wearing a gorilla suit. Mangan, a self-employed energy consultant from Waukesha, waged what he called a “guerilla attack against state spending.” Mangan criticized the state’s “King Kong deficit,” which is quite a coincidence since he happened to own a gorilla mask. (Fortunately for Mangan, the deficit wasn’t the size of a turtle, as he would have had to scramble for a new costume.) Mangan was actually a fan of Ed Thompson’s run, seeing it as a breakthrough for third parties in future races, saying, “I think he’s opening doors.”

These independent candidates represent only a small sliver of the colorful history of third party politicians in Wisconsin. In 1974, flamboyant West Milwaukee used car dealer James Groh legally changed his name to “Crazy Jim” to run for governor as an independent. Crazy Jim was a staunch advocate of legalized gambling, and frequently spun a tale of how he once played cards with Frank Sinatra in Las Vegas. At the time, the concept of legal gambling in Wisconsin seemed to be far-fetched—yet Crazy Jim turned out to be a visionary, as Wisconsin adopted a state lottery and welcomed almost unlimited Indian casino gambling by the 1990s. Crazy Jim lost to incumbent Patrick Lucey 629,000 votes to 12,100; but his family said he took solace throughout his life in the fact that he carried Waushara County. (Although he did not—records show he only garnered 47 votes in Waushara County, which placed him a distant fifth.) Crazy Jim died in 2002 of a heart attack.

In Madison, self-described “futurist” Richard H. Anderson has run for numerous offices, including state assembly, mayor, and city council. Anderson routinely ran on an “anti-mind control” platform, believing the government had planted a cybernetic chip in his brain. A self-described bisexual, Anderson fought for better treatment of minorities and, as a surprise to exactly no one, for legalized marijuana. “Just because I’m a pot head doesn’t mean I’m not qualified to hold office,” he once said. Unfortunately, the government rarely used mind control to direct voters to vote for him, as he once mustered a scant six votes in a race for the state Assembly against now-Congresswoman Tammy Baldwin. Naturally, the Progressive Capital Times newspaper said Anderson had “made a good impression.”

(One has to wonder what a debate between a “pro-mind control” and “anti-mind control” candidate is like. Presumably, the “anti” candidate would get up to speak, the “pro” candidate would glare and point his finger at them, and the “anti” candidate would sheepishly sit back down without saying a word.)

Yet the candidacy of Ed Thompson in 2002 represented a breakthrough for independent candidates, who had previously been relegated to the scrap heap of oddities, curiosities, and also-rans. In early 2001, Thompson was a man without a party. Without the backing of a more established third party, a Thompson candidacy could have been viewed as a fringe endeavor and may have lost traction quickly.

Early that year, Thompson met with notorious independent Governor Jesse “The Body” Ventura of Minnesota, who had been carried by his nationwide wrestling fame to victory in 1998. (Thompson would later joke that he should be called Ed “The Belly.”) The meeting was arranged by Bob Collison, leader of the Libertarian Party of Wisconsin. Soon thereafter, Thompson signed on as the official Libertarian candidate for governor of Wisconsin. It was a symbiotic relationship—the Libertarian tag gave Thompson the legitimacy his campaign needed, while Thompson gave the Libertarians a big enough name to finally make a splash in state politics.

Yet there remained an internecine struggle within the party between Libertarians who fundamentally subscribed to the Libertarian principles of limited government and those looking for statewide legitimacy in the electoral process. Clearly, Ed Thompson wasn’t a dyed-in-the-wool Libertarian, although he espoused many of the dangers of government police powers. In the late 1990s, Thompson’s Tee Pee supper club was raided by authorities and four nickel slot machines were confiscated. He refused to cut a deal and plead guilty, and the charges were dropped when the county district attorney was voted out of office over the raid. Thompson said that one of his motivations for running for governor was to beat then-Attorney General Jim Doyle, whom he believes had ordered the raid on the Tee Pee.

However, this desire for deregulated gambling alone wasn’t enough to make him a Libertarian. As mayor of Tomah, Thompson governed as if he were any mayor of any small town in Wisconsin. His gubernatorial platform included more environmental regulation to preserve Wisconsin’s natural spaces and more money for the University of Wisconsin system. Thompson’s supporters bred more distrust among philosophical libertarians when they bitterly complained about Thompson not receiving enough public tax money to run his campaign—a concept anathema to those truly interested in restricting government spending.

Furthermore, as his running mate, Thompson signed up retiring Democratic Assembly Representative and former Ladysmith Mayor Marty Reynolds. While Reynolds described himself as socially liberal and fiscally conservative, throughout his twelve years as a representative he represented a reliable vote for Assembly Democrats when they sought to expand taxes and spending. Yet, as is required of Northern Democrats in Wisconsin, Reynolds was staunchly in favor of individual rights with regard to firearms and property. Before picking him as his running mate, Thompson said he had never actually met Reynolds—he had only read an editorial the representative had written decrying the “corruption” at the State Capitol. Thompson praised Reynolds’ experience as a legislator, saying he would be an “active participant” in his administration, instead of “playing basketball all the time”—a thinly veiled shot at McCallum, who was known for his hard court wizardry during his brother’s administration.

On November 15, 2001, at the State Capitol, Thompson officially announced his candidacy for governor of Wisconsin. He posited himself as the everyman candidate, saying:

I am no big time Charlie. I’m just a common hard-working man who is dedicated to serving the hard-working people of Wisconsin. I’m a fighter. I’ve been in the ring many times as a boxer and there is nothing I like better than a good fight. This is the biggest fight of my life, and I plan on winning it.

Having announced he was running, it was time for Thompson to mobilize his supporters. This included Libertarian Party of Wisconsin President Bob Collison, who had introduced Thompson to Jesse Ventura. Collison had recently garnered press attention for his opposition to the U.S. Census, believing the questions asked on their survey were too personal. (Collison would later leave the Libertarian Party to make an unsuccessful run for the Wisconsin State Assembly.)

Also in the mix was Wisconsin Libertarian Vice Chair Rolf Lindgren, who in November 2003 was accused of stealing $50 out of a bar apron at the Irish Waters Tavern in Madison. After being accused of stealing the cash, Lindgren was arrested for his fourth drunk driving violation. At his trial, he pleaded insanity, testifying that the stress caused by the police accusations related to the Irish Waters incident caused him to blow a .23 on the breathalyzer (11 times the legal limit for someone with three prior drunk driving arrests).

Lindgren also said he was feeling anxiety over appearing in a documentary about Ed Thompson’s life the next morning, and suggested that his arrest was retribution for his attempt to recall Jim Doyle from the governor’s office. Said Lindgren, “it doesn’t really matter why they [filed charges]. What really matters is that they did do it. If I were a black person, I’d be charging racism. What are they saying, all white people look alike?”

The charge against Lindgren for stealing the $50 from the tavern was dropped, as the Dane County District Attorney said the prosecuting attorney needed more time to prosecute the drunk driving charge. In 2006, a jury rejected Lindgren’s insanity plea and he was sentenced to five months in jail for driving while intoxicated.

With his campaign team mobilized, Thompson hit the road in his beat-up, 20-year-old motor home. In the week following his campaign announcement, he visited Waukesha, Wausau, Superior, Eau Claire, and Sparta. On the trail, Thompson’s policy agenda began to round into shape. He espoused the benefits of lower taxes and more local government control. He pushed for legalization of marijuana and for the release of nonviolent felons from prison. He argued for term limits that would limit governors and legislators to eight years in office.

However, Thompson most often used what he thought was his most powerful talking point—that government was corrupt and it was time for a third party candidate to change it. Eventually, discussion of policy issues merely faded into the background in favor of his corruption speech. When Thompson launched his first radio ads in April 2002, they focused on the ongoing criminal investigation of the Legislature. “Our state government is being tarnished by corruption,” Thompson boomed in the ad. “Enough is enough. It’s time to put the people’s interests above special interests. We need common sense and accountability in government,” he said.

At one point in May 2002, students at a campaign appearance at Rice Lake High School asked Thompson what a Libertarian was. “It means you have the right to live your life as you want, as long as you don’t physically hurt someone and no one physically hurts you,” he said. “It takes the business attitude of the Republican Party and the social attitude of the Democratic Party and improves them,” he added.

Later that day, at Bob’s Grill in Rice Lake, an 81-year-old patron asked Thompson what life was like in Washington D.C. “No, that’s my brother,” Ed Thompson politely replied. He then mentioned that he’s three years younger but ten years smarter than Tommy, and definitely better looking.

As the campaign wound into the oppressive Wisconsin summer months, Thompson was able to set himself apart from the other candidates in one regard: his yard and highway campaign signs seemed to outnumber his opponents’ by a fifty-to-one ratio. By September, Thompson had 850 large highway signs and 9,000 yard signs out the door. Thompson’s close ties to the Wisconsin Tavern League virtually guaranteed a black and yellow Ed Thompson sign would be in front of every bar in the state. In rural Wisconsin, those bars are often the centers of civic debate. Tommy Thompson’s exploits in local bars are often credited with catapulting him to statewide recognition. It seemed his little brother may be able to capture a little of the same plainspoken magic.

Meanwhile, the race between the major party candidates raged ahead. McCallum ran a television ad that accused Attorney General Doyle of being “crooked” for not aggressively pursuing corruption in the Legislature. Doyle volunteers held a “bingo party” at a Kenosha home for the developmentally disabled where there also conveniently happened to be absentee ballots available for residents to fill out on site.

As election day grew nearer, Thompson was finding it harder and harder to take his “common man” message to the voters. For one, he was having difficulty working his way into debates, which required a candidate to earn six percent of the total vote in the primary. Since Thompson ran unopposed in the Libertarian primary, he didn’t garner enough votes. He argued, accurately, that rather than waste their vote on him, his supporters likely voted in the contested primaries between the major candidates.

Eventually, Thompson filed a complaint with the State Elections Board, arguing his exclusion amounted to an illegal campaign contribution to the major candidates. He lost the complaint, but went on to take part in minor debates throughout October. Finally, on October 29th, he participated in a debate broadcast statewide. But by that point, the race between Doyle and McCallum had turned bitter and personal, and Thompson was left without much time to speak between the bickering.

When the dust settled on election night a week later, Thompson had received 10.5% of the vote. While it wasn’t nearly enough to win, it was the largest percentage any third party candidate for governor had received in sixty years. Watching the results at the Tee Pee, Thompson seemed upbeat. “We changed the face of politics in Wisconsin,” he beamed, adding, “We’ve made the third party viable.” Furthermore, reaching the 10% vote level meant that the Libertarian Party would be validated by having an official representative on the State Elections Board.

Thompson’s supporters, however, were confused as to why their candidate didn’t fare better. Following the election, Rolf Lindgren wrote an editorial claiming that Ed Thompson hadn’t been beaten by the voters; he had instead been beaten by the polls. In the column (in which he listed his credential as “1986 UW-Madison Mathematics Graduate,”) Lindgren expressed disbelief that Thompson only received 10.5% of the vote, when a poll prior to the election had Thompson’s approval rating at 39%. Since a candidate merely had to receive 34% to win the three-way election, Lindgren was confused as to why Thompson wasn’t able to garner enough support to emerge victorious. Apparently, he was unaware that approval ratings measure a candidate’s popularity against only themselves, while actual elections pit candidates against each other.

Lindgren went on to argue, as only a 1986 mathematics graduate could, that polls published during the campaign that showed Thompson with single digit support actually depressed his popularity. Lindgren believed the polls showing (accurately, as it turned out) Thompson with little support drove away individuals that normally would have been supporters. “In hindsight, if he had done a few more polls at key moments, and put out a few more polls-related press releases, he might have won the election,” said Lindgren.

The debate still rages in Wisconsin about whether Ed Thompson handed the state over to Jim Doyle by stealing votes from McCallum. Conventional wisdom tells us that since Libertarians are further to the right, they steal votes from Republicans. Thus, the GOP immediately groused that Thompson’s 10.5% vote total may have swung the race to the incumbent Governor had “Fightin’ Ed” not run.

The numbers seem to indicate that, even had Thompson not run, a McCallum victory would have been a long shot. When Thompson’s 185,000 votes are divided up, McCallum would have had to win 67.7% of them to overcome Doyle’s 66,000-vote margin. While it is true that Thompson did extremely well in GOP-dominated counties like his home Monroe County (Thompson 45%, McCallum 27%, Doyle 26%), Thompson also pulled substantial votes out of the city of Madison, likely due to his support for legalized marijuana. (It is estimated Thompson received 100% of the vote from the much sought-after “dudes who make late night trips to Taco Bell” demographic.)

Additionally, rather than merely being a Libertarian, Ed Thompson was a once-in-a-generation cult of personality. There’s no evidence that his votes were from people who lean Libertarian. It’s possible his votes were comprised of voters sick of the two parties generally and who recognized his family name as a safe haven for their vote. His addition of Marty Reynolds to the ticket may have made it even easier for Democrats to vote for him.

On the other hand, it is possible that Thompson pulled more votes from Republicans than Democrats. Aside from the votes on election day, Thompson’s entry into the race drew other types of resources away from the major candidates—he was able to raise and spend over $400,000, which may have favored McCallum, had Thompson not been able to get his hands on it. Furthermore, the curiosity of Thompson’s campaign took up media time that may have changed the face of the race had he not been in it (although given the press McCallum was getting at the time, it might have been better for him to get less coverage throughout the campaign).

Whether Ed Thompson gift-wrapped the 2002 election for Democrat Jim Doyle, we can never really know (although Doyle did defeat a strong Republican challenger, Republican Congressman Mark Green, in 2006). What we do know is that third parties in Wisconsin are a force to be reckoned with. While many regard third parties as a motley group of political nutballs, they have what the major candidates need—votes.

Given the proclivity of Wisconsin voters to cast their ballots for a third party, the 2008 presidential election could hinge on how well candidates relate to these third party voters. With Wisconsin’s traditional razor-thin margins of victory, the major candidate who appeals most to third party voters could be the one who emerges victorious. Senators John McCain and Barack Obama need to tap into the wealth of Wisconsin votes that could easily stray into third party territory. With big names like Former Congressman (and star of “Borat”) Bob Barr running as a Libertarian, Former Congresswoman Cynthia McKinney seeking the Green Party nomination, and Ralph Nader doing whatever it is he does, independent voters could very well decide Wisconsin, and therefore the presidency.

In 2005, three years after his gubernatorial run, Ed Thompson was elected to the city council back in Tomah. The problem was, he didn’t know he was running. Thompson had benefited from a write-in vote effort of which he was unaware. After receiving 31 of 34 votes, he begrudgingly took office. In 2007, Thompson flirted with the idea of running for president himself after aligning himself with a group of “9/11 Truthers” who believe the U.S. government had a role in the September 11, 2001, attacks. In 2008, he was once again sworn in as Mayor of Tomah, assuming the comfortable position he had left to run for governor. It appears he is now content to be an important footnote in Wisconsin’s political history—one that major candidates should not soon forget.

Wisconsin’s “Subprime” Budget Planning

The recession of 2001 exposed a dark secret in the way Wisconsin plans for economic downturns. It doesn’t. Wisconsin is near the bottom in the nation in setting aside money for fiscal emergencies, which makes budgeting during a recession a fiscal high-wire act.

Nearly every state in the U.S. sets aside a portion of their budget in a “rainy day” fund, or mandates a minimum balance to protect themselves from economic downturns. Wisconsin is near the bottom in the nation in both.

As demonstrated in this report, even a mild recession, as was seen in 2001, would cause a budget imbalance of up to $1.4 billion  in the Wisconsin’s current biennial budget. Furthermore, the lack of state planning for such a downturn serves as a recipe for more damaging tax increases and detrimental fiscal maneuvers. It appears that despite the pain caused by the last recession, Wisconsin state government has learned nothing. Wisconsin’s budget planning is clearly far from ideal; to use a term which has recently become familiar, it can be fairly characterized as “subprime.”

The possibility of recession

In early 2008, the American economy presents a mixed picture. On November 19, 2007, the National Association for Business Economics (NBER) released results of a survey showing roughly one in five of its economists figured the risk of a recession was more than 50%.[i]

In a speech before Congress in November 2007, Chairman of the Federal Reserve System Ben Bernanke warned of a slowing economy while announcing a quarter-point reduction in the federal discount rate. Bernanke noted that while economic growth in the third quarter of 2007 had been a strong 3.9%, indications were that such strong growth could not be maintained over the remainder of the year.[ii]  Bernanke warned that because of the reduced availability of credit, the contraction in housing-related activity would continue to intensify. If the housing market completely bottoms out, it could mean a significant negative effect on other sectors of the economy.

Some experts go even further in their negative reviews of the economy. In September 2007, University of Wisconsin-Madison economist Donald Nichols said he believed a recession was likely. Nichols based his prediction on the “popping of the risk and housing bubbles” caused by the collapse of the market for subprime mortgages.[iii]

Professor Nichols believes that the spillover effect from this housing crisis may have already begun, and could drive the economy into negative growth. He cites slumping auto and retail sales, as well as a survey that indicates willingness by business leaders to postpone large investment and curtail hiring.

Nouriel Roubini, a professor of economics at New York University, not only believes the American economy is headed toward a recession, but that the impending recession will be worse than the downturn in 2001. Roubini points out that 30% of the employment growth in the past three years was housing industry-related, and a significant downturn in home construction and sales could cause widespread damage throughout the economy.[iv]

While nobody knows precisely what direction the economy will take, it is prudent for governments to plan ahead for economic downturns. This is something state governments across the U.S. have figured out—yet Wisconsin still lags well behind most states in recession-readiness.

The recession of 2001

In order to understand what might await state government finances in the event of a recession, it is instructive to review the most recent downturn in 2001.

According to NBER, the U.S. economy went into recession in November or December of 2000.[v] This recession was the tenth such recession since World War II and followed a record ten straight years of economic growth. According to NBER, the previous record for uninterrupted economic growth was set in the 1960s, a period of eight years and 10 months lasting from February 1961 to December 1969.

The late 1990s delivered unprecedented economic growth and consumer confidence. The rise in internet-related stocks boosted Wall Street and the economy. Investors in the dot-com boom were making money and spending lavishly. As a result, state treasuries saw large increases in sales and income tax revenues.

In the 1990s, personal income of the average Wisconsinite grew by 57%,[vi] while inflation only grew by 32%.[vii] As a result, state revenues grew from $5.6 billion in 1990 to $10.9 billion in 2000, an increase of 94%.

Yale economist Robert Shiller believes that in many ways, the dot-com boom foreshadowed the housing problems of today. Shiller believes that the same irrational exuberance that caused investors to overvalue technology stocks has caused them to put too much faith in the value of their homes. As a result, housing is overvalued, partly driven by lowered credit standards.[viii]

Despite this large impact on the budget, many economists believe the 2001 recession was rather mild. According to Curt Hunter, Senior Vice President and Director of Research for the Federal Reserve Bank of Chicago, “the 2001 recession . . . was mild compared with other recessions,”[ix] and was short-lived by comparison. In fact, some believe that without the damaging effects of the September 11, 2001, attacks in New York City, the economic downturn may have been too mild to be considered a recession.[x]

This fact may lead one to ask: If the recession was so mild, why did it have such a severe impact on the Wisconsin budget? If a similar recession were to hit in 2007 or 2008, what would the effect be on the current Wisconsin budget? These questions will be addressed in the following sections.

Wisconsin’s history of weak fiscal mismanagement

There are several fiscal management tools used by state governments to mitigate the effects of economic downturns. Nearly every state has minimum statutory balances and budget stabilization funds from which to draw in the event of a shortfall.

In the years of strong revenue growth in the late 1990s, states were experiencing record ending balances (including stabilization funds). According to the National Association of State Budget Officers (NASBO), nationwide ending balances reached 10.4% of expenditures in 2000, and 9.4% in 2001. During the 2001 recession, states were able to draw on $25.8 billion of reserves to help balance their budgets. As a result, ending balances had been reduced to 3.7% of expenditures. Balances built up over the previous years served to ameliorate many of the budget problems caused by lagging revenue.

Following the recession in 2001, most states have gotten back on track in setting money aside in a budget reserve. In 2006, nationwide ending balances in state budgets had reached $62.1 billion, or 10.9% of expenditures. Increased revenue due to a growing economy has contributed to these new funds, as states have learned their lesson about the importance of setting aside money for emergencies.

But Wisconsin has not. Wisconsin remains one of only four states which retains a minimum statutory balance under 1% of expenditures. Wisconsin had ending balances of 0.4% of annual spending in 2006 and 0.6% in 2007, and has budgeted a minimum balance of 0.4% in the 2008 budget. This compares to a nationwide average of 8.2% in 2007.[xi] By the standard set by other states, Wisconsin’s government is running on fumes.

In November 2007, Standard and Poor’s downgraded the outlook for Wisconsin’s bonds from “positive” to “stable” based in large part on the state’s lack of reserves. According to S&P analyst Peter Block, “Any variation in revenue performance could produce relatively large funding gaps, which are not easily recoverable given existing resources.” Block added that while the state has taken steps to reduce its structural deficit, “we just don’t think they have the budget structure—which is a combination of revenues, tax structure, and level of expenditures—to achieve meaningful surpluses.”[xii]

The minimum statutory balance in Wisconsin

A minimum statutory balance protects the state from incidental revenue shortfalls or expenditure overruns within the current budget. The Wisconsin Legislature first passed a minimum balance requirement in 1981, requiring a balance of 1% of biennial expenditures. Yet before that legislative session expired, the requirement was lowered to 0.5% of expenditures. This was the first of many adjustments that minimized budget reserves. For the next four years the required balance fluctuated between 0.5% and 1% of expenditures.

In 1987-89 the minimum statutory balance was set at 1% of annual general purpose appropriations, where it remained until with minimal changes for a number of years. In the 1999-01 budget bill, Governor Tommy Thompson proposed a new graduated scale whereby the minimum balance would gradually be increased from 1% of annual expenditures to 2% over a period of five years. In the final version of the budget, the Legislature slightly altered the schedule, and completely eliminated the minimum percentage for 2001-02.[xiii] Fiscal management could not compete with other legislative priorities.

With enactment of the 2003-05 biennial budget, the scheduled minimum balances on a percentage basis were eliminated by Governor Doyle and the Legislature. They crossed out the targets of 1.6% and 1.8% for 2004 and 2005 and replaced them with flat amounts of $35 million in 2004 and $40 million in 2005. These balances were well below 1%. In the subsequent budget, the minimum balance was increased to $65 million through 2008-09 after which it was scheduled to become 2% of annual spending. Finally, the 2007-09 budget bill extended the $65 million figure for two more years, through 2010-11, and set the amount at 2% of annual spending thereafter. Through the years, budget reserves have been regarded as a luxury that governors and legislatures did not think they could afford.

It should be noted that the $65 million ending balance figure for 2008-09, at the end of the current biennium, equates to about 0.45% of annual appropriations, or roughly 0.23% of biennial appropriations. Hence, in the 28 years from 1981-82 to 2008-09 the ending balance requirement has gone from the initial 1% of biennial appropriations to effectively less than one-quarter of 1% of biennial appropriations. It’s somewhat depressing to realize that over the past quarter century the state’s required budget reserve has actually dwindled.

As can be seen above, the 2003 fiscal year was the last year in which the percentage balance standard was applied. Since then, minimum balances have been applied as a fixed dollar amount, which fall well short of 1% of gross appropriations. In fact, it is worth noting that the current $65 million minimum statutory balance is actually less than it was in 1984 when the balance was first enacted.

Budget stabilization fund

While minimum statutory balances protect states from short-term downturns, budget stabilization funds cushion governments from long-term revenue loss. According to NASBO, 47 states have some form of a budget stabilization fund. Nearly three-fifths of those states limit the size of their stabilization funds, usually setting them between 3% and 10% of appropriations. In most states, the fund is set up statutorily; however, in seven states the stabilization fund is mandated by the state constitution.[xiv] Furthermore, putting money in stabilization is automatic and is not reliant on legislative action. In most states there are heightened restrictions on how state legislatures may use the funds, such as requiring legislative supermajorities for appropriation.[xv]

In 1985, Wisconsin’s budget stabilization fund was created to “provide state revenue stability during periods of below-normal economic activity when actual state revenues are lower than estimated revenues.”[xvi] However, no funds were deposited in the fund until 1998, when State Representative Doris Hanson and Mr. Nathan Henry donated $10 and $2, respectively, to the fund.[xvii]

Governor Scott McCallum’s 2001 budget, introduced during the last recession, created a mechanism for funding the budget stabilization fund. Under McCallum’s budget, 50% of tax collections in excess of anticipated revenues were required to be deposited in the stabilization fund.

Under the new law, the moneys in the stabilization fund could only be used during a fiscal emergency. According to Wisconsin state law, a “fiscal emergency” occurs when “authorized expenditures will exceed revenues in the current or forthcoming fiscal year by more than one-half of 1% of the estimated general purpose revenue appropriations for that fiscal year.”[xviii]

The first transfer of money to the stabilization fund under this new law was made in September 2007, when the Department of Administration transferred $55.6 million to the fund. This is half of the revenue collected above the level anticipated when the 2005-07 budget was enacted.

When the $55.6 million stabilization fund and the $65 million minimum statutory balance are combined, Wisconsin’s budget still has total reserves of only $120.6 million, less than 1% of general fund appropriations.

There are several negative consequences resulting from carrying one of the lowest budget reserves in the nation. First, having no surplus leaves little margin for fluctuations in revenues or spending estimates. As has been the case over the last three budgets, the governor and legislature have had to take drastic actions to balance the budget, including fund transfers, delayed payments, and one-time funding. Each of these budget maneuvers exacerbates the state’s structural deficit.[xix]

While views of budget experts vary, an informal standard of 5% of general fund appropriations is generally seen as an adequate fiscal cushion for economic downturns.[xx] If Wisconsin were to reach the 5% standard, it would need to set aside $691 million in 2007-08 and have $710 million in reserve in 2008-09.[xxi] According to the 2007 Wisconsin Annual Fiscal Report, that would make the stabilization fund the sixth-largest single state appropriation, behind school aids ($5.2 billion), medical assistance ($1.7 billion), the University of Wisconsin System ($1 billion), corrections ($1 billion), and aids to local governments ($944 million).[xxii]

Between 2003 and 2007, insufficient revenue growth in the general fund prompted the governor and legislature to transfer $1.1 billion out of the state’s transportation fund and into the general fund. The resulting shortfall in the transportation fund was then replaced by bonding, which will cost state taxpayers more in the long term. Had the budget stabilization fund been funded adequately, this transfer and the related borrowing would not have been necessary.

Bond rating agencies consider budget reserves as an important indicator when rating the state’s debt. The combined effect of a high structural deficit and low surplus revenues may indicate financial difficulties to a bond rating agency. While the cost of borrowing for a state is largely driven by conditions in the bond market, a state’s rating can affect the price the state receives. The lower the rating, the more the state may have to pay for the bonds over the life of the term.

Is Wisconsin well prepared for a recession?

Given Wisconsin’s razor-thin margin for budgeting, an economic slowdown could cause significant problems for the state’s general fund. To estimate the impact of a recession on the Wisconsin budget, let’s examine how an economic slowdown similar to the 2001 recession would affect state revenue collections. State general fund revenues grew as follows during and immediately after the recession (after factoring out law changes which altered state tax collections):

2000-01:                                        0.1%

2001-02:                                        -0.1%

2002-03:                                        1.9%

2003-04:                                        4.9%

These revenue growth numbers can then be applied to the 2007-08 base year revenues.

First, let’s examine state government’s estimates for the next four years. Table 2 shows the revenues expected in the current budget and growth of 4.7% and 4.5% in the subsequent years as projected by Governor Doyle’s budget. Similarly, expenditures in Table 2 are the actual amounts budgeted for the current biennium and increases of 5.3% and 2.2% as projected in the Governor’s budget. Table 2 shows that in each year, the state budget would close the year with a positive balance.

Now let’s apply the recession scenario to these budget years. With revenue growth constrained as it was in the 2001 recession, the budget is quickly thrown out of balance. In this exercise, the hypothetical recession takes place in the 2008 fiscal year.

Table 3 shows what would happen if general fund revenues were to drop as they did in the recession of 2001.[xxiii] By the end of the current biennium, only eighteen months away, the state would face a shortfall of about $1 billion. By 2011, even if the deficits that arose each year were addressed, estimated expenditures would still outpace revenues by more than $1.3 billion.

Chart 1 graphically shows the gap between revenues expected for the next four years versus what those revenues would be if there was a recession of the depth of the 2001 recession.

As demonstrated in this exercise, even a mild recession could send the state’s finances into a substantial deficit. The disparity between revenues and appropriation would balloon to nearly $1.5 billion in fiscal year 2010, before closing slightly to $1.3 billion in 2011. The $50 million from the budget stabilization fund would barely dent the deficit.

The table and the related chart above show a negative balance at the end of fiscal year 2008. For the purposes of projecting the impact of a recession, it is assumed that the Governor and Legislature would act to eliminate the deficit each year—either by reducing spending or raising taxes. Thus, the negative balance is not carried forward from year to year. (Since it can’t be assumed that any positive balance would be created, no opening balance is shown for future years.) If the negative balances were carried forward, the resulting fiscal imbalance would be significantly greater.[xxiv]

The total magnitude of the problem the state would face in the event of a mild recession can be determined by adding together the deficit figures for all the years that would be affected by the recession. In the current biennium, the state would have to figure out how to cope with a total deficit of $1.359 billion—$352 million in the first year of the biennium, and $1.007 billion in the second year. Over the course of a four-year period, the deficit problem would total a whopping $4.185 billion. Table 4 details the cumulative problem if negative balances were carried over from year to year.

In the event this happens, the state has several options: it can raise taxes, cut programs, or continue the fiscal shell games that have produced structural deficits for the last decade. None of these choices are especially appealing. Yet the lack of any significant rainy day fund makes them inevitable.

Conclusion/recommendations

As demonstrated above, Wisconsin could be in serious trouble in the event of an economic slowdown. The state’s lack of a fiscal cushion is a recipe for tax increases and budget tricks in the event of hard economic times.

The state could take several steps towards fiscal responsibility in order to protect itself against declining revenue. Among them:

  • Phase in greater minimum statutory balance levels, ending with a balance of 2% of gross annual appropriations. For instance, start with a 1% balance one year, 1.2% the next year, 1.4% the next, until the balance reaches 2%. Under currently budgeted numbers, that would require setting minimum balances of $138.2 million in 2008 and $170 million in 2009.
  • Phase in a requirement that the state fund the stabilization fund up to 5% of gross appropriations. Require that the stabilization fund be the first draw on general fund revenue growth to the state.
  • Require that all unanticipated revenues be deposited in the state’s budget stabilization fund, until the fund reaches 5% of gross appropriations and compensation reserves. Current law only requires 50% of these revenues to be deposited in the stabilization fund.
  • Continue the requirement that the Governor introduce a bill to spend the stabilization fund and the minimum balance in the event of a fiscal emergency. Require a two-thirds majority of both the Senate and Assembly to appropriate these funds, to ensure that they don’t merely become easily accessible pools of money.
  • Initiate legislative action to make these requirements constitutional. As has been seen recently, statutory minimum balance and stabilization fund requirements are only as enduring as the commitment to prudent fiscal management. The Governor and Legislature have routinely suspended these requirements.

Sound financial practices should not be a partisan issue. Democrats should applaud having a fiscal cushion, because it will avoid sudden and drastic cuts in funding for core services in the event of a downturn. Republicans should be equally supportive, since rainy day funds avoid the pressure for increasing taxes and fees during a recession. Rainy day funds would also lessen the need for transfers from segregated funds.

It is time for Wisconsin to join the rest of the nation in planning for fiscal downturns. Wisconsin’s lack of foresight has led to a vicious cycle of bad budgeting practices and acrimonious budget sessions in recent years, and threatens to do so in the future should revenues recede.

 

 

[i] Rick Barrett, “Risk of Recession Jolts Wall Street,” Milwaukee Journal Sentinel, November 19, 2007

[ii] Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System, testimony before the Joint Economic Congress, November 8, 2007.

[iii] Donald A. Nichols, “Economic Outlook for Late 2007 and 2008: Recession Likely,” Prepared for the Economic Outlook Conference: The Management Institute, School of Business, UW-Madison, September 14, 2007.

[iv] Nouriel Roubini, “The Biggest Slump in US Housing in the Last 40 Years…or 53 Years?,” RGE Monitor, August 23, 2006.

http://www.rgemonitor.com/blog/roubini/142759/

[v] Initially, NBER declared the recession to have begun in March of 2001, but later revised that estimate to extend it retroactively into 2000.

[vi] U.S. Department of Commerce, Bureau of Economic Analysis.

[vii] U.S. Department of Labor, Bureau of Labor Statistics.

[viii] Barron’s, “The Bubble’s New Home,” by Jonathan R. Laing, June 20, 2005.

[ix] William C. Hunter, Senior Vice President and Director of Research, Federal Reserve Bank of Chicago, Speech at the America Club Annual Economic Outlook Luncheon, January 10, 2002.

[x] Quote from NBER, Business Week, “Good News: Mild Recession: Bad News: Mild Recovery” December 10, 2001.

[xi] National Association of State Budget Officers, “The Fiscal Survey of States,” June 2007, p. 21

[xii] Yvette Shields, “Wisconsin Loses S&P’s Positive Outlook As It Readies $150 million GO Offering,” The Bond Buyer, November 15, 2007.

[xiii] The Governor’s initial budget proposed minimum balances of 1% in 1999-00, 1.1% in 2000-01, 1.2% in 2001-02, 1.4% in 2002-03, 1.6% in 2003-04, 1.8% in 2004-05, and 2% in 2005-06 and thereafter. The budget as passed by the Legislature required minimum balances of 1% in 1999-00, 1.2% in 2000-01, no requirement in 2001-02, 1.4% in 2002-03, 1.6% in 2003-04, 1.8% in 2004-05, and 2% in 2005-06 and thereafter.

[xiv] Legislative Fiscal Bureau Budget Paper #240, “Required General Fund Statutory Balance,” June 7, 1999.

[xv] http://www.ncsl.org/programs/fiscal/rdfaxa.htm

[xvi] LFB, “Required General Fund Statutory Balance.”

[xvii] Ibid.

[xviii] Wis. Stat. 16.50(7).

[xix] Wisconsin’s Constitution requires budgets to be balanced on a cash basis; however, there is often an imbalance between ongoing revenues and ongoing spending commitments in future biennia. This is known as the “structural deficit.”

[xx] National Association of State Budget Officers, “The Fiscal Survey of States,” June 2007, p. 21.

[xxi] According to the state budget passed in October 2007, gross general fund appropriations will be $13.8 billion in 2007-08 and $14.2 billion in 2008-09.

[xxii] Wisconsin Department of Administration, “2007 Annual Fiscal Report,” p. 9.

[xxiii] For a full explanation of the calculation of the 2001 recession see the full version of this paper, Wisconsin’s Subprime Budget Management at http://www.wpri.org/.

[xxiv] If the negative ending balances were carried forward from year to year, the gap between available revenue and spending would be $4.2 billion at the end of fiscal year 2011.

The Tail End of Conservatism

In America, thousands suffer from eating disorders—due, in large part, to their skewed self-images. Many women believe that they are fatter than they are, which leads to dangerous dieting routines and eating habits.

I, on the other hand, suffer from what could be considered the “anti-eating disorder.” I actually think that I’m a lot thinner than I am. This is a good problem to have, as I continue to eat all I want without ever sitting down to seriously contemplate my personal relationship with mayonnaise.

I continue to ignore the warning signs of getting fat. My belt loops provide me a daily news report on the state of my midsection. My belly button continues its long, slow march towards the television. And yet, I figure as long as I only gain a couple pounds a year, I’m doing okay.

As it turns out, I have kindred spirits among legislative Republicans in Wisconsin, who think the state budget looks just fine in neon spandex. The dairy state’s lawmakers continue to crow about the health of Wisconsin’s budget despite large spending increases, growing state structural imbalances, and rising taxes. They believe that holding spending to an acceptable rate of growth is enough to pacify a public who already believes their taxes are too high.

The state’s cholesterol count doesn’t look good. According to the Wisconsin Taxpayers Alliance, Wisconsin’s taxpayer burden ranks sixth in the nation relative to income. In 2004, state and local expenditures claimed 21.9 percent of personal incomes, up from 20.2 percent in 1999. Total state and local taxes and fees have increased 47 percent in the past decade, despite a reduction in income tax revenue in 2002 due to the slumping economy. When an economic recession hits and tax revenue declines, the state still manages to spend more and more every year—even when Republicans control both houses of the Wisconsin Legislature.

Despite the best efforts of many good conservative office holders in Wisconsin, the way Wisconsin spends money is rigged to keep the cash flowing. Take, for example, our system of intra-governmental funding, which is an artery-clogging nachos grande of confusion and non-accountability. The state raises over a billion dollars per year, which they send back to local governments, presumably for property tax “relief.” When property taxes go up, a taxpayer doesn’t know who to blame—local officials complain that they don’t get enough money from the state, and state officials blame the local governments for increasing their levies. According to the Wisconsin Taxpayer Alliance, Wisconsin is seventh highest in the nation for the level at which the state government funds local governments.

In the end, the finger-pointing will continue, as the funding framework has built-in excuses for both levels of government. Over 60 percent of the state budget is made up of aids to local governments. Try to reduce state spending, and property taxes go up. If a local government tries to keep spending down, they lose eligibility for state aid. Try to change the system, and you get the reward Scott McCallum received for his proposal to end aids to local municipalities: A job in the private sector.

The way Wisconsin budgets also fails to provide adequate funding oversight. During the budget process, legislators are presented with documents that merely detail changes in funding—they get papers analyzing the governor’s proposals to add three percent here, and four percent there. Rarely are base reviews conducted as to whether programs deserve new funding. Programs about which there are questions receive smaller increases as punishment; nothing is ever actually cut.

Furthermore, during the budget process, there is one phrase that allows lawmakers to brag about fighting wasteful spending without actually doing so: “than the Governor.” We are told that Republican budgets tax less “than the Governor,” spend less “than the Governor,” bond less “than the Governor,” and have smaller deficits “than the Governor.”

Thus, when a budget is put together and political talking points are needed, all the Legislature needs to do is be a little better than the Democratic governor on those key points, and the budget is considered a success. The assumption, of course, is that Wisconsin citizens will get around to giving them credit for responsible budgeting as soon as they’re done watching American Idol.

True fiscal conservatism remains the “Big Idea That’s Never Been Tried” in Wisconsin. In fact, it would be hard to point to a time at the state level when the Legislature buckled down and made tough decisions about Wisconsin’s total tax level. Instead, the budget rolls on for decades, gaining more and more weight, eventually wearing black socks, plaid shorts, and wrap-around sunglasses. Actually, wait—that’s me, again.

Wisconsin won’t die all at once, like the day that I’m found on the side of the road lying in a pool of my own Arby’s sauce. As taxes continue to rise, people will look at Wisconsin, decide the harsh winters and lack of jobs aren’t worth the trouble, and seek more fiscally friendly states. Rumor has it that trash even gets picked up in states below the Mason Dixon line, despite their lower tax burdens (we know that now because of the internet). As people flock from the state, so will businesses—leaving fewer taxpayers to pick up the ever-growing tab.

Wisconsin Republicans will continue to seek credit for holding down our government’s rate of increase, just as I give myself credit for only getting a little fatter every year. But in the end, the only thing that will save us both is to hit the treadmill and shed the extra pounds. Not a pleasant experience, but a necessary one.

So has conservatism in Wisconsin run out of gas? I’ll tell you when I’m done with this burrito.

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