Minnesota’s Gloomy Budget Forecast - Minnesota 2020

Jeff Van Wychen. Minnesota 2020, December 3, 2010

While the November budget forecast revealed good news in the short term, the long-term outlook is somewhat worse than previously anticipated.  The bottom line: eight years of “no new tax” leadership has left state finances in bad shape.

The good news is during the current biennium, ending June 30, 2011, state finances have improved by $399 million due to savings on the expenditure side of the state budget, including $231 million resulting from a six month extension of a higher federal matching rate for the Minnesota’s Medical Assistance program.  Revenue for the current biennium is down slightly relative to previous projections, with a decline in income tax collections being mostly offset by growth in other state taxes.

The improvement in the current biennium is important because it eliminates the chance for Governor Pawlenty to unallot December aid payments to local governments and mitigates the need for short-term borrowing.

The long-term outlook has deteriorated somewhat.  The projected state deficit for the next biennium (FY 2012-13) has expanded from $5.8 billion to $6.2 billion.  To make matters worse, the official state budget forecast ignores the impact of inflation on state expenditures.  A more realistic measurement would yield an anticipated deficit that is about $1 billion greater than the official projection.

The increase in the size of the FY 2012-13 deficit relative to what was previously forecast is primarily the result of a decline in projected state revenues.  Projected state income and sales tax revenue for the next biennium have both dropped significantly relative to what was anticipated at the end of the 2010 legislative session.  According to State Economist Tom Stinson, the decline in projected state revenue is the result of less optimistic projections of economic growth over the next two years.

A casual glance at the general fund spreadsheet indicates a massive $8.3 billion (27.5%) growth in projected state spending from the current FY 2010-11 biennium to the upcoming FY 2012-13 biennium.  However, the November forecast summary document notes that three-quarters of this growth ($6.3 billion) is not true spending growth, but rather is the result of:

• One-time federal stimulus dollars that were used to reduce general fund spending in FY 2010-11 by $2.3 billion,
• K-12 education funding shifts that further reduced FY 2010-11 spending by $1.9 billion,
• Repayment of a portion of the K-12 funding shift that increases state general fund spending in FY 2012 13 by $1.4 billion, and
• One time spending reductions of $660 million in FY 2010-11 that are restored in FY 2012-13 under current law. When you consider the following factors, the actual deficit is much higher.

The FY 2012-13 “structural deficit”—i.e., the gap between revenue entering the state general fund and expenditures made from the general fund over the course of the biennium—is projected to be $6.6 billion.  The structural deficit is somewhat larger than the “budgetary balance” (i.e., the $6.2 billion deficit) because it excludes balances carried forward from the previous biennium as well as the cash flow and budget reserves.  Realistically measured to include the impact of inflation, the projected deficit is actually closer to $7.6 billion.

The November forecast also provides grim news for future years.  Based on planning estimates, the structural budget deficit for the FY 2014-15 biennium, which begins July 1, 2013, will be approximately $5 billion.  However, a more realistic projection of the FY 2014-15 deficit that includes the impact of inflation is about $8 billion.

In addressing past deficits, the state has largely exhausted the easy and painless solutions.  State budget reserves have been depleted, tobacco settlement dollars have been liquidated, and school aid payments have been shifted forward; all of these measures provide a one-time infusion of dollars, but do not address the long-term structural gap between state revenues and expenditures.

The state has also made significant budget cuts.  Real (i.e., inflation-adjusted) state general fund spending for the next biennium is projected to be about seven percent less than it was in FY 2002-03, after adjusting for shifts, takeovers, and other one-time budget fixes.  A large share of previous state budget cuts came in the form of reductions in state aid to schools, counties, cities, and towns, which lead to property tax increases and cuts in funding for K-12 education, public safety, human service programs, and roads and other infrastructure.

However, there is one budget alternative that has been underutilized over the last eight years.  State tax revenues have come no where near keeping pace with inflation and population growth since FY 2002-03.  Increases in progressive state tax revenue need to part of a balanced solution to the state budget deficit during the 2011 legislative session.

The following November forecast budget documents from Minnesota Management & Budget can be found on-line:

The forecast summary [ http://www.mmb.state.mn.us/doc/fu/10/summary-nov10.pdf ]
The complete forecast document [ http://www.mmb.state.mn.us/doc/fu/10/complete-nov10.pdf ]
The general fund spreadsheet, which lists all actual and projected general fund revenues and expenditure for FY 2010-11, FY 2012-13, and FY 2014-15 [ http://www.mmb.state.mn.us/doc/budget/report-fba/nov10-detail.pdf ].