November Forecast: $1.2 billion deficit now, $5.4 billion deficit later

$1.2 billion. That’s the new deficit that has opened up for the current biennium (FY 2010-11), according to the state’s just-released November Forecast. About 70 percent of this deficit is due to lower than expected income tax receipts. Remember, policymakers already took action earlier this year to resolve a $6.4 billion deficit for FY 2010-11. This $1.2 billion is a new deficit that must be addressed before the biennium ends on June 30, 2011.

The legislature will need to be ready to act fairly quickly when they convene in early February - we are already about half-way through the first year of the biennium, Fiscal Year 2010 (which ends June 30, 2010). As of today, Commissioner of Minnesota Management and Budget Tom Hanson reports that we’ve spent 22 percent of the FY 2010-11 budget. That means the $1.2 billion deficit works out to about five percent of our remaining general fund spending for the biennium.

Of course, many wonder whether the Governor will take unilateral action to solve some or all of the deficit through unallotment. Although time may be short, unallotment is undesirable because it would preempt any public discussion of how this deficit should be addressed and precludes public participation in the process. Also, unallotment narrows the choices for resolving the deficit – raising revenues would be off the table. During the press conference, Commissioner Hanson deferred questions about unallotment to the Governor. However, he did mention that there is about $400 million in aid payments going out to city and county governments before the end of December.

$5.4 billion. That’s the updated deficit projection for the next biennium (FY 2012-13) – about 14 percent of that biennium’s general fund budget. That deficit figure does include repaying the K-12 aid deferral (at a cost of $1.167 billion). It does not include repaying the K-12 property tax recognition shift – the second piece of the K-12 education shift done through unallotment ($562 million), covering the costs of inflation ($1.179 billion), or fully restoring General Assistance Medical Care ($928 million).

What should we do? (also check out our press release)

  • We need to find long-term solutions to long-term problems. The new $1.2 billion deficit is not just due to poorer than expected income tax collections – it’s also because we didn’t implement more long-term solutions earlier in the game. Policymakers have been relying heavily on one-time resources, budget gimmicks and unallotment to solve recent deficits. The overuse of those tools has just kicked the can down the road. Now we are really seeing the implications of that strategy.
  • We need to raise revenues to help us resolve the current deficit – and future deficits. We can’t solve the whole problem by raising revenues, but it is unsustainable to continue to address budget deficits almost entirely by relying on one-time resources, spending cuts and budget gimmicks. Not only are those decisions hurting Minnesotans who need help the most during the current economic downturn, but they are also reducing the investments Minnesota needs to position our state to take advantage of an economic upswing. We wouldn’t be alone in raising taxes. Nationwide, 35 other states are currently facing budget deficits. And during the last year, at least 30 states have enacted tax increases to help close budget holes. It’s our turn.

There was a little good news. State economist Tom Stinson did assure us that, “we are clearly on the long, slow path upward.” The economy as a whole is actually tracking pretty close to previous expectations. The problem is jobs and wages. Back in February, we were projecting a loss of 120,000 jobs in Minnesota. That number has been revised to 154,000 (131,000 jobs have already been lost). Nationally, total wages were expected to shrink by 0.4 percent in 2009. That number has now been revised dramatically up to 4.5 percent nationally. In Minnesota, we are estimating a 5.5 percent decline in total wages. Commissioner Hanson warns us that although the recovery has begun, it will be “long, slow and bumpy.”

This is just our first look at this news. In the coming weeks, there will be additional legislative hearings that will get into more of the details. We’ll be there, and we’ll be sure to blog on what we learn.

-Christina Wessel

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3 Responses to November Forecast: $1.2 billion deficit now, $5.4 billion deficit later

  1. Ethan says:

    Another great summary Christina. I would add that under the category of “what should we do,” that Dr. Stinson specifically mentioned a couple of ideas for tackling the budget deficit and improving the overall economy. First, when asked about what kind of additional federal stimulus would he like to see, Dr. Stinson said that a continuation of the Medicaid FMAP increase would be his first priority (I know that FMAP something that Steve Francisco at the Budget Project is working on already, so I look forward to his posts on this in due time). Additionally, Dr. Stinson when asked about a bonding bill said the right kind of projects where the money could be spent relatively quickly would be helpful though he does believe it costs the State about 100,000 per job, per year. While I appreciate that these are both temporary, partial fixes and are not a substitute for the long term solutions you wisely listed above, an additional increase in the FMAP plus a strong bonding bill will likely be necessary to help us get through the worst of the Great Recession.

  2. Christina Wessel says:

    Thanks Michael – that report is more to the point!

  3. Michael Kuchta says:

    I believe the more-correct link for the 30 other states that have raised taxes to address budget deficits is http://www.cbpp.org/cms/index.cfm?fa=view&id=2815