December 4, 2008
Well, now we know what we are facing…lots and lots of red ink. Minnesota Management and Budget (formerly known as the Department of Finance) announced the bad news at a press conference late this morning.
- For the current biennium (FY 2008-09, which ends June 30, 2009) the deficit is $426 million (that’s about half the size of the deficit we already closed during the 2008 Legislative Session).
- For the next biennium (FY 2010-11) the deficit is $4.8 billion (add another $650 million for inflation). That deficit amounts to about 13% of our budget. That’s a lot. State Economist Tom Stinson says this recession is expected to last 24 months - which would be the longest recession on record.
- For the biennium after that (FY 2012-13) the planning estimate predicts a $4.6 billion deficit (add another $1.5 billion for inflation).
By the way, in case you are confused by the $5.2 billion deficit announced in the media - that adds the FY 2008-09 and FY 2010-11 deficits together.
So, how will we solve this deficit? You are going to hear again and again that we need to tighten the belt on state (and local) government. Sure, spending cuts are one of the tools we are going to need to conquer this mammoth problem. But, here are a two things to keep in mind during this initial frenzy:
1. We have been tightening our belt since 2003…and it shows. The Minnesota Budget Project is releasing a report next week talking about what has happened to the state’s investment in critical services over the last decade. Let’s just say the report is called “The Lost Decade.” We’ll announce the report’s release on the blog next week.
2. Raising taxes should be on the table. And here’s just one of many reasons why that’s true: We’ve said it before, and we’ll say it again (and again) - huge spending cuts can be more of a drain on the state’s economy than making targeted tax increases. Nobel-prize winning economist Joseph Stiglitz and Congressional Budget Office director Peter Orszag wrote during the last recession that government spending cuts take money directly out of the state economy. But a focused tax increase on high-income earners is less likely to have a drag on the state’s economy because those individuals are likely to maintain their levels of consumption, but compensate for the tax by saving less. Plus, the state is more likely to spend money in Minnesota, while high income earners are more likely to spend money outside of the state (or even outside of the country).
If you find this stuff totally fascinating, you should also look at an editorial by Dane Smith, President of Growth and Justice, in today’s Star Tribune talking about how “Governments shrank, the top got more and paid less, and the economy is underperforming.”
-Christina Wessel
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Budget Process | Tagged: 2009, budget deficit, deficit, forecast, minnesota, Taxes | 
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Posted by Christina Wessel
December 1, 2008
The Minnesota Budget Project team was out at a conference during the week of November 17, and one thing I was very sorry to miss was the meeting of the Legislative Commission on Planning and Fiscal Policy on Friday, November 21.
Minnesota Public Radio and other news outlets have reported that information presented this meeting suggest that the state’s budget deficit may be around $4 billion for the next biennium. That seems consistent with the $4 to $6 billion going around the rumor mill. We will have more precise figures when the official forecast is released on this Thursday, December 4.
$4 billion is about 11% of the state’s general fund budget for FY 2010-11. Clearly big challenges are ahead. We recommend that policymakers keep the following principles in mind as they consider the deficit:
- A balanced approach is needed. With a deficit of this size, we cannot afford to take any of the primary budget-balancing tools - raising revenue, using reserves and other one-time measures, and cutting spending - off the table.
- The state needs to respond to the economic downturn and help build a stronger economy in the long run. Services that help people get and keep jobs, and that help families make ends meet must be allowed to work during these tough times. Budget-balancing choices should not make the impact of the recession worse for those least able to weather the economic downturn, including low-income families, laid-off workers and other vulnerable populations.
- We must understand the impact of state budget decisions on the economy. Joseph Stiglitz (a Nobel Prize-winning economist) and Peter Orszag (currently director of the Congressional Budget Office) have argued that spending cuts can be a bigger drag on a state’s economy than a targeted tax increase. As Christina has stated in a previous blog entry, cutting state spending takes dollars out of Minnesota’s economy. A targeted tax increase on high-income earners is likely to have less of a drag on the state’s economy, because those individuals are likely to maintain their levels of consumption, but compensate for the tax increase by saving less. That maximizes the amount of money moving in the state’s economy.
And if you missed it, the Star Tribune had an interesting story this week-end that looked behind the scenes at how the forecast is developed. It covers the art and science of forecasting, but also confirms that we are going to hear some very bad news on Thursday when the forecast is released.
-Nan Madden
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Budget Process, Economy, Taxes | Tagged: budget deficit, forecast, Taxes | 
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Posted by Nan Madden
November 20, 2008
A few weeks ago I attended the second-to-last meeting of the Minnesota Budget Trends Study Commission. To recap, this commission, established by the state legislature (not to be confused with the Governor’s 21st Century Tax Reform Commission), is made up of state budget experts and is tasked with recommending how we can minimize volatility in our state budget and tax system and prepare for the fiscal impact of demographic changes.
The commission discussed some of their draft findings (no draft report was handed out). We’ll get their final word in December. From what they discussed, here’s what you need to know:
- Inflation in the forecast matters. There was near unanimous agreement (with two or three notable exceptions) that the current practice of including inflation in the economic forecast for revenues and not expenditures creates a false picture of the budget.
- The need to limit growth in health care spending will be a major finding of the report. It’s not clear how the the commission will recommend we resolve this very sticky issue. I very much hope the commission recognizes that health care costs have been rising in both the public and private sectors. And in fact, private health care spending rose faster than public health care spending in 2005 (see this Minnesota Department of Health report). This is not a “big government” problem.
There are two meetings of this commission left. Next meeting is scheduled for Tuesday, November 25th at 9 am in the Centennial Office Building (could be changed since it’s close to Thanksgiving).
-Katherine Blauvelt
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Budget Process, Health Care, Taxes | Tagged: budget trends, commission, Health Care, inflation | 
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Posted by Katherine Blauvelt
November 7, 2008
It isn’t the highest-profile outcome of the recent elections, but North Dakotans overwhelmingly rejected Measure 2, which would have cut their state personal income tax by 50% and cut the corporate income tax by 15%, with an estimated two-year cost of $420 million. The Bismarck Tribune reports that about 70% of North Dakotans voted against the measure.
In rejecting this measure, North Dakotans recognized that the oil boom that fueled their current budget surpluses was not going to last forever. They have retained the flexibility to enact better targeted changes to their tax laws and the ability to invest in the strong workforce and quality infrastructure that can build a healthy state economy into the future.
- Nan Madden
1 Comment | Budget Process, Taxes | Tagged: Measure 2, North Dakota, tax cuts | Permalink
Posted by Nan Madden
October 28, 2008
I’ve previously written about the process for developing the Governor’s budget and the instructions that state agencies received as they put together budget options for the Governor to consider.
In mid-October, cabinet-level agencies received new instructions. Noting the significant risk of a larger deficit in the November 2008 Forecast, state agencies have been asked to achieve a 5% reduction in their general fund spending in the proposals they must submit by November 3.
Specifically, the directions state: “The preliminary options you submit on November 3rd should result in a 5% reduction in your total General Fund base as well as your direct appropriated Other Funds base for FY 2010-11 (excluding Federal Funds and Internal Service Funds).” The directions also say that, “unless otherwise directed, any proposed increases should be factored in” in coming up with the 5% reduction.
To give that 5% figure some context: 5% of the state’s projected general fund spending in the FY 2010-11 biennium is $1.8 billion.
What are the implications?
- I do not think the Governor will propose 5% across-the-board cuts in his budget. In his past budgets, Governor Pawlenty has tended to take a more precise approach, so this is about developing a set of options for where cuts might be made.
- I also don’t think that 5% is the maximum amount of cut that will be proposed in any particular area of the budget. The Governor is likely to propose larger cuts in some areas than others.
- In addition, the Governor’s budget will likely have some new initiatives, and the cost of these new initiatives would need to be offset by actions elsewhere in the budget.
While I would assume that the Governor’s FY 2010-11 budget will try to address the budget deficit through a significant and painful amount of cuts, that does not mean the deficit will be made up entirely through cuts. We’re likely to see one-time savings through timing shifts, such as delaying payments to school districts. This move has been done to address past deficits, and its use in the 2009 Legislative Session seems quite probable.
-Nan Madden
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Posted by Nan Madden
October 11, 2008
Hot off the presses (or web site, in this case), as of 2 p.m. today, the state’s October 2008 economic update is out!
The good news: Fiscal Year 2009 revenues are still holding slightly above what was predicted - up over $100 million. Income tax collections were better than expected, though sales tax receipts were worse than expected.
The bad news: For the next budget biennium of FY 2010-11, our economic outlook continues to worsen. Here’s a phrase you don’t want to see in your state’s economic update: “Unless conditions in financial markets change dramatically for the better, however, this recession will be the most severe faced by U.S. residents in the past 25 years.” [emphasis added] Remember back just seven months ago, in February when we got our last economic forecast? Then, the forecast predicted real GDP would grow 2.2% in 2009. Now the same forecasters are estimating GDP growth at 0.2%. That’s a major downward revision, which may very well result in less revenues (and a larger budget deficit).
Again, this is a quarterly economic update, just four pages long. Hang on until December 4th, when November forecast is scheduled to be released. That’s when we’ll learn more about how big the deficit for the next budget biennium could be.
This news today is sure to be of interest to Minnesotans. The economy and jobs are the #1 worry for two-thirds of Minnesotans, according to a new poll reported by MPR.
-Katherine Blauvelt
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Posted by Katherine Blauvelt
October 1, 2008
The Center on Budget and Policy Priorities has recently issued an analysis of a measure before voters in North Dakota this fall called Measure 2. Despite the bland name, Measure 2 is a dramatic proposal: it would cut the personal income tax by 50% and cut the corporate income tax by 15%, with an estimated two-year cost of $420 million.
North Dakota is in a fiscal situation very different from ours. The state is projecting a surplus, in part because the North Dakota economy is benefiting from high oil prices and high crop prices.
Remember the late 1990s when Minnesota was enjoying surpluses? I do, and I encourage North Dakotans to learn from some things that Minnesota did right, and some things that have come back to haunt us.
First the good. When states have large surpluses, it may make sense to use some of the surplus to reduce taxes - and why not learn from Minnesota’s experience? Minnesota issued several sales tax rebates, and policymakers found ways to include as many Minnesotans as possible, recognizing that all Minnesotans pay taxes.
Now the bad. During that boom period, Minnesota made permanent tax cuts assuming that the good times would last. Those permanent tax cuts made the state revenue shortfalls that followed more severe than they otherwise would have been, resulting in painful spending cuts and our ongoing challenges in funding state services.
I urge our North Dakota neighbors to learn from our experience. If you want to use some of your surpluses to cut taxes, make those tax cuts as broad-based and fair as possible. But don’t make permanent tax cuts as if the good times will last forever. In contrast, Measure 2 is poorly targeted: it cuts North Dakota’s already low income taxes (they are the lowest among the 41 states that have personal income taxes) and provides no tax cut to the approximately 30% of North Dakotans who currently pay no income tax. If Measure 2 passes, it would make it nearly impossible for the state to make changes to the state’s sales and property taxes, which have a greater impact on most North Dakotans than the income tax does.
The Center on Budget and Policy Priorities adds this recommendation: use a portion of this surplus to make investments that will give North Dakota a stronger economy in the long run. High-quality schools, strong universities, improved infrastructure - these are the investments that will help North Dakota thrive after the current oil boom goes bust.
- Nan Madden
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Posted by Nan Madden
September 8, 2008
If you’ve heard me speak anywhere in the past month, you’ve heard me say that the process of developing the Governor’s budget proposal for FY 2010-11 has already begun. Last month, the Minnesota Department of Finance released more detailed instructions to state agencies as they develop their budget proposals.
These directions include a FY 2010-11 budget context that highlights the following:
- “We are currently spending more than we are collecting.” It is noted that the solution to budget shortfalls last year used $500 million in budget reserves, and these resources are not available this year and need to be replaced.
- “Current planning estimates show a significant gap.” Current figures show a deficit of $940 million for FY 2010-11, before accounting for any inflation.
- “Monthly revenues have exceeded expectations.” Currently, revenues are coming in higher than previous projections, but that is not expected to continue after this year.
- “The economic outlook has weakened.” As a result, the deficit could get worse when we see updated figures in the November Forecast.
- “The current law planning estimates do not include general inflation.” State agencies are directed to plan to absorb any inflationary increases. Requests for funding to address inflation will compete with other options. Agencies are directed to plan for 3% per year increases in total compensation increases for their employees.
The memo highlights the Governor’s approach for addressing the budget gap:
- Transform government to “become more consumer friendly and cost-effective.”
- Reward performance: “the state should implement performance incentives to make government more market-driven and consumer-oriented.”
- Reduce cost. “Growth in the overall size and cost of government must be reduced.”
Considering the economic context and these themes, state agencies are asked to follow three steps towards completion of the Governor’s budget.
- State agencies will assess current activities by October 6, focusing on effectiveness and results.
- State agencies will to prepare preliminary budget options for review by November 3, based on the memo developed in step one and the Governor’s themes.
- The Governor will appoint an Executive Budget Team Review that will evaluate options that best meet state priorities in early November through mid-December.
After the November Forecast comes out, tentatively on December 4, the Governor will make final budget decisions in order to release his budget to the legislature on January 27, 2009 (tentative.)
-Nan Madden
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Posted by Nan Madden
August 27, 2008
Last week, we held a joint Minnesota Budget Project/Minnesota Council of Nonprofits workshop on better understanding how the Governor’s budget is developed and how to best influence that process.
Kristin Dybdal from the Minnesota Department of Finance and Employee Relations provided a great overview of the process, including the following timeline for developing the Governor’s budget proposal:
- From July to November, state agencies work to develop potential budget initiatives based on agency goals and objectives, the Governor’s priorities and stakeholder discussions.
- From September to December, the Department of Finance works with state agencies to analyze and refine potential initiatives, provides analysis to the Governor and facilitates the decision-making process.
- In December and January, the Governor decides what budget initiatives will be recommended in his budget.
Kristin also pointed out some important resources at the Department of Finance’s web site:
And finally, she gave us some tentative dates to look forward to - the November Forecast release on December 4 and the Governor’s budget release on January 27, 2009.
We also had a roundtable discussion with Steve Nelson from the Department of Human Services, Craig Acomb from the Department of Health and Mary Ellison from the Department of Public Safety. Some of the things I took from the discussion about how nonprofits can best participate in the budget development process included:
- State agencies are open to input from constituents, including nonprofits. Start with your program officer or other state agency folks with whom you have relationships.
- The most effective information you can provide is data. Data showing the impact of the services your organization provides or that you advocate for will have more impact than anecdotal stories.
Finally, Kevin Goodno gave some important tips about how to best influence the process, drawing on his experiences as a legislator, as Commissioner of Human Services, and today, as a lobbyist. Some of the “take aways”:
- Even in tight economic times, there will always be some new initiatives funded.
- To have the greatest impact, you need to understand the “decision tree” within a state agency and have a champion at each level: division, assistant commissioner and senior management team, and within the Dept. of Finance and the Governor’s office.
- Don’t underestimate the political influence of the House minority and the importance of building relationships with the Department of Finance.
- If you are working to launch a pilot program, think about what data you should collect to best be in a position later to argue for an expansion of that program.
-Nan Madden
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Posted by Nan Madden
August 18, 2008
Last Friday, the House Committee on Governmental Operations, Reform, Technology and Elections, chaired by Rep. Gene Pelowski, put forward a draft report of possible changes to the legislative process. The intent, according to Chair Pelowski, was to study ways to improve the legislative process in Minnesota. Since the spring, the committee has spent a lot of time holding hearings, researching and otherwise working on this very important, but thorny subject (we can all agree the legislative process isn’t perfect, but that’s where the agreement ends…).
Committee members made it very clear on Friday that the still-in-draft-form report is not a recommendation from the committee, but rather a list of possible changes that they gathered from House members, lobbyists and members of the public. Because of that, some of the ideas contradict each other and, of course, committee members do not agree with all of the listed changes.
It is quite a comprehensive list (I’ve posted the hard copy I picked up in committee here) running eighteen pages in length and covering ideas on floor procedures, conference committees, scheduling, public participation and new ways to structure committees. The changes run the gamut from amending the constitution to eliminate the 120-day limit on legislative sessions to requiring conference committees to be scheduled with more advance notice.
So what happens next? You should certainly read the report and weigh in with your representative and members of the Government Operations committee on what you believe would improve the legislative process and facilitate public participation. Chair Pelowski says this list of possible changes will sit until after the election. Then he hopes that whomever is in office when the dust clears from November 3rd will consider this report as they formulate rules for the 2009 session.
-Katherine Blauvelt
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Posted by Katherine Blauvelt
