January 14, 2010
Earlier in the month, I was asked what the chances are that the February Forecast would be worse than the November Forecast, which estimates a $1.2 billion shortfall in the current FY 2010-11 biennium and a projected $6.6 billion deficit for FY 2012-13 (including inflation). I suggested that we needed to watch out for things like holiday sales or end-of-year income figures coming in lower than projected, or news hinting that the future economy would be even worse than predicted. Remember, a bad economy doesn’t necessarily make the February forecast worse – only a bad economy that is worse than we previously thought.
Minnesota Management and Budget has released their January 2010 Economic Update, a quarterly report that provides a snapshot of how state government revenues and the state’s economy are doing, compared to the most recent forecast. It indicates that, so far, state general fund revenues are pretty much on track, although there is still more significant information to come that will inform the February Forecast.
- State general fund revenues are consistent with the forecast. Revenues since the forecast’s release (November and December 2009) are down $1.5 million, or 0.06 percent less than forecast. Because of the timing in which sales taxes are remitted, the Update reminds us that these figures only include the November part of the holiday shopping season.
- The future economy is going to be bad, but no hints yet that it will be even worse. The Update says that there are “only modest changes in the baseline forecast for 2010 and 2011 since November.” So it’s good that it is not getting worse, but remember the baseline forecast is not rosy. A pertinent quote from the Update:
[W]hile this year’s economic outlook is far less frightening than 2009′s, economic conditions are not expected to return to normal in 2010. The U.S. unemployment rate is expected to remain above ten percent for the entire year and although some job growth is projected, it is only the first step in replacing the nearly 8 million jobs that have been lost since late 2007.
So, at least for now, no hints that the February forecast will get substantially worse. However, MMB always warns us against reading too much into a few months of data. Global Insight, the state’s economic consultants, still assign a 60 probability to their economic predictions, with a 20 percent chance of a better recovery and a 20 percent chance of a “double dip” recession.
Another interesting note: the Update talks about technical adjustments they’ve made to account for the fact that the state has been dealing with cash flow issues through delaying certain kinds of tax refunds.
-Nan Madden
Leave a Comment » | 
Budget Process, Economy | Tagged: budget deficit, Economy, forecast | 
Permalink
Posted by Nan Madden
April 2, 2009
Well, wonder no more.
Last Sunday, I teamed up with Paul Anton (chief economist over at Wilder Foundation) at the DFL Education Foundation’s annual meeting to talk about what the federal stimulus dollars will mean for Minnesota’s budget and the nation’s economy.
Now you are probably like most other people and prefer to spend your Sunday afternoons relaxing, not attending presentations on the federal stimulus package. Fortunately, the event was videotaped by staff at the St. Louis Park City Hall.
The presentation – “Federal Stimulus: Manna from Heaven or Finger in the Dike?” – is available online as a streaming video or an audio podcast. The links are available at the DFL Education Foundation website.
-Christina Wessel
Leave a Comment » | Budget Process, Economy, Federal Budget | Tagged: budget, Budget Process, budget proposal, Economy, federal, federal stimulus, Governor's budget, stimulus, Taxes | Permalink
Posted by Christina Wessel
March 11, 2009
Naturally, there is a lot of focus these days on how we are going to solve the budget deficit for FY 2010-11. But it is important to remember there is another large deficit waiting for us in the following biennium – the so-called “tails.” The February Forecast projects a $5.1 billion deficit for FY 2012-13, or $6.5 billion if we include the impact of inflation.
So, we have a $6.4 billion deficit now and a $5.1 billion deficit later. In other words, we aren’t going to grow our way out of this problem. We are in this situation for the long haul.
And it could be worse than predicted in the future. That’s because the planning estimates for the future biennium assume that Minnesota’s economy will perform at the national average. That’s a fair practice – it’s far more difficult to model a state economy that far into the future than it is the national economy. But Minnesota’s economy has been under-performing the national economy over the last two years. That means those future projections may turn out to be too optimistic.
This becomes a significant concern because it’s very likely that a huge portion of the solution to the FY 2010-11 deficit will be one-time. The one-time money on the table includes potentially $2.6 billion from the federal stimulus package, plus the $1.3 billion from shifting education funding and roughly $1 billion from selling bonds that was in the Governor’s budget. That means more than two-thirds of the solution to the deficit could be a one-time fix.
If we rely so heavily on one-time solutions this time around and Minnesota continues to under-perform the national economy, we could be facing another big budget mess in two years.
Recently, however, the Governor signed a bill that could make things interesting. The new law requires the Governor to propose, and the legislature to enact, a budget that is balanced through FY 2012-13.
This isn’t a new idea. Governor Arne Carlson regularly followed the practice of balancing the budget over four years. And earlier this year, the State Budget Trends Study Commission recommended the Governor and legislature institute a policy of passing a budget that is structurally balanced for the current and following biennium.
However, if policymakers truly attempt to meet this challenge, it will mean making some very tough decisions about revenues and expenditures starting in the FY 2010-11 biennium. A heavy reliance on one-time fixes won’t do the trick. Hopefully, this bill will prompt a more honest look at the long-term consequences of the choices we make to solve the budget deficit.
-Christina Wessel
Leave a Comment » | Budget Process | Tagged: balanced budget, budget, budget deficit, Budget Process, Economy, forecast | Permalink
Posted by Christina Wessel
March 3, 2009
The numbers are out…but the federal stimulus dollars are clouding the seriousness of the situation.
The state budget deficit is projected to grow to $6.4 billion for FY 2010-11, or about 17% of the state general fund budget. This is up from the $4.8 billion predicted in the November Forecast and is right in line with the kind of bad news people have been expecting.
However, the headlines are focusing on a rosier number – $4.6 billion. What accounts for the difference? The lower number includes the impact of some federal stimulus dollars. Specifically, $1.8 billion in Medicaid matching funds (although $460 million of these matching funds come in FY 2009). The largest chunk of money coming to the state from the federal government is in the form of an increase in the federal matching rate on Medicaid spending. Normally Minnesota pays 50% of Medicaid costs and the federal government matches at 50%. Under the federal stimulus plan, the federal matching rate rises closer to 60%, allowing Minnesota’s share to fall to about 40%. These federal dollars are included in the forecast because the state already has the statutory authority it needs to accept Medicaid funds. However, in order for the state to draw down the full $1.8 billion, we cannot make any changes in eligibility to Medicaid programs. This restriction will force the Governor to make some significant revisions to his proposed cuts in health care.
There are other federal stimulus dollars the state is likely to receive, but does not yet have the statutory authority to accept, so they aren’t included in the forecast. The biggest chunk of unrealized federal funds: about $800 million in state stabilization funds, most of which must be spent in K-12 or higher education.
What the $1.8 billion in federal Medicaid funds may hide, however, is the seriousness of the state’s current economic circumstances. State Economist Tom Stinson warns that this is likely to be the longest and deepest recession since World War II. Before it’s over, Minnesota is expected to lose 120,000 jobs – 50,000 of them are already gone. And this prediction assumes positive effects from the federal stimulus legislation.
Don’t get me wrong, the federal stimulus dollars are helpful and welcome, but they are just a one-time solution. And the Governor’s budget proposal already includes about $2.3 billion in one-time solutions for solving the deficit – including selling bonds and shifting state education payments. Adding these three pieces together means that more than 60% of the budget solution could end up being just a one-time fix.
Unfortunately, our budget troubles don’t end in FY 2011. In fact, the projected deficit for FY 2012-13 has grown to $5.1 billion, or $6.5 billion if we include the impact of inflation. These numbers are more for planning purposes, but they do indicate that there is no quick answer to Minnesota’s economic challenges.
The situation is serious – we shouldn’t let the influx of federal resources hide the fact that Minnesota has a long-term problem. That means we need to have all the potential budget-balancing tools on the table – including solutions that will have a long-term impact on reducing our deficits - like raising revenues.
Be sure to visit the Minnesota Management and Budget website to download a copy of the February Forecast or to look at the very useful PowerPoint presentation from the press conference. You can also check out the Minnesota Budget Project’s press release on the forecast.
-Christina Wessel
1 Comment | Budget Process, Economy | Tagged: budget, budget deficit, deficit, Economy, federal stimulus, forecast, forecast deficit budget, recession, Taxes | Permalink
Posted by Christina Wessel
February 26, 2009
The staff at the Minnesota Budget Project has been quite busy this week, which is why our blog has been a little quiet. But don’t worry, plenty of information is on the way…
…Starting with us releasing our analysis of the Governor’s budget proposal. Round One: Governor’s Initial Budget Proposal Focuses on Spending Cuts and One-time Measureshighlights the major components of the Governor’s budget and provides a deeper look at the proposed spending reductions. It includes many of the proposals we’ve been blogging on…plus more! Read it, become an expert and impress (or annoy) your friends at cocktail parties.
But remember, things are going to change significantly starting next Tuesday (March 3). That’s when Minnesota Management and Budget will be releasing the state’s February Forecast. We expect to find out that we have a new deficit for the FY 2008-09 biennium (the Governor closed the initial $426 million deficit through unallotment). And, as I’m sure you’ve heard, the deficit for the FY 2010-11 biennium is expected to grow from $4.8 billion to $6 billion (or more). But all this is speculation until we learn the facts next Tuesday.
The Governor will be releasing a supplemental budget later in March. In this 2nd round, he will need to adjust his initial budget proposal to respond to the new deficit figures and incorporate the impact of the federal stimulus bill. Under these unusual circumstances, it will nearly be like starting from scratch.
And we have some advice for the Governor and legislature as they try to address the budget gap. First, I have an op-ed in the St. Paul Pioneer Press today (Make the numbers add up to a future that works) outlining a few ideas for how we can design a budget that kick-starts our state economy, builds a workforce ready for the future and keeps our families strong through the recession. A key part of that – raising revenues! So be sure to check out our recent piece on revenue raising options.
-Christina Wessel
Leave a Comment » | Budget Process, Budget Proposals | Tagged: budget deficit, Budget Process, deficit, Economy, forecast, Governor's budget, supplemental budget | Permalink
Posted by Christina Wessel
February 11, 2009
On February 10, the U.S. Senate passed its version of the Economic Recovery and Reinvestment Act by a vote of 61 to 37. Minnesota Senator Amy Klobuchar voted for the final bill. Passage of the bill was assured when three moderate Republican senators from the Northeast, Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania agreed to vote for a modified bill that trimmed over $100 billion in provisions passed by the House last week. Senators, however, added several tax provisions to their version that brought the final price tag of the Senate bill up to $838 billion. The House-passed bill was $819 billion.
Some of the biggest cuts in the Senate bill included $40 billion in state fiscal stabilization, $16 billion for school modernization and $1.2 billion for retrofitting Section 8 public housing. For a list of other items that have been reduced or eliminated in the Senate bill, visit CNN.com.
Tax provisions in the Senate-passed bill include around $70 billion to exclude more taxpayers from the Alternative Minimum Tax (AMT) and $35.5 billion for a new tax credit of 10% of the value of a new or existing home purchase, up to $15,000. The House also included a tax credit for home purchases, but limits the tax credit to $7,500 for first-time homebuyers who purchase their homes before July 1, 2009, costing just $2.6 billion. The Senate also includes a new $11 billion tax deduction for interest payments and sales taxes paid on new cars purchased from November 2008 through 2009. The deduction would be limited to individuals with incomes under $125,000 or couples making less than $250,000.
Following passage of the Senate bill, conferees were quickly appointed to resolve differences between the two bills. Any final package will probably have to win the support of Sens. Collins, Snowe and Specter as well as all Senate Democrats in order to pass with a filibuster-proof 60-vote margin. Many Democratic House members are looking to restore some of the education and infrastructure cuts made by the Senate by scaling back some of the Senate’s tax provisions, such as the AMT “fix,” the new tax credit for homebuyers, and the new tax deduction for interest and sales taxes paid on new car purchases. But Sens. Collins, Snowe, Specter and Democratic Sen. Ben Nelson have warned that any final bill with a price tag above $780 to $800 billion would prompt them to vote against a final package.
With the President’s Day deadline looming, negotiators have reportedly agreed to a $790 billion compromise package, although details have not yet been released. A conference report is expected to go back to the House and Senate for a final vote this weekend and the President hopes to sign the bill into law on Monday, President’s Day.
-Steve Francisco
Leave a Comment » | Economy, Education, Federal Budget, Taxes | Tagged: AMT, economic recovery, Economy, federal, stimulus, tax credits | Permalink
Posted by Steve Francisco
January 27, 2009
The Governor’s budget proposal, released this afternoon, lists his top three priorities as enhancing our job climate, improving K-12 education and protecting state public safety programs. Unfortunately, many of his proposals will cut the ground out from beneath families struggling in this economy. While the Governor undoubtedly faced a huge challenge in coming up with solution to the $4.8 billion deficit for FY 2010-11, he made his task even more difficult by taking revenue increases off the table.
After a quick look at some of the documents, here are a few key points:
- Under the Governor’s budget, general fund spending for FY 2010-11 would be $750 million below spending in FY 2008-09. That doesn’t sound like a big deal…but it is. Even though just about every economist will tell you that government spending is the surest bet for stimulating the state’s economy in a recession, the Governor would take us backwards.
- The Governor’s proposal to create jobs focuses exclusively on tax cuts/incentives for businesses, which he hopes will stimulate job creation. Meanwhile, he proposes $2.4 billion in permanent spending cuts, which we know will result in the loss of jobs in the public, for-profit and nonprofit sectors as services are severely reduced or eliminated. Research shows business tax cuts are not an effective way of providing stimulus.
- For families struggling in this economy, the Governor limits their options. His proposal includes moves like eliminating adult eligibility for MinnesotaCare and eliminating dental benefits, reducing funding for child care, cutting $50 million per year from the Renters’ Credit, reducing state support for higher education by more than $300 million next biennium, and much more. We’ll provide more in-depth analysis on his proposals in the coming days - and we’ll also connect you with the great analysis being done by others.
A few other major components of the Governor’s budget include:
- He assumes Minnesota will get $920 million in federal stimulus relief (this is just a placeholder amount for now).
- He reduces the FY 2010-11 deficit by $1.3 billion by shifting K-12 education payments into the future.
- He raises close to $1 billion upfront by selling bonds secured with our tobacco lawsuit revenues.
We will give the Governor credit for putting $250 million in the budget reserve to help resolve any current-biennium deficit that might arise in the next few months.
As an alternative to the Governor’s approach, earlier today, the Minnesota Budget Project joined with the Organizing Apprenticeship Project to recommend a set of Kitchen Table Principles for solving the budget deficit. These principles, developed through conversations with people from around the state over the last six weeks, reflect the values of ordinary Minnesotans who are concerned about the state’s future.
Of course, we encourage you to take a first-hand look at the Governor’s budget proposal. You can review his powerpoint, look over issue briefs and read the detailed proposals for each agency on the Minnesota Management and Budget website.
-Christina Wessel
4 Comments | Budget Process, Economy | Tagged: budget, budget deficit, Budget Process, budget proposal, business taxes, deficit, Economy, finance, Health Care, low-income, medicaid, Pawlenty, Taxes | Permalink
Posted by Christina Wessel
January 21, 2009
Next Tuesday, January 27th, Governor Pawlenty will be releasing his budget proposal for the FY 2010-11 biennium. Naturally, we are all very conscious of the current challenges facing our state: large and ongoing budget deficits. However, it’s important that we don’t lose sight of the past…and the decision-making that contributed to our current circumstances.
We don’t have to go very far back to find some short-sighted choices. Last session will do.
The Minnesota Budget Project recently released a report – Punting the problem: 2008 Legislative Session ends with a short-term solution – that examines the final agreement reached last May. We have several disappointing conclusions:
- Policymakers relied on budget reserves and other one-time revenues to solve nearly 60% of the deficit in the FY 2008-09 biennium, leaving fewer resources available to solve the deficits we are facing now.
- The heavy reliance on short-term solutions also meant that policymakers did little to chip away at future deficits we knew were coming – the final agreement still left a $946 million deficit for the FY 2010-11 biennium (which has now grown to $4.8 billion, or $5.5 billion if you include inflation).
- The health and human services budget was reduced by $230 million, which amounted to 21% of the final budget-balancing agreement, leaving fewer resources to help Minnesota’s most vulnerable weather the current recession.
Keep in mind that budget deficits have become rather common place since 2002, and that has had a dramatic impact on funding for critical state services. Another source of information is The Lost Decade, a report we released last month that talks about what has happened to funding for K-12 education, child care, housing and higher education as a result of those lean years.
-Christina Wessel
Leave a Comment » | Budget Process, Health Care | Tagged: budget, budget deficit, budget reserves, budget trends, deficit, Economy, Health Care | Permalink
Posted by Christina Wessel
January 16, 2009
The incoming Obama administration and Congressional leaders have been working on an $825 billion economic recovery package that was released by the House yesterday. The package is in two pieces and is expected to move quickly through the House Ways and Means and Appropriations committees next week before going to the House floor for a vote. The bill is likely to be considered under a “closed rule” that limits amendments. In the Senate, the package will be considered by the Finance and Appropriations Committees before coming to a vote in the full Senate in early February. Congressional leaders hope to have a conference agreement passed by both the House and Senate before members go home for the President’s Day recess on Feb. 13.
One of the key features of the package is expected to be federal fiscal aid to states in the form of a temporary increase in the federal Medicaid matching rate. Currently, the federal government pays half of Minnesota’s Medicaid costs. The House bill includes $87 billion in additional matching funds to the states through the end of FY 2010, which would help states maintain Medicaid coverage for low-income individuals and families even as they face budget shortfalls.
However, some in Congress, including Senate Minority Leader Mitch McConnell, R-KY, are now suggesting that any federal aid to states should be in the form of loans instead of grants, which would dramatically reduce the ability of the aid to stimulate the economy. In fact, some states are prohibited by their state constitutions or state law from taking loans. At a time when nearly all of the states, including Minnesota, are running cumulative budget shortfalls of more than $350 billion due to the nationwide economic downturn, it is imperative that the federal government provide aid through grants, not loans. Continued health care for low-income Minnesotans is at stake.
Stay tuned for more analysis in the days ahead.
-Steve Francisco
Leave a Comment » | Economy, Federal Budget, Health Care | Tagged: Congress, economic stimulus, Economy, federal, federal deficit, fiscal aid, Health Care, medicaid | Permalink
Posted by Steve Francisco
January 16, 2009
Yesterday, Governor Pawlenty gave his State of the State speech (available as text, podcast, streaming audio or video at his web site.)
The state is facing a big budget deficit because we are in a really tough economy. So let’s take a look at how some of the initiatives mentioned in the Governor’s State of the State would impact the economy…and contrast that with what Mark Zandi, chief economist at Moody’s economy.com, finds will most effectively stimulate the economy (note that Zandi was an advisor to John McCain during the campaign).
- Pawlenty. The Governor says job creation is one of his top priorities. He did not name any direct investments in job creation, but rather a set of business tax cuts including cutting the corporate income tax in half, tax credits and a capital gains exemption for investments in small business, a refundable tax credit for small business owners, faster depreciation, and more. These tax cuts would have to be paid for through greater spending cuts elsewhere.
- Zandi. But the research shows tax cuts are the least successful means of stimulating the economy. Accelerated depreciation would deliver $0.27 in economic activity for each $1 in government revenues forgone, and a corporate tax cut would generate $0.30 in economic activity. In contrast, infrastructure spending, in which the government more directly invests in jobs and purchases of goods and services, shows a return of $1.59.
- Pawlenty. The Governor noted the growth in the health and human services budget (remember – the increased cost of health care is occurring in both public and private systems, it is not anything unique to state programs). He’ll propose significant cuts in this area, only protecting “current health care eligibility for children.”
- Zandi. Those policies that help low- and moderate-income people sustain their incomes during tough times have the greatest bang for the buck, delivering more than $1 of economic activity for each $1 of government money spent on them. (My editorial comment: cutting adults off of health care is not a great way to help Minnesota workers to make ends meet.)
- Pawlenty. A wage freeze for state employees for two years, and requiring a wage freeze for any Minnesota government entity that accepts state money.
- Zandi. Cuts in state and local government spending are a real concern, and can be a substantial drag on the economy. Zandi found that federal aid to the states to help them maintain their payrolls and continue to fund programs would result in $1.36 in economic activity for each $1 spent.
But you don’t need to be an economist to understand the problem. Pawlenty hopes to create jobs through tax cuts for businesses. In the meantime, he would plan to slash spending on local government and health and human services which we know will lead to the loss of already existing jobs. Common sense, as well as econometrics, suggests the most effective way to help our economy is to spend money wisely rather than cut taxes rashly.
-Nan Madden
2 Comments | Budget Process, Economy | Tagged: budget, budget deficit, Budget Process, business taxes, Economy, Health Care, stimulus, Taxes, unemployment | Permalink
Posted by Nan Madden
