State’s October Economic Update says the recession is over, but times are still tough

October 13, 2009

In my last post, I talked about what kind of state budget deficits lie ahead, and said we would have more up-to-date information when Minnesota Management and Budget released their October Economic Update. That came out on Monday, and I thought this was worth quoting:

…[T]he longest and deepest recession since World War II almost certainly has come to an end…Forecasters no longer are debating when the recession will end. Their attention has turned to the question of what kind of recovery should be expected and how long it will take to regain pre-recession levels of output and employment.

The answers are sobering.

Few forecasters expect to see increases in U.S. payroll employment until after the first of the year and most expect the unemployment rate to move higher until early summer…Payroll employment is not expected to again reach pre-recession levels until 2012 and the U.S. unemployment rate is not expected to dip below 8 percent until 2013.

What does that mean for the state’s budget, past, present and future?

FY 2008-09, the biennium that just ended: Mid-July analysis estimated that FY 2009 would end with a $188 million surplus. That $188 million carries forward and helps balance the FY 2010-11 budget. The October Economic Update reports that general fund revenues came up $142 million below projections for FY 2009.

FY 2010-11, the biennium we’re in: In July, a balanced budget for FY 2010-11 was projected. However, these October figures estimate that we started FY 2010 with $142 million less than expected. The October Economic Update further finds that general fund revenues for the first quarter of FY 2010 were down $52 million, or 1.7 percent, from projections.

The Economic Update notes that IHS-Global Insight, the state’s economic consultants, is projecting a smaller decline in GDP in 2009 than previously. However, Global Insight is now projecting slower GDP growth in 2010 and 2011. Given that, I would not be surprised if there is an adjustment in the underlying economic model with lower economic growth when the November Forecast comes out, and as a result, a deficit for FY 2010-11. But that is speculation at this point.

FY 2012-13, the biennium to come: In July, the FY 2012-13 deficit was estimated by Minnesota Management and Budget at $4.4 billion. If the November Forecast does indeed include lower economic growth projections than previously modeled, a larger deficit for FY 2012-13 seems likely.

But again, take this with all the necessary caveats, cautions and grains of salt – these are figures based on one quarter of preliminary revenue data for FY 2010. A more comprehensive analysis awaits us when the November forecast is released.

-Nan Madden

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Posted by Nan Madden

Minnesota’s February Forecast – federal stimulus clouds the situation

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

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Posted by Christina Wessel

The latest from the state economist on our budget & economy

January 14, 2009

Yesterday I went to the Minnesota Budget Project’s second annual briefing on the state of the economy by our state economist, Dr. Tom Stinson. Download his powerpoint presentation here.

In front of a packed audience of over 200 people, Dr. Stinson delivered the not-so-surprising bad news: the budget outlook was bad in November, when the economic forecast projected a $4.8 billion budget shortfall, and it has likely worsened since then.

In other words: expect an even larger projected budget deficit in the February economic forecast. The only upside is that it shouldn’t increase by more than $1 or $2 billion, and there’s the slim chance that our economy could defy expectations and improve earlier than anticipated.

Dr. Stinson expertly gave a clear and comprehensive view of the state of our economy:

  • We are in a recession. Expect loss  of 55,000 jobs in Minnesota in 2009, across all sectors.
  • FY 2010-11 revenues are down $3.3 billion from end-of-session estimates back in May.
  • Watch job growth for signs of an economic recovery. National monthly job growth of 150,000 jobs indicates “normal” growth.
  • Some good news: Minnesota was recently able to sell $300 million worth of bonds. We couldn’t have done that in October.
  • The federal economic recovery package could be helpful in the short-term, and provide an estimated several hundred million dollars to the state in FY 2009 and something in the ballpark of $600 million in FY 2010-11.

If you missed this event and want to hear about future events, subscribe to our email newsletter.

-Katherine Blauvelt

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Posted by Katherine Blauvelt

February Forecast: Yep, we’re in a recession

March 7, 2008

State economist Tom Stinson has been saying for a while that Minnesota is in a recession, and the new February Forecast assumes that is the case as well. The forecast assumes that the national economy is in a recession, but that the situation brightens in the second half of the year, as the federal stimulus plan starts to have an impact. After that, it’s slow growth in the beginning of 2009.

Not good news, but I don’t think anyone was expecting any. So the numbers are these:

  • $935 million budget deficit for FY 2008-09
  • $2.1 billion deficit for FY 2010-11 if the impact of inflation is included.

- Nan Madden

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Posted by Nan Madden

Raising taxes can be better than cutting spending

February 8, 2008

When facing budget deficits, lawmakers have several choices for addressing the problem. Most people seem to assume that raising taxes is the worst option. Not true. At a joint hearing in the Minnesota House this week, Paul Anton, chief economist at Wilder Research, pointed out that raising taxes to fight an economic downturn may be better for the economy than cutting spending. (You can listen to the audio for the February 6th hearing on-line.)

Why? If the goal is to keep money flowing in the economy, protecting state spending is a pretty sure bet. Every dollar of state government spending is just that…dollars that are guaranteed to go out the door. If you cut spending to fix a deficit, you are pulling those dollars away from services that were going to use those funds. And even worse, they were very likely to spend those dollars in Minnesota.

Nobel Prize winner Joseph Stiglitz and Congressional Budget Office director Peter Orzsag have argued that a better option is to raise taxes, particularly on higher-income households. Those families are likely to maintain their same level of consumption, but perhaps save a little less. They conclude in their paper that, “reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”

By preserving state spending and raising progressive taxes, Minnesota can most effectively use the tools the state has at its disposal to rejuvenate the economy. 

-Christina Wessel

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State agencies directed to brace for deficit

February 4, 2008

Back in November, we learned that the state is now expecting a $373 million deficit for the current biennium. In response, the Minnesota Department of Finance issued a memo in January directing all state agencies to submit proposals that would cut their general fund budget by 3% for FY 2009. The memo directs that these cuts should be permanent, and should look at “rolling back increased spending” in state grant programs.

The latest Economic Update, released by the Dept. of Finance last month, does not offer much good news either. Although revenues are ahead of forecast projections, the increase may be because of timing, rather than a stronger economy. Instead, the Update warns that “policymakers are in largely uncharted territory” as they try to prevent a slowdown from turning into a recession.

Clearly, policymakers face a challenge as they begin the 2008 Legislative Session. But we would remind them of the principles for good fiscal policy we laid out last time Minnesota faced a recession: the most important being that we should not respond with decisions that make the recession worse for those Minnesotans least able to weather the downturn.

-Christina Wessel

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Posted by Christina Wessel