The Great Recession is not the only cause of Minnesota's budget deficit.
According to the most recent economic forecast, the next budget is $2.5 billion in deficit, including inflation ($1.1 billion without inflation -- more on that later).
Economists refer to Minnesota's budget situation as a structural deficit. This means that revenues are less than expenditures in a normal economic year. Put another way, the Great Recession is not the only cause of Minnesota's budget deficit.
One must go back to 1999 to explain the structural deficit. In that year, Gov. Jesse Ventura and the Legislature enacted permanent income-tax rate cuts, increased K-12 education funding dramatically, and gave tax rebates to Minnesotans based on their sales tax payments.
The problem was that, by 2001, the state and national economies started sinking, resulting in declining state revenues. There simply wasn't enough revenue to pay for all of the expenditure commitments. By 2003, there was a $5 billion state budget deficit. Budget deficits continued periodically through 2011 and are forecast for the 2013-14 budget.
In January 2009, the Minnesota Budget Trends Study Commission released its recommendations for solving the ongoing budget crises. The commission had been created by the governor and Legislature to review the state budget situation, determine the causes of the shortfalls and make recommendations for resolving them. The 15-member commission included Democrats, Republicans and an independent.
The commission found that, in addition to the legislative changes of 1999, Minnesota was experiencing major demographic aging, that funding of public health care support was growing far faster than state revenues, and that the number of school-age children would continue to increase. In a budget projection over 25 years, expenditures were expected to grow 5.5 percent per year, with revenues expected to grow only 4 percent per year.
What can be done to fix Minnesota's structural budget deficit?
The Minnesota Budget Trends Study Commission recommended the following:
• Establish a permanent, long-range planning function in state government: Unlike a well-run business or nonprofit, Minnesota does not have a long-range planning function. As a result, the state has no strategic plan or long-range goals. Planning needs to include the best demographic information available. Regular, long-term budget projections should also be undertaken.
• Base economic forecasts on current law plus inflation for both revenues and expenditures: Under current law, the economic forecasts include inflation on the revenue side but not on the expenditure side. No other business, nonprofit or government that I am aware of creates an unbalanced forecast like Minnesota state government.
• Spend no more in the biennial budget than can be supported by ongoing revenues: In passing the last state budget, ongoing revenues were substantially less than ongoing expenditures. Accounting shifts, one-time revenue and borrowing from the Tobacco Settlement Fund for operating purposes were used to balance the last budget. All of those efforts are inconsistent with this recommendation.
• Use one-time revenues for building reserves, paying off shifts or other one-time purposes: When the state has a surplus, as in 1999, taxes should not be cut permanently, nor should expenditures be increased permanently. Any surplus should be used to build up the budget reserve, reverse the school-aid shifts enacted in 2011 and fund one-time items like capital projects.
• Increase the budget reserve: Given that Minnesota state revenues rise rapidly in good economies and fall rapidly in bad economies, a sizable budget reserve is necessary to cushion state finances. The commission recommended a budget reserve of more than $2 billion.
• Create a long-term public-private commission to recommend changes to health care programs: As Minnesotans age, more citizens will qualify for the state public health care programs. Further, health care inflation is rising more rapidly than the increase in state revenues. This is unsustainable. A commission of the state's best and brightest should propose the tough solutions we will need to enact for the future.
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Not since 1990 has state government leadership been composed of one party. There is a real opportunity for Gov. Dayton and the new Legislature to finally fix the structural budget-deficit problem. It will take a balanced approach, including tax increases and expenditure cuts.
All of us need to support the governor and the new Legislature in this difficult task.
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