Surplus offers hope for Minnesota schools and communities

December 1, 2011

Nobody expected this morning’s good news – that the State of Minnesota is projecting an $876 million surplus for the current two-year budget cycle (FY 2012-13). This gives the state the chance to take positive steps toward keeping our promise to our kids and protecting vital investments in our economy.

While it’s nice to have good news for a change, it is short-lived. The November 2011 Economic Forecast projects a $1.3 billion shortfall for the next budget cycle (the FY 2014-15 biennium), or $2.6 billion if we include the impact of inflation. So policymakers must be careful how they use these one-time resources. In the face of serious economic hard times in the last few years, lawmakers have depleted most of the state’s rainy day resources and resorted to significant borrowing, including from our schools. The best thing we can do is to start reversing some of those actions.

Fortunately, that is exactly what will happen with this surplus. As required by state law, the first $255 million of the projected surplus will be used to refill the state’s cash flow account and the remaining $621 million will go to refilling the state’s budget reserve close to its target of $653 million.

That is good news for Minnesota’s schools, because it brings us closer to making good on the state’s promise to pay back what it borrowed from our schools. After the state’s cash flow and budget reserves are refilled, by law, any future surplus will be used to start buying back the school payment shift.

Unfortunately, the slow economic recovery means the state is projected to face deficits again. Using the current surplus to rebuild our rainy day funds will allow us to avoid deep cuts to areas vital to our future economic success – like education and training for Minnesotans of all ages.

Decisions being made at the federal level pose an additional threat for Minnesota’s economic future. The November Forecast assumes that Congress will extend the payroll tax cut and unemployment insurance benefits that expire at the end of this year. If Congress fails to do so, we face the serious risk of another national recession. Furthermore, federal deficit reduction could result in the loss of federal funding for health care, education, and other community services are the critical for Minnesota’s future prosperity.

Although some may float the idea of using the surplus for other purposes, policymakers will be wise to stay the course and refill our rainy day funds to position us to weather the storms on the horizon.

You can get all the details on the November Forecast on the Minnesota Management and Budget website.

-Christina Wessel

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Going full circle on the cycle of advocacy – tell your story

October 6, 2011

As the leaves fall, many of us are bracing for the next legislative session and continuing our advocacy for critical state services.  But we also know that the cycle of advocacy is a complete circle—including raising awareness of the consequences of past budget cuts in order to strengthen our case for a balanced approach to meet our state’s future needs in the next budget.

If you are seeing first-hand how families and communities throughout Minnesota are suffering because of severe cuts in the state budget, your stories can help us ensure that the public and policymakers see the human impact of over $2 billion in budget cuts.

Together we can complete the cycle of advocacy and shape public opinion to prevent such severe cuts in the future. If you know about someone who was harmed by a budget cut, or if you or your organization has a story to share, please complete our online Tell Your Story form. We’ll be in touch after we receive your information to discuss ways to publicize it.

For more information, contact me at 651-757-3063 or lgardner@mnbudgetproject.org.

– Leah Gardner


State’s revenues on track, but forecast looks grim

September 13, 2011

The odds are increasing that Minnesota state government will face a new revenue shortfall when the Legislature reconvenes in February. This July, the Governor and Legislature passed a balanced budget for the FY 2012-13 cycle, which runs through June 30, 2013. But a weakening economic outlook raises the prospects that a mid-biennium shortfall will open up.

Minnesota Management & Budget (MMB) recently released its July/August Economic Update, providing current state revenue numbers and a look at economic trends. Minnesota closed FY 2011, which ended on June 30, 2011, $355 million, or 2.3 percent, above what was projected in the February Forecast. However, this is not a sign of an economic turnaround. More than 60 percent of that increase came by collecting Wisconsin income tax reciprocity payments earlier than expected (in FY 2011 instead of FY 2012.)

For July and August, the first two months of FY 2012, MMB said revenues “appear on track.” Although revenues are down $93 million, or 4.4 percent below the February Forecast, part of that resulted from collecting Wisconsin income tax reciprocity payments in FY 2011. Further, the state government shutdown in the first half of July slowed tax collections.

The big concern is for the future. Global Insight, Minnesota’s macroeconomic consultant, has downgraded its economic forecast. Its September baseline forecast predicts that the nation’s economy, as measured by GDP, will grow 1.5 percent in 2011 and 1.8 percent in 2012. That is down from its February baseline forecast that anticipated GDP growth of 3.2 percent in 2011 and 2.9 percent in 2012. Such an economic slowdown would mean that more Minnesotans will be struggling, and the State of Minnesota would collect less revenue than it budgeted for in the coming months.

Global Insight gives a 50 percent probability that its baseline forecast is correct. It gives a 40 percent probability that a recession will start this fall, saying the U.S. economy is “dangerously close to stall speed.” According to the July/August Update:

Global Insight’s concern is that in its current weakened state the U.S. economy is unlikely to be able to withstand a policy mistake in either Washington or the Eurozone. And, given the counterproductive political stalemates observed in both Europe and the U.S. in recent months, the risk that policy adjustments will not be made quickly enough to avert another economic downturn is high.

Minnesota faces a potentially weakened economy in a tenuous situation, the result of both economic forces and political choices. Minnesota came through very difficult budget negotiations this year without finding a long-term solution to funding our state’s priorities. Further, Congress spent months stuck on what should have been a routine vote on the debt ceiling and did not move a jobs agenda.

MMB will issue another Economic Update in October, with new revenue numbers. Its November Forecast will provide a more comprehensive picture based on a more current economic forecast and updated revenues and spending estimates, and determine if the Governor and Legislature will need to act in 2012 to bring the budget back into balance. If so, policymakers will have the opportunity to take a balanced approach, including raising revenues, that prevents deeper job losses, maintains the services that Minnesotans are turning to during these tough times, and lays the groundwork for our future prosperity.

-Scott Russell


Proposed constitutional amendment would lead to more bad budgets

August 22, 2011

Minnesota is still reeling from a contentious legislative session and a state government shutdown. Now some policymakers are advocating for a constitutional amendment that would permanently undermine our ability to arrive at common-sense solutions to balancing the state’s budget. The amendment would guarantee gridlock by creating extra hurdles for passing a responsible budget, leading to more budget gimmicks as policymakers seek to fund critical state services.

Last Thursday, a group of Republican state representatives held a news conference to announce their 2012 legislative agenda. A major element is likely to be a constitutional amendment that would require a supermajority vote in both houses of the Legislature to raise taxes. With such a supermajority requirement in place, just a minority of legislators could block critical legislation, even if the legislation had broad public support.

Supporters of the amendment claim that raising the bar for increasing taxes will lead to better budget outcomes. But we already know that isn’t true. Minnesota has essentially been living with this restriction for years: we haven’t passed a statewide tax increase since Governor Pawlenty agreed to raise the tobacco tax in 2005. So we have seen first-hand what happens when policymakers are prevented from using all their budget-balancing tools. Fewer budgeting options leads to legislative gridlock, and ultimately pushes policymakers to agree to compromises that rely heavily on short-term budget gimmicks.

Advocates of the constitutional amendment want to force policymakers to concentrate on spending cuts to balance the state budget. Policymakers did agree to deep spending cuts in the 2011 Special Session. Over the next two years, the state will invest fewer general fund dollars in higher education, public safety, transportation, the environment, agriculture, and jobs and economic development than we did in the last two years.

However, many policymakers also understand that balancing the budget through cuts alone would eliminate vital investments that Minnesotans value. Cuts that deep would devastate families, erode our public infrastructure, and ultimately undermine the state’s long-term economic growth.

Just as water forges a new path when it encounters an obstacle, so policymakers find ways to meet the needs of their constituents. But the danger is that if state tax increases are essentially off the table, policymakers turn to less transparent funding methods to avoid spending cuts that would fundamentally damage Minnesota’s economy. Just this last session – after plenty of gridlock – lawmakers finally agreed to use $2.8 billion in timing shifts and borrowing from the future to balance the budget. They failed to find a permanent solution to the state’s ongoing needs, so the state will be back facing deficits in another two years, if not sooner.

Minnesotans are tired of the gimmicks and want policymakers to arrive at a permanent solution using a balanced approach, according to recent public opinion polls. For example, a recent survey commissioned by the Bush Foundation found that nearly two-thirds of Minnesotans felt that borrowing funds and delaying payments shouldn’t be used to pay for current budget deficits. And 57 percent agreed that policymakers should use both spending cuts and revenue increases to address any future deficits.

The state doesn’t need a constitutional amendment that limits the ability of policymakers to pass a responsible budget. And we know that the public doesn’t support the gridlock and gimmicks that flow from these kinds of restrictions. We do need to try something new to get our budget on the right track. That new idea is a balanced approach that relies on spending cuts and revenue increases to sustainably fund the state’s priorities.

-Christina Wessel


Short-term budget solutions are leading to credit rating problems for Minnesota

August 10, 2011

Minnesota and the U.S. government have suffered recent downgrades in their credit ratings. The negative news could worry investors and may eventually lead to higher borrowing costs for federal, state and local governments. However, it is important to take note of the reasoning behind the recent downgrades: credit rating agencies are concerned about the lack of long-term solutions to ongoing budget deficits.

Three major rating agencies assess the credit-worthiness of governments and businesses: Fitch Ratings, Moody’s and Standard & Poor’s. The highest possible rating from any of these agencies is a AAA. Last week, for the first time in history, Standard & Poor’s lowered the United States’ credit rating from AAA to AA+. In July, Fitch downgraded Minnesota’s credit rating from AAA to AA+. And Moody’s recently issued a warning that it, too, is concerned about Minnesota’s long-term financial health, although it did not actually downgrade the state’s rating. Minnesota continues to maintain a AAA rating with Standard & Poor’s.

There is an important lesson in the recent spate of downgrades and warnings: If Minnesota policymakers want to restore the state’s credit rating, they must start passing long-term budget solutions. 

Minnesota is being considered a slightly higher credit risk because the state is facing a structural deficit, meaning that our revenues are not matching up with our expenditures over the long-term. Instead of finding a sustainable solution this past session, state leaders agreed to delay payments to schools and issue one-time tobacco bonds, a significant strike against the state in the eyes of credit agencies. The outlook for FY 2014-15 already shows Minnesota with a nearly $2 billion deficit. Moody’s cites this “reliance on one-time measures to solve the $5 billion budget gap in the current fiscal 2012-13 biennium and the likelihood of future structural budget gaps as a result of the use of the one-time budget measures” as a primary reason for its negative outlook on Minnesota.

The rating agencies take no position on the appropriate mix of revenue increases and spending cuts – they just want to see permanent fixes. However, we have long argued that policymakers should be using a balanced approach to resolving the state’s structural budget deficit, including both spending cuts and revenue increases. Relying on cuts alone would negatively impact the quality of our educational system, access to affordable health care, and the level of services available for seniors and persons with disabilities. These are all investments that are essential to improving the quality of life in our state and building our future economic success.

Minnesota’s creditworthiness is being called into question. To stop our ratings from slipping further in the wrong direction, policymakers should start passing budgets that balance cuts to services with increases in revenues, and fund our long-term priorities in a sustainable way.

-Scott Russell


Minnesota’s bond rating drops amid budget instability

July 7, 2011

On Thursday, Fitch Ratings downgraded Minnesota’s bond rating from AAA to AA+, impacting $5.7 billion in state general obligation bonds. The news comes at a critical time in state budget discussions and underscores the need for a long-term solution that addresses the imbalance between the revenues we are raising and the cost of meeting the state’s needs.

The downgrade is a small warning flag that wasn’t triggered just by Minnesota’s current budget impasse; the flag also went up because of the state’s recent track record of using accounting gimmicks and one-time resources to address budget deficits. Fitch cites the decision to delay payments to school districts as an example. In financial speak, these one-time solutions are called “non-recurring” measures and bond agencies don’t look favorably on states that overuse them.

The Business Wire reported on the Fitch decision:

The downgrade reflects the state’s reliance on non-recurring gap-closing measures over the course of the recession, the difficulties in reaching consensus on a plan to address the resulting large budget gap for the biennium that began on July 1, the likelihood that the final budget agreement will again include non-recurring solutions, and an increasingly contentious budget environment in the state in recent years.

Back in April, a Politics in Minnesota article predicted that a budget showdown could negatively impact the state’s credit rating. The article noted that the state maintains a AAA from Standard & Poor’s. However, Moody’s Investors Service downgraded Minnesota to Aa1 back in 2003, citing concerns about the state’s use of “volatile, short-term fixes” – it hasn’t upgraded the state’s rating since then.

And on Thursday afternoon, just before the announcement from Fitch, an independent commission chaired by former state legislators Senator Stephen Dille and Representative Wayne Simoneau also recognized that we are on a dangerous path: “Minnesotans are suffering, our reputation has been hurt and our credit rating is endangered.”

Why does it matter? The drop in credit rating makes it more expensive for the state to borrow money for capital projects. But the effects don’t stop there, other units of government are also hurt: “Rating agencies take into consideration the state’s creditworthiness in assessing the reliability of bonds issued by school districts, municipalities and counties across Minnesota,” reported Politics in Minnesota.

If Minnesota hopes to preserve, and perhaps even improve, our credit rating, then we will need a quick resolution to the budget standoff that focuses on responsible long-term solutions.

-Scott Russell


Independent commission recommends revenue increases, spending cuts

July 7, 2011

On Thursday afternoon, an independent commission consisting of a mix of former legislators, former finance commissioners and business leaders announced a “Framework for a Budget Solution.” The ad-hoc commission’s specific recommendations include both revenue increases and spending reductions:

  • $2.2 billion in unspecified permanent spending cuts, focusing on “spending reform and economic growth.”
  • $1.4 billion in savings by postponing the repayment of the K-12 payment shift (although they oppose the use of any additional shifts or budget gimmicks).
  • $700 million in permanent revenue increases: $250 million from increasing surcharges on health care providers, $140 million from an inflationary increase in the alcohol tax and $330 million from a $1.29 per pack increase in the tobacco tax.
  • $700 million in a temporary revenue increase through a four percent income tax surcharge. The way surcharges generally work is that everyone calculates income tax liability following existing tax laws, but then an a surcharge is added. For example, if your tax liability was calculated at $1,000, you would then add on four percent, or another $40. The tax surcharge would sunset after the FY 2012-13 biennium.

The commission also recommends that policymakers reform the state’s sales tax system over the long term, working to expand the base and lower the rate.

Some of the commission’s guiding principles include:

  1. Both revenue increases and spending reductions need to be part of the solution.
  2. Everyone should contribute to solving the deficit.

We agree with this balanced approach of both revenue increases and spending reductions…and so do a majority of Minnesotans.

However, as policymakers consider which revenues to raise, they should be sure not to make the system more regressive. Everyone will need to contribute to the solution, but the most vulnerable in our society shouldn’t be asked to pay the highest price.

The commission was convened by former Governor Arne Carlson and former Vice President Walter Mondale and its members include former legislators Steve Dille and Wayne Simoneau, former finance commissioners John Gunyou and Jay Kiedrowski (Wayne Simoneau also served as a finance commissioner), and business leaders Jim Campbell and Kris Johnson.

-Christina Wessel


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