State revenue and cash flow steady, but economic worries remain

October 12, 2011

First the good news. The State of Minnesota started out the first quarter of the FY 2012-13 biennium with higher-than-expected revenue. From July through September, the state collected $59 million above estimates, up about two percent from earlier projections, according to the state’s October 2011 Economic Update. Corporate income tax, individual income tax and sales tax receipts all exceeded forecasted levels.

While revenue is up slightly, Minnesota’s cash reserves remain low. Still, state financial experts reported at a legislative hearing last week that they do not expect that it will be necessary to take any administrative actions or turn to short-term borrowing in order to cover our bills during the current fiscal year. (State leaders took out a line of credit in 2010, just in case.)

The national economy continues to be the problem. The October Update reiterated concerns raised earlier this summer:

While most economists expect the U.S. to avoid a recession, real GDP growth over the next six to nine months is expected to be very slow…Forecasters’ major concern is that the tepid growth rate now seen likely through at least mid-2012 leaves the expansion dependent on the absence of extraordinary events and the avoidance of policy errors both in the U.S. and in the Eurozone.

State economist Tom Stinson says Minnesota will likely face a new deficit for the current biennium, MPR reported. When Governor Dayton and the Legislature made FY 2012-13 budget decisions, the national economy was expected to grow at a somewhat respectable pace – 3.2 percent growth in GDP in 2011 and 2.9 percent in 2012. The latest GDP growth estimates have been cut by about half, to 1.7 percent for 2011 and 1.4 percent for 2012. The steep drop in economic growth means a decline in state revenues, which increases the likelihood that a deficit will open up within the current biennium.

Federal and state leaders need to steer a careful course. This subdued level of economic growth assumes Congress will extend the expiring employee payroll tax cut into 2012, a proposal that is part of President Obama’s jobs bill. Stinson said last week that if Congress fails to extend the payroll tax cut, it would further reduce GDP growth expectations by one percent in 2012, resulting in a virtually no-growth scenario nationally.

We’ll know whether the state will face a deficit in the current biennium – and the size – when Minnesota Management and Budget releases the November Forecast. And on January 24, the Minnesota Legislature will reconvene. Given the current fiscal instability, policymakers need to focus on supporting Minnesota families struggling in the slow economy, and investing in the future economic health of the state.

-Scott Russell


Bad news and really bad news about Minnesota’s financial situation

July 12, 2010

First, the bad news. Despite some optimism from the Governor at the end of the 2010 Legislative Session that the cash flow situation for FY 2011 was manageable, the latest news from Minnesota Management and Budget (MMB) shows that the state’s cash balance in the statutory general fund will dip to near zero as early as October. The cash balance will remain near or below zero until May. That’s clearly well below the minimum workable cash balance of $400 million.

The administration is proposing some options to help manage the cash flow situation which could be implemented as soon as this August. Recommendations include:

  • Deferring $83 million in K-12 payments until May 2011.
  • Deferring $89 million in payments to the University of Minnesota until June 2011.
  • Delaying $221 million in sales tax and corporate tax refunds over $5,000 by up to six months (all would be paid out by January 2011).
  • Delaying $110 million in payments to health plans and county-based health services in October and November (all would be paid by December 2010).

Unfortunately, these actions wouldn’t be sufficient to completely resolve the cash flow problem that persists through next spring. The state is also pursuing a line of credit option to help manage those shortfalls.

And now for the really bad news. The latest economic update released by Minnesota Management and Budget shows the state’s revenue collections for the current biennium are below expectations. We are closing FY 2010 (which ended on June 30) with a $99 million revenue shortfall. This shortage will be absorbed by the $6 million policymakers left on the bottom line and the $266 million in the cash flow account. As a result, there is no deficit for the current biennium. However, if there is another shortfall of more than $173 million before the end of FY 2011 (that’s what will be left in the cash flow account), then policymakers may need to solve another budget deficit before June 30th. (As a side note, the cash flow projections mentioned above take into account the $99 million shortfall.)

The future doesn’t look any rosier. Remember that the actions of the 2010 Legislative Session left the state with a $5.8 billion deficit for the FY 2012-13 biennium, $6.9 billion if you include inflation. Although the U.S. economy is showing consistent growth, the economic update points out that, “a crisis of confidence is emerging now as Americans begin to recognize how slow this recovery is likely to be.” Although most economists do not fear another recession, real GDP growth is now expected to average 2.9 percent over the next biennium, not the 3.5 percent initially projected. As a result, “it appears that the 2012-13 budget gap is likely to be materially wider than end-of-session estimates.”

State policymakers may soon be regretting that they did not take more action to reduce the FY 2012-13 deficit during the last legislative session. A slim ray of hope could come from the federal government. Congress has been debating for months whether to provide states with additional fiscal relief. This latest financial news clearly shows that the crisis in the states continues and federal assistance is critical to preserving core public services and sustaining economic growth.

-Christina Wessel


This week on Facebook…

February 12, 2010

Here are this week’s highlights from our Facebook page (the information is also posted to twitter):

  • The House and Senate have announced tentative committee deadlines: 1st deadline is March 12 (committees must act favorably on bills in the house of origin), 2nd deadline is March 19 (committees must act favorably on bills that met the first deadline in the other house) and 3rd deadline is March 29 (finance divisions of the House and Senate must act favorably on omnibus appropriation bills).
  • Governor announces in his State of the State that he will release his budget on Monday and it will include “very dramatic and painful spending reductions.”
  • Minnesota’s tax collections in January were $47 million above expectations. That’s good news, but it’s not likely to have much impact on the state’s $1.2 billion deficit. State Economist Tom Stinson told MPR that the February Forecast may “vary by plus or minus a couple hundred million dollars” from the last forecast. The deficit is not going away, but it also isn’t going to be twice as bad. The February Forecast is expected on March 2.
  • Moody’s has lowered its outlook for Minnesota from stable to negative, but is keeping our bond rating at Aa1. Minnesota’s bond rating with Moody’s has been at Aa1 since June 2003.

Also, the Minnesota Budget Project has posted a new fact sheet that describes impact of cuts to Renters’ Credit on renters and the economy. Renters’ Credit was cut in 2010 under last year’s unallotments, but we expect the Governor to propose permanent cuts in his supplemental budget.

-the Minnesota Budget Project team

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Early bonding bill could hit an unexpected hurdle

February 9, 2010

Many policymakers are hoping for a quick bonding bill this session, wanting to take advantage of a favorable credit market to create jobs in Minnesota. However, at a legislative hearing on Monday morning, many were surprised to learn that an early bonding bill could have more implications than we were aware of. (Session Daily has written up a good summary of the discussion.)

It is standard practice that the state does not sell bonds until the legislative session is over. That’s because in order to issue bonds, Minnesota must first provide a statement that discloses the state’s fiscal situation. It’s a little difficult to give an accurate accounting of the state’s finances before policymakers have agreed on a budget and resolved the state’s deficit.

So, what happens if policymakers pass a bonding bill with plenty of “shovel-ready” projects early in the session? Those projects would probably need to be paid for out of the general fund until the state was ready to put the bonds up for sale after the legislative session ended (at which point the general fund would get paid back). Unfortunately, fronting bonding money will only contribute to the state’s significant spring cash flow problem. Keep in mind, however, that the state would only be advancing money for projects that were ready to go immediately, which is likely to be a small percentage of the total bonding bill.

There is no law preventing the state from issuing bonds during the legislative session. In fact, it was done in January 2009. However, Minnesota Management and Budget described that situation as “extraordinary.” So, while a quick bonding bill could be positive news for Minnesota’s economy, it could also exacerbate the state’s cash flow woes. (For more about bonding, take a look at a helpful information brief written by the House Research.)

-Christina Wessel

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Many states raise taxes to help balance budgets

January 19, 2010

Policymakers in 30 states passed tax increases last year, according to a July 2009 report by the Center on Budget and Policy Priorities. Those include states with both Republican and Democratic governors, who took balanced approaches to resolving their state’s budget shortfalls.

According to the Center’s report, 11 states raised income taxes, 12 raised sales taxes, 11 raised business taxes and 15 raised tobacco and alcohol taxes. Some states raised more than one tax. Here a sample of tax increases from the Center’s report.

  • Wisconsin passed a new 7.75 percent income tax bracket (for married couples making more than $300,000 and individuals making more than $225,000). Along with other income tax changes, the package will raise $280 million in 2010.
  • California passed a 0.25 percent across-the-board increase in all income tax brackets, expected to raise $5 billion in FY 2010.
  • Hawaii temporarily created three new higher income tax brackets, starting at $300,000 for a married couple. Hawaii’s top income rate will be 11 percent until 2015, up from 8.25 percent. (Hawaii also increased standard deductions and personal exemption amounts by 10 percent. That will lower tax bills for low- and moderate-income families.) The package raises $100 million for the biennium.
  • New Jersey temporarily increased income taxes on households earning more than $400,000, raising $1 billion in FY 2010.
  • Iowa limited the size of five different business tax credits, saving the state $18 million in FY 2010.
  • Nevada temporarily raised the sales tax rate from 6.5 percent to 6.85 percent, raising $280 million over the biennium.
  • Wisconsin raised its cigarette tax by $.75 a pack to $2.52 and changed the method for taxing snuff. The taxes are expected to raise $170 million a year.

The Center on Budget’s analysis said during a recession, tax increases could help the economy recover more effectively than spending cuts. Maintaining programs that help people in need means those dollars are quickly spent in the local economy. On the other hand, “high-income households typically spend only a fraction of their income and save the rest,” the Center wrote, quoting a letter signed by 120 economists. “As a result, each $1 increase on taxes on high-income households will reduce their spending by much less than $1.”

The only Minnesota tax increase mentioned in the report? The $51 million cut to the Renters’ Credit that occurred under unallotment.

States are continuing to face budget shortfalls: roughly four of every five states face budget deficits in FY 2010. Deficits are expected to continue into FY 2011. Recent headlines report that states continue to look for balanced approaches. During her recent State of the State address, Gov. Jan Brewer (R-Arizona) “renewed her call for a sales tax increase to help” cover the state’s $5 billion deficit, the Phoenix Business Journal reported. The Seattle Times told a similar story about Gov. Chris Gregoire’s (D-Washington) State of the State speech. Gov. Gregoire said, “she can’t abandon her values or ‘eliminate the safety net for our most needy and cripple our economic future.'” Both states still plan to make budget cuts, in addition to the revenue increases.

-Scott Russell

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Governor announces unallotment plans

June 16, 2009

**Update: Read our blog post – Legislature challenges Governor’s unallotment decisions – about the legislature’s response to the Governor’s unallotment proposal.**

When the 2009 Legislative Session ended on May 18, the state was still left with a $2.7 billion deficit for the next biennium. This afternoon, Governor Pawlenty announced his plan for solving that remaining deficit through unallotment. He described his announcement as a proposal, not a finalized plan.

Some of the major components of the unallotment proposal include:

  • K-12 education – shifts $1.8 billion in payments to school districts
  • Higher education – $50 million cut to University of Minnesota and another $50 million cut to MnSCU
  • Local government aid – $300 million in reductions to cities, counties and townships
  • Renters’ credit – $51 million in reductions, a 27% cut
  • State government – $33 million in cuts to state agency operating budgets
  • Health and human services – There are 28 separate unallotment proposals for HHS, totaling $236 million. Some examples include reducing children and community services block grants by 25%, reducing payment rates for various health care providers, suspending increases in provider payments, delaying all continuing care grants by one month, paying for Transitional MinnesotaCare from the Health Care Access Fund instead of the general fund, and ending General Assistance Medical Care one and one-half months sooner.

You can read Commissioner Hanson’s letter and view the details of the unallotment proposal online.

Also, the Governor has encouraged the public to respond to his unallotment proposal by emailing budgetideas@state.mn.us.

Remember, however, that the Governor does not need to use unallotment to bring the state’s budget back into balance. There are other options for solving the problem.

  • The move is unprecedented – only two other governors (besides Pawlenty) are known to have used their unallotment authority (Quie and Perpich). And it has never been used at the beginning of a budget cycle or to solve a budget deficit this large.
  • The action is also unnecessary. It is not uncommon for the legislative session to end without a complete budget in place. The normal course of action is to call a special session so that our elected representatives can negotiate a balanced budget solution with more public input.
  • And unallotment will cause a great deal of pain for low-income families, but still fail to solve our underlying budget problems. The Governor can only cut spending in the FY 2010-11 biennium, but our state faces a projected $3.1 billion deficit for the FY 2012-13 biennium. We need a long-term solution to our budget problems, not a one-time quick fix.

Given that the Governor’s unallotment action is unprecedented, unnecessary and fails to address our underlying budget problems, the state would be better off if the Governor worked with the legislature to negotiate a balanced solution to the situation – a solution that uses a combination of spending cuts and revenue increases to eliminate our long-term deficits.

What happens next?

  • Tom Hanson, the Commissioner of Minnesota Management and Budget, will be presenting the Governor’s unallotment plan to the Legislative Advisory Commission this Thursday afternoon (3:00 p.m. in Room 15 of the Capitol). This is an informational hearing only; the legislature has no authority to change or reject the plan.
  • Starting July 1st, the first day of the FY 2010-11 biennium, the Governor can begin implementing his unallotment plans.

-Christina Wessel


A few hints on what we may see in unallotment

June 10, 2009

Last week, the Commissioner of Management and Budget certified that the state is facing a $2.7 billion deficit for FY 2010-11 – the official notice needed to trigger the Governor’s unallotment authority. Earlier this week, we had a chance to get some insights into the potential unallotment plans from Cal Ludeman, Commissioner of the Department of Human Services (DHS).

As we’ve heard before, the unallotments will come from four key buckets:

Higher education– it sounds like unallotments in this area may be as large as possible without triggering the loss of federal fiscal stabilization funds.

K-12 education – the Governor is likely to maximize the education shift recommended during the legislative session, potentially $1.7 or $1.8 billion.

City and county aid and other credits – there will probably be significant cuts here, including reducing state funding where new federal funds are available.

Health and human services – since we were meeting with the Commissioner of DHS, we learned a little more detail about this particular bucket.

  • The Commissioner said not to expect any huge surprises – the unallotments are likely to be spread between 30 to 40 programs and will mostly reflect proposals that were made during the legislative session.
  • Contrary to early reports, the cuts in HHS will not come mostly in the second year of the biennium. Instead, look for most of the unallotments in this area to take effect in the first year (which starts on July 1st).
  • Look for additional cuts to provider rates and suspensions of previously authorized rate adjustments.
  • Look for delays in implementing initiatives – including initiatives that were passed as far back as 2007.
  • Although the Governor will attempt to avoid losing federal dollars, it is inevitable that the state will end up forgoing some federal matching funds as a result of unallotments.
  • The hope is to avoid piling-on those areas which have already been significantly cut (probably referring to adults without children and hospitals impacted by the elimination of General Assistance Medical Care) and minimize the pain to the most vulnerable (he mentioned the elderly and people with disabilities).

It is also useful to note that in the next biennium (FY 2012-13), base funding for programs will return to the appropriations level prior to unallotment. That is not the case for any line-item vetoes made by the Governor, according to the Commissioner.

The Governor’s unallotment announcement may come at any time in the next week or two. We’ve heard that the Governor hopes to announce the entire unallotment plan at once, providing everyone with as much notice as possible to adjust to the cuts to programs and services.

As a procedural note, the Governor must present his unallotment plan to the Legislative Advisory Commission before it can be implemented. The LAC, however, has no authority to change or reject the plan. Instead, the legislature’s opportunity to respond will come when they reconvene next February. By that time, however, many cuts may have already taken effect.

-Christina Wessel


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