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.