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


November Forecast: $1.2 billion deficit now, $5.4 billion deficit later

December 2, 2009

$1.2 billion. That’s the new deficit that has opened up for the current biennium (FY 2010-11), according to the state’s just-released November Forecast. About 70 percent of this deficit is due to lower than expected income tax receipts. Remember, policymakers already took action earlier this year to resolve a $6.4 billion deficit for FY 2010-11. This $1.2 billion is a new deficit that must be addressed before the biennium ends on June 30, 2011.

The legislature will need to be ready to act fairly quickly when they convene in early February – we are already about half-way through the first year of the biennium, Fiscal Year 2010 (which ends June 30, 2010). As of today, Commissioner of Minnesota Management and Budget Tom Hanson reports that we’ve spent 22 percent of the FY 2010-11 budget. That means the $1.2 billion deficit works out to about five percent of our remaining general fund spending for the biennium.

Of course, many wonder whether the Governor will take unilateral action to solve some or all of the deficit through unallotment. Although time may be short, unallotment is undesirable because it would preempt any public discussion of how this deficit should be addressed and precludes public participation in the process. Also, unallotment narrows the choices for resolving the deficit – raising revenues would be off the table. During the press conference, Commissioner Hanson deferred questions about unallotment to the Governor. However, he did mention that there is about $400 million in aid payments going out to city and county governments before the end of December.

$5.4 billion. That’s the updated deficit projection for the next biennium (FY 2012-13) – about 14 percent of that biennium’s general fund budget. That deficit figure does include repaying the K-12 aid deferral (at a cost of $1.167 billion). It does not include repaying the K-12 property tax recognition shift – the second piece of the K-12 education shift done through unallotment ($562 million), covering the costs of inflation ($1.179 billion), or fully restoring General Assistance Medical Care ($928 million).

What should we do? (also check out our press release)

  • We need to find long-term solutions to long-term problems. The new $1.2 billion deficit is not just due to poorer than expected income tax collections – it’s also because we didn’t implement more long-term solutions earlier in the game. Policymakers have been relying heavily on one-time resources, budget gimmicks and unallotment to solve recent deficits. The overuse of those tools has just kicked the can down the road. Now we are really seeing the implications of that strategy.
  • We need to raise revenues to help us resolve the current deficit – and future deficits. We can’t solve the whole problem by raising revenues, but it is unsustainable to continue to address budget deficits almost entirely by relying on one-time resources, spending cuts and budget gimmicks. Not only are those decisions hurting Minnesotans who need help the most during the current economic downturn, but they are also reducing the investments Minnesota needs to position our state to take advantage of an economic upswing. We wouldn’t be alone in raising taxes. Nationwide, 35 other states are currently facing budget deficits. And during the last year, at least 30 states have enacted tax increases to help close budget holes. It’s our turn.

There was a little good news. State economist Tom Stinson did assure us that, “we are clearly on the long, slow path upward.” The economy as a whole is actually tracking pretty close to previous expectations. The problem is jobs and wages. Back in February, we were projecting a loss of 120,000 jobs in Minnesota. That number has been revised to 154,000 (131,000 jobs have already been lost). Nationally, total wages were expected to shrink by 0.4 percent in 2009. That number has now been revised dramatically up to 4.5 percent nationally. In Minnesota, we are estimating a 5.5 percent decline in total wages. Commissioner Hanson warns us that although the recovery has begun, it will be “long, slow and bumpy.”

This is just our first look at this news. In the coming weeks, there will be additional legislative hearings that will get into more of the details. We’ll be there, and we’ll be sure to blog on what we learn.

-Christina Wessel

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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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