Digesting the November Budget Forecast: Brandl/Weber in Full Validation

Digesting the November Budget Forecast: Brandl/Weber in Full Validation

If you're looking for an excellent summary of Minnesota Management and Budget's (MMB) recently released FY 2012-2013 state budget forecast and its implications for Minnesota, you need look no further than a report celebrating its 15th anniversary. In 1995 An Agenda for Reform: Competition, Community, Concentration was prepared by John Brandl and Vin Weber at the request of Governor Arne Carlson to address a projected General Fund structural gap of over $2.5 billion annually. Two big asset bubbles simply postponed what was foreseen fifteen years ago with remarkable accuracy and prescience. Numbers aside, the commentary is just as timely, the issues just as relevant, and the analysis just as true to decision making in 2011 as it was in 1995.

The policy changes facing Minnesota are unprecedented. Beginning immediately and mounting over the next several years, Minnesota must cope with fiscal deficits of massive proportions. (An Agenda for Reform, p. 5)

		FY 2010-11	FY 2012-13	$ Change	% Change
	Balance Forward	446,921	673,667	226,746	50.7%
	Tax Revenues	28,017,148	29,992,641	1,975,493	7.1%
	Non Tax Revenues	1,570,421	1,475,480	(94,941)	(6.0%)
	Dedicated Revenue	17,983	3,200	(14,783)	(82.2%)
	Transfers from Other Funds	822,302	482,247	(340,055)	(41.4%)
	Prior Year Adjustments	65,376	50,000	(15,376)	(23.5%)
	Total Resources Available	30,940,151	32,677,235	1,737,084	5.6%
	K-12 Education - Subtotal	11,438,157	15,647,587	4,209,430	36.8%
	K-12 Education	13,327,079	14,342,827	1,015,748	7.6%
	Prop Tax Rec Shift/Aid Payment Shift	(1,888,922)	1,301,760	3,190,682	NA
	Higher Education	2,814,217	2,916,580	102,363	3.6%
	Tax Committee Appropriations (Aids and Credits)	3,018,425	3,468,946	450,521	14.9%
	Health and Human Services	8,669,427	11,906,878	3,237,451	37.3%
	Public Safety	1,820,125	1,782,650	(37,475)	(2.1%)
	Transportation	167,036	181,742	14,706	8.8%
	Environment, Energy, & Natural Resources	314,452	349,128	34,676	11.0%
	Agriculture & Veterans	247,966	244,550	(3,416)	(1.4%)
	Economic Development	283,269	262,778	(20,491)	(7.2%)
	State Government	631,479	660,201	28,722	4.5%
	Debt Service	832,167	1,141,473	309,306	37.2%
	Capital Projects	22,898	45,219	22,321	97.5%
	All Other	9,163	0	(9,163)	(100.0%)
	Cancellation Adjustment	(15,000)	(20,000)	(5,000)	NA
	Dedicated Revenue Expenditures	12,703	3,200	(9,503)	(74.8%)
	Total Expenditures and Transfers	30,266,484	38,590,932	8,324,448	27.5%
	Balance Before Reserves	673,667	(5,913,697)	(6,587,364)
	Cash Flow Account	266,000	266,000	--
	Budget Reserve	8,665	8,665	--
	General Fund Balance	399,002	(6,188,362)	(6,587,364)

As Exhibit 1 shows, the budget deficit is a function of modest revenue growth being overwhelmed by new spending growth and the disappearance of the one-time fixes that served as the basis for the last budget agreement. The headline-grabbing statistic, a 27.5% spending increase ($8.3 billion) over the previous biennium, is misleading since three-fourths of the increase is attributable to the elimination of these one-time fixes that do not continue in the coming biennium. These components include:

• elimination of $2.3 billion in federal stimulus which reduced FY 20 I 0-1 I general fund spending
• elimination of the $1.9 billion K-12 education payment shift which reduced FY 2010-11 general fund spending
• addition of $1.4 billion to FY 2012 -13 to "buy back" the K-12 funding shift, as required in current law
• elimination of $660 million in one-time reductions (unallotments) which reduced FY 2010-11 spending

Some of these solutions could be used again to address the new biennial budget deficit - the one-time reductions could be made permanent and the $1.4 billion IOU to schools could be extended another two years. On the other hand, federal stimulus is not returning which brings that $2.3 billion of forecasted spending back to the general fund ledger. It is also unlikely that further K-12 education funding shifts will be made.

In many ways the budgetary gymnastics of 2010 and the politics surrounding them distracted attention from the core issue: continuing structural deficits based on a mismatch between anticipated rates of revenue and spending growth. Stripping out the one-time fixes highlighted above still leaves $2 billion (6.6%) in anticipated program spending growth absent any inflationary adjustments. Even biennial spending growth of "only" 6.6% is still relatively high: it is twice the forecasted GDP growth rate for 20 12 and 2013, and is also larger than the 5% growth in total revenue MMB projects for the FY 2012-13 biennium. Looking further out to FY 2014-15, MMB projects an additional $5 billion biennial deficit even though revenues are forecasted to grow by $2.6 billion during the biennium. As the forecast notes, "absent significant changes, the current level of spending matched against revenue growth permanently lost during the recession will likely create significant budget gaps well be-yond FY 12 13."

Self-inflicted wounds compound the budget problems created by the economic environment. Chief among these is the Clean Water, Wildlife, Cultural Heritage, and Natural Areas amendment to the state constitution approved by Minnesota voters in 2008 which further hamstrings an already highly-stressed fiscal system. Adding 0.375% to Minnesota's sales tax propelled the tax rate to among the highest in the nation. But by dedicating the proceeds through the state constitution there are no general fund stability or sustainability benefits to show for the effort. As ever-larger amounts of revenue are dedicated to support programs with diminishing returns while other essential programs remain chronically cash-strapped, the repercussions of this amendment will quickly become evident.

In fact, the implications are already noticeable. In the current biennium when few areas of state and local government were spared, resources allocated to the Minnesota State Arts Board tripled. This coming biennium a fresh $520 million is expected to pour into the four legacy fund accounts. While lawmakers struggle to figure out how to provide the additional $87 million in additional basic education aid needed to support 16,000 new public school pupils during FY 2012-13, $103 million in tax receipts is expected to flow into the arts and cultural heritage fund -a sum that will do nothing but increase until the amendment's expiration in 2034. Perhaps one can take solace in knowing that no matter what other courses and activities schools eliminate and regardless how big class sizes become, world-class arts experiences await.

Government spending primarily benefits students, the elderly, and the disabled. We will continue to see a bulge in these populations which will put immense stresses on our budget. (An Agenda for Reform, p. 5)

Much has been said about how changing demographics will challenge and potentially reshape government revenue and spending going forward, but the budget forecast brings these details and their associated costs into sharp relief. According to MMB, "calendar year 2011 marks the beginning of substantial policy implications of population aging."

An aging population puts downward pressure on income growth and income tax receipts while putting upward pressure on health care and long term care costs. In ten years. Minnesota is projected to have more people over 65 than between the ages of 5 and 17. But the implications of demographic shift are already very visible in the budget forecast, and the spending repercussions are compounded by increasing demands for other high needs populations. Table 1 provides selected examples just in the Medical Assistance program alone.

Similarly, public school enrollment is currently at a multi-year low and is projected to increase nearly 5% by 2015. The additional 16,000 students expected in the next biennium triggers an additional $87 million in basic education aid obligations as mentioned earlier. In addition, an estimated $346 million in various categorical and compensatory aid spending is projected for the coming biennium which includes 12% growth in special education aid. These education finance entitlements are expected to increase by another $600 million in the FY 2014-15 biennium. Importantly, these figures are based only on current law and demographic projections: they do not include any changes to the aid formulas themselves.

As Brandl/Weber recognized, attempting to create any sense of budgetary sustainability without a fundamental reconstruction of the methods, means, and financing in these two influential areas of government is a recipe for failure.

This is no time for timidity in the public policy arena ... this apparent conflict between the public's unwillingness to pay for higher taxes and their demand for improved services marks the central rationale for radical restructuring rather than a more traditional approach to budget management. (An Agenda for Reform, p. 6)

The November forecast only lays out the problem. It is, of course, silent about what should be done. Brandl/Weber laid out a plan of action featuring 39 recommendations permeated with stunningly blunt rhetoric and assessments about the inherent limitations of government bureaucracies to address these challenges. As controversial as their recommendations were in 1995, they are no less so today. Yet the ideas they planted in budgeting practices, education, state local relationships, and health care are gaining traction, if not by desire than out of necessity. Legislators would be wise to revisit this report, embrace its principles and ideas, and act on them.