$6 billion-plus deficit on Minnesota’s horizon

Did you think that Governor Pawlenty’s cuts made the state’s budget woes magically disappear? Think again. Minnesota’s projected budget deficit for the upcoming fiscal year (FY) 2012-13 biennium is projected to hit $6.4 billion.

This huge deficit, which represents sixteen percent of projected FY 2012-13 general fund expenditures, is not the result of spending growth, but rather a decline in real per capita state revenue combined with Pawlenty’s unilateral decision to shift the state’s budget problems into the future as opposed to dealing with them responsibly in the present.

Based on the official state general fund summary (PDF) which reflects the governor’s recent unilateral “executive actions” (which consists primarily of accounting shifts imposed through his unallotment authority), the state is projected to have a structural budget deficit of $4.4 billion for the FY 2012-13 biennium. However, the official budget document overlooks two key factors.

First, the official budget projections from Minnesota Management & Budget include the impact of inflation on state revenue, but not on state spending. Minnesota 2020 has made the case against this lopsided approach to forecasting. Both the State Council of Economic Advisors and the non-partisan State Budget Trends Study Commission have stated that a realistic assessment of state finances should include the impact of inflation on both sides of the state ledger. If we realistically take into account the impact of inflation on state revenues and expenditures, the structural budget deficit swells to $5.5 billion.

Second, the total expenditures listed in the official state general fund summary do not include the projected cost of General Assistance Medical Care (GAMC) in the FY 2012-13 biennium. The governor vetoed GAMC funding for FY 2011, taking health insurance from more than 30,000 Minnesotans. However, the GAMC program remains in statute; thus, a strong case can be made that projections of the cost of GAMC should be included for the FY 2012-13 biennium. Including projected funding levels for GAMC for FY 2012-13* would further expand the state’s structural budget deficit to $6.4 billion.

While Governor Pawlenty will be able to skip out of Saint Paul with an officially balanced budget for the current biennium, he has done his successor (and the state as a whole) no favors. The next governor will have to tackle a $6.4 billion deficit in the next biennium with much of the ability to “shift” already exhausted.

Anti-tax proponents contend that the large state budget deficit is the result of state spending “run amok.” However, an examination of real (i.e., inflation-adjusted) per capita state expenditures reveals that this is not the case. The graph below shows the percent growth in real per capita state general fund spending from FY 2002-03, the last biennium under a budget enacted under Governor Ventura, through FY 2012-13 based on planning estimates. The graph includes the restoration of GAMC funding in the FY 2012-13 biennium.

The blue line shows the change in real per capita spending based on amounts from the official state general fund summary after the July “executive actions.” The dashed red line is based on the same data, except that it shows the change in general fund spending after removing the spending growth resulting from the state takeover of general education funding; the growth resulting from this takeover was not the result of an expansion of public services, but merely a shift in terms of how these services were paid for. For this reason, it is legitimate to show general fund expenditure growth excluding growth resulting from the takeover.

From FY 2002-03 to FY 2008-09, real per capita state general fund spending declined by 8.9 percent; after adjusting for the state takeover of general education, the decline is 11.7 percent. The claim that the state’s budget woes going into the FY 2010-11 biennium was the result of rampant spending growth is demonstrably false.

The huge decline in projected state general fund spending from FY 2008-09 to FY 2010-11 is due in part to the governor’s unallotments and line item vetoes, including the veto of GAMC funding for FY 2011. However, the decline in spending in FY 2010-11 is artificially large for two reasons. First, spending is deflated because of the governor’s shift of $1.76 billion of K-12 funding into the subsequent biennium. Second, approximately $1.4 billion of one-time federal recovery dollars related to the “Family Medical Assistance Percentage” shows up as a spending reduction (as opposed to a revenue increase) in FY 2010-11.

The large increase in projected spending from FY 2010-11 to FY 2012-13 is due in part to the restoration of GAMC funding. In addition, the growth in spending in FY 2010-11 to FY 2012-13 is artificially large because spending in FY 2010-11 is artificially deflated for reasons noted in the preceding paragraph.

State spending is further increased in FY 2012-13 because a portion of the governor’s FY 2010-11 K-12 funding shift must be repaid in FY 2012-13 under current law. The aid payment percentage portion of the governor’s K-12 funding shift is done using his unallotment authority; this portion of the shift will not recur in FY 2012-13 without legislative action or a new unallotment in that biennium. Thus, under current law, a projected $1.16 billion of the $1.76 billion school funding shift will have to be repaid in FY 2012-13, thereby further artificially inflating state expenditures.

Based on information in the official state general fund summary, real per capita state general fund spending is projected to decline by 0.8 percent from FY 2002-03 to FY 2012-13; after adjusting for the state takeover of general education funding, the decline is 3.9 percent. After further adjusting FY 2012-13 spending for inflation and the artificial spending increase resulting from the partial buy-back of the FY 2010-11 K-12 funding shift (not shown in the graph), real per capita state general fund spending is projected to decline by 4.1 percent from FY 2002-03 to FY 2012-13 even after restoration of GAMC funding.

The analysis of state general fund spending over time is a complicated exercise, made even more perplexing through funding shifts and the willful neglect of the inevitable impact of inflation. However, the 4.1 percent figure is currently the most meaningful apples-to-apples measure of the decline in real per capita state general fund spending from the beginning of Pawlenty’s tenure as governor through FY 2012-13. With a projected expenditure reduction of just over four percent, there is no way that the projected $6.4 billion FY 2012-13 deficit can be attributed to spending growth.

Rather, the projected $6.4 billion FY 2012-13 deficit is the result of a sharp decline in real state revenue and to the governor’s willingness to shift the state’s budget problem into the next biennium for future state policymakers and future taxpayers to deal with. Given that the governor brushed aside legislative proposals in favor of unilateral executive actions, he is now entirely responsible for the outcome; welcome to the era of the Pawlenty budget deficit.

When policymakers address the Pawlenty deficit either during a 2009 special session or the 2010 regular session, all options-including revenue increases and additional spending cuts-should be on the table. Most importantly, however, any solution to the deficit must begin with an honest assessment of its cause.

*While Minnesota Management & Budget does not include the GAMC cost among “total expenditures” for the FY 2012-13 biennium, it does list the projected GAMC cost in a footnote within the official general fund summary document. Based on this footnote, the projected cost of GAMC for the FY 2012-13 biennium is $889 million.