February forecast: no real improvement


Tuesday’s release of the February forecast did not appreciably change the state’s budget situation. We are still confronting a very large deficit (about $1 billion) within the current biennium and a humongous deficit (approximately $7.8 billion) in the next.

The good news is that the size of the projected deficit in the current biennium has shrunk from $1.2 billion to $1.0 billion. This good news is tempered by the fact that 40 percent of the improvement is the result of a previously unanticipated increase in federal reimbursements for state Medicaid spending. While these dollars are booked as a reduction in state spending, they actually represent a temporary infusion of one-time federal dollars as opposed to a permanent improvement in the state’s fiscal situation.

The rest of the $200 million reduction in the deficit in the current biennium is the result of small changes in projected state revenue and spending. In addition to the spending reduction due to the increase in federal reimbursements, other projected state spending fell by $101 million, which is just 0.3 percent of total state spending projected for the current biennium. Projected revenues increased by an even smaller amount-$25 million. A slight decline in projected individual income tax and “all other” tax collections were offset by a somewhat larger increase in projected corporate income and sales tax collections to produce a tiny net revenue improvement.

While the $200 million improvement in the state’s budget situation during the current biennium is not huge in comparison to total state general fund spending (projected to be $31.1 billion), it could be helpful in mitigating cuts. For example, $200 million would be sufficient to reduce the Governor’s proposed FY 2011 cuts to county and city aids (which would be paid in calendar year 2010) by nearly 47 percent.

The bad news in the forecast is that the official state budget deficit projected for the next biennium (FY 2012-13) has swelled from $5.4 billion to $5.8 billion. The growth in the projected deficit is the result of a $311 million decline in projected revenue and a $51 million increase in projected spending relative to the previous November forecast.

Furthermore, this $5.8 billion figure understates the true size of the deficit by ignoring the impact of inflation on most state spending and by failing to include the cost of General Assistance Medical Care (GAMC). While the Governor has vetoed and unallotted funding for GAMC in the current biennium, the program remains in law and should be considered when calculating the deficit for the next biennium.  After properly adjusting for inflation and the cost of GAMC, the state deficit grows to $7.8 billion.

All in all, the February forecast reveals no significant change in the state’s budget outlook relative to the previous November forecast.

If anything, the situation has gotten slightly worse insofar as the projected long-term imbalance between the state revenues and expenditures has grown. State policymakers have been infinitely inventive in concocting shifts and gimmicks to resolve the state’s budget problem in the current biennium. They have been considerably less adroit in addressing the long-term problem.

The sad fact is that there is no shift or accounting maneuver that will solve the state’s long-term fiscal conundrum. A lasting solution to the state’s fiscal mess will require difficult decisions regarding spending cuts, spending reforms, and revenue increases. In tackling the state’s $7.8 billion deficit, all of these options need to be on the table.

Official February forecast documents from Minnesota Management & Budget can be found on-line. For the February forecast summary document, click here. For the full February forecast document, including summary tables for the FY 2008-09, 2010-11, and 2012-13 biennia, click here. For presentation materials used during today’s forecast release press conference, click here. For complete state general fund line item detail for FY 2010-11 and FY 2012-13 based on the February forecast, click here.