Federal aid funds state aid for disaster victims

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The Minnesota legislature met in Special Session on Monday and approved an $80 million package to individuals and communities affected by two separate disasters: those in the 13-county area hit last summer by the “Wadena tornadoes,” and those in the 21 southern Minnesota counties overrun by extreme flooding in September.


Some of the funding appropriated in this bill pays for a state and local match required to receive aid from the Federal Emergency Management Agency (FEMA).


In an odd twist, the state essentially is paying for its federal match with federal dollars. The only reason the state had resources available to respond to this unanticipated emergency is because Congress approved additional funding for health care and education to the states this summer. The influx of federal dollars for health care freed up state dollars that otherwise would have been spent on those services, essentially creating a pool of resources that was available to use for this emergency package. This highlights the importance of federal aid to states during these tough economic times – but also demonstrates how the state’s lack of adequate reserves not only is contributing to cash flow problems, but also makes it difficult to respond to unanticipated needs.


The aid package had universal support, passing the House 131-0 and the Senate 66-0. But it was not without some controversy. The bill became a metaphor for the upcoming FY 2012-13 session. Many Minnesotans have been deeply affected by the economic downturn, losing jobs, homes or health care through no fault of their own. When the legislature reconvenes in January, will it still have that cooperative “This is what we do, we look out for Minnesotans” spirit?


Recent economic news only amplify those concerns. Minnesota Management and Budget recently released the October 2010 Economic Update, which painted a good-news, bad-news picture. The good news is that in FY 2011′s first quarter, the state collected $55 million more revenue than projected.


The bad news is that Global Insight, the state’s national economic consultant, has lowered its expectation for national economic growth. Its October forecast projects 2011 Gross Domestic Product will grow at 2.2 percent, compared to its February forecast projection of 2.8 percent GDP growth. Slower than expected economic growth is likely to lead to lower state revenue collections.


The result? Despite the $55 million reported in the latest update, the state’s revenue collections for FY 2010-11 are still $22 million below forecast. All things being equal, lower revenue collections could open up a new deficit in the FY 2010-11 biennium and increase the size of the $5.8 billion deficit in FY 2012-13.