As the legislature enters the final week of the 2010 session, the state general fund budget deficit will be the hot topic at the State Capitol, especially in light of last week’s Supreme Court unallotment ruling. Anti-tax lawmakers will call for reining in growth in state spending as the sole solution to Minnesota’s budget quagmire. In fact, real per capita state general fund spending has fallen significantly since the fiscal year (FY) 2002-03 biennium.
There is a lot of confusion and conflicting numbers tossed around regarding changes in the level of state general fund spending. However, at a minimum, most non-partisan experts would agree that spending growth should be examined on a per capita basis in order to account for growth in the state’s population. In addition, spending should be examined in real (i.e., inflation-adjusted) dollars to take into account the declining purchasing power of the dollar over time. Per the recommendations of the state’s Council of Economic Advisors, the following analysis will measure inflation using the implicit price deflator for state and local government purchases.
Part One in a Two-Part Series
The graph below shows per capita state general fund spending in constant FY 2010-11 dollars based on information from the 2010 February forecast, adjusted for the budget reductions already enacted during the 2010 legislative session (chapter 215).
Real per capita state general fund spending has fallen slightly from $7,137 during the FY 2002-03 biennium to a projected $7,108 during the FY 2012-13, a decline of 0.4 percent. However, there is a peculiar dip in spending in FY 2010-11 and a subsequent spike in FY 2012-13 that requires further examination.
From FY 2008-09 to FY 2010-11, real per capita state general fund spending is projected to fall by 11.7 percent. However, this decline is driven not by an actual decline in state spending, but by two accounting quirks that create the illusion of decline:
- Federal recovery dollars received during the FY 2010-11 are booked not as additional general fund revenue, but as a reduction in general fund spending. Thus, while the spending is still occurring, it is not appearing in the state general fund, thereby creating the appearance of a spending decline.
- In order to address a projected deficit within the FY 2010-11 biennium, Governor Pawlenty shifted approximately $1.7 billion in school funding from the FY 2010-11 biennium into the subsequent FY 2012-13 biennium. These shifts represent a delay-as opposed to an actual reduction-in general fund spending.
From FY 2010-11 to FY 2012-13, real per capita state general fund spending is projected to grow by 23.2 percent. As with the decline from FY 2008-09 to FY 2010-11, this growth is primarily artificial. Just as one-time federal dollars caused the illusion of a spending decline in FY 2010-11, the removal of these dollars in FY 2012-13 creates the illusion of spending growth relative to the artificially low FY 2010-11 base. At the same time, the statutory requirement to repay the school the FY 2010-11 school funding shift in the FY 2012-13 biennium causes the appearance of spending growth, when it is in fact the undoing of a shift.
Information from Minnesota Management & Budget (MMB) shows general fund spending in FY 2008-09, FY 2010-11 and FY 2012-13 after adjusting for the impact of one-time federal recovery dollars and K-12 funding shifts (see last page of this document). These adjustments effectively remove the artificial swings in state general fund spending resulting from accounting quirks to reveal the actual change in state general fund spending over time prior to adjusting for inflation and population growth.
The MMB information cited above does not cover the period prior to FY 2008-09. Artificial fluctuation in state general fund spending resulting from school funding shifts also occurred during the FY 2002-03, 2004-05 and 2006-07 biennia. In addition, the state takeover of general education and transit funding in FY 2003 caused an increase in state general fund spending that was not due to growth in government spending, but to a shift of funding responsibilities away from local property taxes and into the state general fund.
The graph below shows per capita general fund spending similar to that in the preceding graph, except that adjustments have been made to reflect the impact of education funding shifts, federal recovery dollars, and state takeovers so as to provide a more “apples-to-apples” comparison of real per capita state general fund spending over time.*
After adjusting for state takeovers and other accounting quirks, real per capita state general fund spending is projected to decline by 7.3 percent from FY 2002-03. Based on this information, it is apparent that complaints of out of control growth in state general fund spending are more hot air than substance.
Anti-tax politicians will certainly take credit for cuts in state general fund spending. However, it should be noted that most of the general fund spending reductions have not come through cuts in state government, but through reductions in the real per capita and per pupil revenue that the state shares with local governments. Thus, while state politicians bask in the glory of having shrunk government, it is local governments that have had to make a disproportionate share of the actual budget cuts.
Anti-tax politicians can rightfully take credit for Minnesota’s deteriorating economic performance. During the “no-new-tax” era, Minnesota has cut state and local own-source revenue more than any other state in the nation, to the point where total Minnesota public revenues and expenditures as a percent of personal income are below the national average. During the same period, Minnesota’s employment growth has lagged behind the national average, real median household income has fallen, road conditions have deteriorated, and pupil-teacher ratios in our public schools have increased.
With the massive deficit that the state is confronting, cuts in public spending will be necessary. However, to insist that the entire deficit must be dealt with through spending cuts without the benefit of revenue increases is nonsensical, particularly in light of the dismal track record of anti-tax, anti-public investment policies over the last eight years.
While real per capita general fund spending has fallen over this period, all of the decline occurred from FY 2002-03 to FY 2006-07. From FY 2006-07 to FY 2012-13, real per capita state general fund spending is projected to increase by 4.9 percent. While 4.9 percent growth spread over three biennia is rather modest, it is nonetheless growth. The primary cause of this growth is rising health and human services expenditures. Tomorrow’s article, part-two in the series, will explore this growth in more detail.
*Thanks to non-partisan staff of the House Fiscal Analysis Office and House Research Department for their assistance in preparation of this information.