Baby boomers are expected to suck the state dry if current budget problems prevail, because more money will be spent for their health care — and living on fixed incomes, they will no longer provide the tax revenues they once did.
The State Budget Trends Study Commission presented this and other findings to a joint meeting of the House Taxes and Finance committees Jan. 13.
Health care is growing at a rate of 8.5 percent per year. State revenues are expected to grow at an annual rate of 3.9 percent over the next 25 years.
“Nothing in this report is going to solve the current problem,” said Jay Kiedrowski, commission co-chair. “We’re going to be facing this three or four years from now unless we plant corn seeds today.”
From 2005 to 2015, the state’s fastest growing population is those ages 55 to 69. Next to health care, education is the second highest cost to the state moving forward.
“If we had a balanced budget this biennium, we still have expenditures exceeding revenue, so we would have a problem in the next biennium as well,” said former Human Services Commissioner Kevin Goodno, also a commission co-chair.
But nothing will stop the fact that people are living longer and will be more of a burden on the state’s health care system, he said. Starting at age 65, all residents are eligible for Medicare whether they are working or not, said Rep. Thomas Huntley (DFL-Duluth).
“What do you do about health care costs?” Goodno asked. “One of the biggest challenges is restrictions from the federal government. We know there are better solutions than this. We’d welcome any solutions you’d like to recommend.”
The 15-member commission was established in the 2007 omnibus state government finance law and held 14 meetings beginning in the fall of 2007. “When I introduced this bill (to form the commission), there was no deficit,” said Rep. Ann Lenczewski (DFL-Bloomington), chairwoman of the House Taxes Committee. “They came together to give us information for the long-term.”
Financial recommendations were reviewed from various studies completed over a 30-year period, and the commission heard presentations from many state officials with backgrounds in demography, education, health care, finance and economics.
Findings of the commission include:
• Minnesota has become more diverse in recent years and this will continue as economic growth depends on drawing new workers to the state;
• public spending priorities will need to shift as the state’s economically dependent population grows larger and relies more heavily on fewer workers;
• Minnesota has a long-term structural budget problem, with long-term expenditure growth likely to outpace revenue growth;
• Minnesota’s statutory budget reserve ceiling has not grown to an appropriate level to adequately manage the underlying risks to the state’s tax system over time; and
• Minnesota needs a cash flow reserve account of sufficient size so the state can avoid short-term external borrowing during a biennium.
House Finance Committee Chairman Rep. Lyndon Carlson, Sr. (DFL-Crystal) said there’s been a debate on how to deal with the state’s reserve fund over the years. “What should be counted as a reserve from our perspective?”
Goodno said the commission didn’t get into that level of detail, but “you want to make sure you have enough of a reserve in place to make necessary changes. If you have a budget reserve, you should be able to use it in times like these, but you don’t have one.”
Kiedrowski, a former state finance commissioner, said therein lays the problem. “The beauty of this (report) is it’s all in the fundamentals. This is absolutely the right time to put these recommendations to use because there is no pressure. The public doesn’t want to implement them because when times are good they want you to spend and reduce taxes.” But, he said, the good times never go on forever.
He added that commission members found the report very sobering. “There’s a harsh reality facing us. It would be nice to have recommendations to grow the economy faster in Minnesota. We have a structural imbalance.”
Some final recommendations include:
• releasing a demographic forecast at the start of each biennium;
• creating a permanent long-range planning function in state government;
• if the budget reserve is depleted in the current biennium, it should be replenished within two biennia; and
• the governor and Legislature should create a structurally balanced budget for the current and following biennia.
“The reality is that these recommendations don’t mean anything unless you follow through,” Goodno said. “You have the ability to change those statutes. It’s up to you to decide if there’s a will to do that.”