The budget cutting ax is once again being sharpened at the State Capitol. As the ax falls – as it most certainly will – progressives must work to ensure that budget balancing menu includes not just careful belt-tightening, but revenue increases.
According to a recently released Finance Department memo, shown here Wednesday, the Governor’s Office is asking state agencies to cut general fund and “other fund” base budgets by five percent for the upcoming FY 2010-11 biennium. While the memo does not preclude some increases in particular areas, apparently such increases must be accompanied by deeper cuts in other areas to maintain a total five percent net cut.
Based on projections released at the end of the 2008 legislative session, the revenue shortfall for the FY 2010-11 biennium will be $2.1 billion. (This is a realistic estimate that factors in inflation; the “official” revenue shortfall projection of just under $1 billion understates the magnitude of the problem by counting the impact of inflation on state revenue but ignoring the impact on spending.) This projection does not take into account the recent turmoil in the credit and stock markets that is expected to cause the state’s financial situation to further deteriorate.
The fiscal problems were compounded during the 2008 session when the Governor and Legislature reduced the state’s budget reserve from $653 million to $153 million in order to balance the budget within the current biennium (FY 2008-09). This has left the state with a much smaller cushion with which to deal with the revenue shortfall in the next biennium.
The budget deficit’s full magnitude will not be known until the November forecast. No doubt, policymakers are likely to put spending cuts on the table. However, they must seek budget solutions that are more balanced and fair than in the past.
Minnesota 2020 would like to make the four recommendations to state leaders regarding the looming budget deficit.
#1: Acknowledge the real state spending cuts that have already occurred
“No new taxes” proponents claim state government has grown from year to year. In truth, during Governor Pawlenty’s tenure, state general fund spending growth has been insufficient to keep pace with a rising population and inflation. In other words, real per capita government revenue has actually fallen.
The graph above shows state general fund spending in constant FY 2008-09 dollars per capita in each biennia from FY 2002-03, the last biennium under a budget set during the Ventura administration, to FY 2008-09. From FY 2002-03 to FY 2008-09, state general fund spending has declined by 7.1 percent or $503 per capita in constant FY 2008-09 dollars.
Even this figure understates the decline in general fund spending because it does not adjust for the state takeover of general education costs half way through the FY 2002-03 biennium. If the takeover costs had been in place for both years of the FY 2002-03 biennium, the decline in state general fund spending from FY 2002-03 to FY 2008-09 would have been approximately 10.1 percent.
Real per capita state general fund spending has fallen significantly. Before state policymakers opt to slash another five percent from state general fund spending, they should remember the past, painful cuts.
#2: Acknowledge the real decline in state revenue that has already occurred
The decline in real per capita state general fund spending has corresponded with a drop in real per capita general fund revenue. In constant FY 2008-09 dollars, general fund current resources have fallen from $6,717 per capita in FY 2002-03 to a projected $6,204 in FY 2008-09-a decline of $513 or 7.6 percent.
The “current resources” referred to in the graph above includes all revenue generated within a biennium excluding the balance carried forward from the previous biennium. General fund total resources-which includes the balance carried forward-has declined by 7.1 percent from FY 2002-03 to FY 2008-09.
The most recent revenue projections for the FY 2010-11 biennium were made in May and do not include the effects of the current economic crisis. With most experts predicting a prolonged and severe recession, revenue projections for the next biennium will almost certainly be less than previously anticipated. Since there is likely to be little revenue left over in the current biennium to carry forward to the next biennium, the decline in general fund total resources from FY 2008-09 to FY 2010-11 could be particularly severe.
Clearly, the state’s anticipated revenue shortfall is not the result of “runaway spending.” Rather, the shortfall is due to the drop in real per capita general fund revenues. To insist that we solve the state’s budget problems by cutting spending while ruling out revenue increases flies in the face of common sense.
#3: Do not heap a disproportionate share of the new budget burden on local governments
The last time Minnesota faced a similar revenue shortfall was back in 2003, when state policymakers were setting the budget for the FY 2004-05 biennium. At that time, a disproportionate chunk of the state’s budget problem was shifted to local governments through state aid cuts.
Real per capita state government revenue declined by 1.0 percent from FY 2003 to FY 2005. However, this decline paled in comparison to the cuts absorbed over the same period by school districts (3.4 percent), cities (5.8 percent), and counties (8.2 percent).
In short, a large portion of the FY 2004-05 revenue shortfall was resolved through massive cuts in aid to local governments. By reducing the revenue that it shares with local governments, the State of Minnesota was able to avoid large state tax increases. Local governments were not so lucky; the large aid cuts forced local governments to increase property taxes. However, these property tax increases didn’t cover the state aid cuts, so total real per capita and per pupil revenue fell.
To add insult to injury, Governor Pawlenty chided local governments for a lack of frugality, saying that “they have to learn to control their spending.” In fact, local governments have been consistently more frugal than state government during the entire period that Tim Pawlenty has been governor of Minnesota.
State policymakers’ approach to the state’s budget problems in 2003 undermined the principal of accountability in government. The most frugal levels of government-cities, counties, and school districts-were compelled to increase property taxes to make up for a portion of lost state aid. Meanwhile, state leaders were able to posture as champions of fiscal restraint since they “held the line on taxes.”
State aid appropriations should not be viewed as a slush fund that state lawmakers can drain to solve the state’s fiscal problems. For the sake of accountability and transparency in government, this dubious practice must be avoided when dealing with the current budget crisis.
#4: Do not ignore the ramifications of cutting public investment
As noted above, real per capita state general fund revenue and spending has declined substantially since 2003. The real per capita and per pupil budgets of counties, cities, and school districts have also shrunk. As demonstrated in a recent Minnesota 2020 report, total state and local government revenues and expenditures in Minnesota have declined significantly relative to other states from 2002 to 2006. Minnesota is now a “middle of the road” state.
The same report also showed how Minnesota’s declining public investment has corresponded with a drop in Minnesota’s performance relative to other states on key economic and quality-of-life indicators.
Minnesota’s slippage relative to other states has been most dramatic in employment. Historically, Minnesota’s unemployment rate had been well below the national average. However, this is no longer the case. Minnesota’s monthly unemployment rate is now slightly above the national average. In addition, in each of the last three years (2005, 2006, and 2007), Minnesota has ranked among the bottom ten states in the nation in terms of the rate of unemployment growth. Minnesota has also slipped relative to the rest of the nation in terms of pupil-teacher ratios and education spending.
Proponents of “no new taxes” argued that shrinking the public sector would lead to an economic boom. Unfortunately for Minnesota, the opposite has occurred. Minnesotans should not be tricked into thinking that public disinvestment in education, public safety, transportation, and other public services and amenities can go on indefinitely without negative consequences.
Hopefully, the recent Finance Department memo is not an indication that the Pawlenty administration is only willing to entertain spending reductions to deal with the state’s revenue shortfall. The central theme of the recommendations presented above is that all options-including both spending cuts and revenue increases-need to be on the table when dealing with a shortfall as large as the one that we are likely to encounter.