In the wee hours of May 18, Gov. Tim Pawlenty and the Legislature reached an agreement to close the state’s current $935 million budget deficit. However, leaders “solved” the budget problem not by eliminating the projected long-term gap between state revenues and expenditures, but by draining the state’s general fund reserves well below the level recommended by fiscal experts.
Opinion: State’s budget problems: Postponed but not solved
The decision was an unfortunate one, precipitated by the governor’s refusal to consider addressing the state’s larger revenue problem. Given the options, using budget reserves was the only feasible way to avoid draconian cuts to education and health care.
More than half of the $935 million shortfall for the 2008-09 biennium was erased by taking $500 million from the state’s budget reserve, thereby reducing it from $653 million to $153 million. Including a cash flow account of $350 million, the state’s reserves now total $503 million.
The state’s Council of Economic Advisors – a nonpartisan panel of economists that counsels state leaders – recommends total reserves equal to 5 percent of the state’s two-year general fund to deal with budget uncertainties and prevent further deterioration in the state’s credit rating. For the current biennium, 5 percent of the state general fund would come to $1.7 billion.
Under the compromise reached between the governor and Legislature, the state’s general fund reserves will be drawn down to less than one-third of the level recommended by the Council of Economic Advisors.
By drawing down reserves – as opposed to increasing revenues and/or reducing expenditures – the budget deal did little to address the structural deficit projected for the next biennium. The projected structural deficit for 2010-11 will remain at approximately $2 billion after adjusting for inflation, little changed from the February forecast projection.
The bottom line is that the state will face a $2 billion structural deficit with reserves that have been largely depleted. To make matters worse, there is considerable downside risk in the February forecast due to uncertainty in the housing market and escalating energy prices. State leaders have chosen to dramatically lower the budget reserve just as Minnesota is moving into a period of large deficits and extreme economic uncertainty.
The 2009 legislative session was already shaping up to be an acrimonious battle between a governor who has presided over an 8-percent decline in real per capita state general fund spending since he came to office and a Legislature determined to end this policy of disinvestment.
But by cutting the budget reserve during a period of economic turmoil, the 2008 Legislature has made the job of the 2009 Legislature all the more difficult.
Minnesota has a long-term revenue problem. It’s time for state policymakers to seriously address this issue through a fair and progressive tax system that moves Minnesota forward.