Paul Thissen: Innovation in Action

Minnesota state government’s financial volatility has been referred to as a roller coaster. There are rising surpluses then falling deficits then flat periods then rising surpluses and steep deficits. Right now, Minnesota’s economy and financial system have surpassed the good times and are headed down very rapidly.  What can we do to control the roller coaster?

In 2007, the legislature created a bi-partisan Budget Trends Study Commission to start thinking about just that issue.  Meeting over the last year, the commission has reached some tentative conclusions.

First, demographic changes must guide our decisions going forward.  The commission found that Minnesota’s population will grow slower than the nation.  The largest growth in cohorts will be among 55-74 year olds.  By 2020, there will be more people over 65 than there are school age children.  Quite soon, the number of children and seniors will be larger than the number of working Minnesotans, a situation that will last at least until 2030.  Finally, Minnesotans grow increasingly more diverse.

The commission is also considering budget trends.  There is no question that Minnesota’s tax base has over the years grown more volatile — up to 30% more volatile in fact — meaning that our tax revenues are subject to large swings based on the state of the economy at any given moment.  (The income tax is most volatile tax and the property tax is the most stable.)   Further, we cannot expect to simply grow out of volatility.  Over the next 25 years, Minnesota revenues are projected to grow more slowly than in the past at 3.9% per year.  At the same time,  state expenditures are projected to grow approximately 5% annually.  The two biggest budget items will lead the way.  K-12  spending is expected to grow at 5% per year and public health care costs will grow at 8.5% per year.  Over time, health care costs will crowd out all other items.

In early 2009, the commission will offer its recommendations for putting Minnesota on a sounder financial footing.  Some ideas being considered include requiring a far larger budget reserve to protect against bad economic winds; a revised forecasting method for good times to better anticipate coming recessions; better long-range planning including demographic updates every two years and financial projections of at least four years; and the creation of an ongoing commission to make recommendations on reducing public health care costs.

Stay tuned.  These recommendations come during difficult economic times.  Minnesota’s unemployment is rising, its economy is cooling, and in July the state economist forecast a $2 billion deficit for the 2010-11 budget that the Governor and Legislature must balance by mid 2009.  Because the international financial crisis is forcing the U.S. economy into recession, the budget deficit will likely climb to nearly $4 billion.  This coming legislative session will rival the 2003 session when the budget deficit was $4.5 billion.

What is a reasonable solution to the projected budget deficit?  Tax increases will need to be considered.  Spending cuts will also be required.   But all decisions should be made in the context of the long-term trends our state faces.

Resources

• Governor’s 21st Century Tax Reform Commission
• Minnesota Budget Project