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Minnesota's Revenue & Spending Problems

December 31, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

In the past, Governor Tim Pawlenty has argued "Minnesota has a spending problem, not a revenue problem."  As repeatedly demonstrated on this website, his statement is incorrect.  Real per capita state general fund revenue and local government revenue have dropped significantly since 2002.  Clearly, Minnesota has a revenue problem.

In the past, I have argued the reverse of the Governor's assertion--that is to say, "Minnesota does not have a spending problem, it has a revenue problem."  Upon reflection, I now realize this statement is not entirely complete.  While Minnesota does indeed have a revenue problem, it also has a spending problem.  However, the cause of the spending problem is not due to profligacy, but demographics and rising health care costs.

Based on general fund information from Minnesota Management and Budget, projected real (i.e., inflation-adjusted) per capita state general fund spending for FY 2012-13 is approximately the same as it was a decade earlier at the dawn of the "no new tax" era. In constant FY 2010-11 dollars,* per capita general fund spending will go from $7,160 in FY 2002-03 to $7,176** in FY 2012-13 based on November forecast projections, , a growth of just 0.2 percent. (Note: the per capita amounts here are based on biennial spending; annual per capita spending is approximately half these amounts).

These figures do not take the state takeover of general education costs in FY 2003
into account. The general fund growth resulting from this takeover did not represent an expansion of government, but rather a shift of existing spending away from property taxes and into the state general fund.  If full state funding of general education had been in place for both years of the FY 2002-03 biennium, general fund spending in that biennium would have been approximately $7,393 per capita and the decline in real per capita spending from FY 2002-03 to FY 2012-13 would be a projected 2.9 percent.


On the basis of the projected real per capita decline in state general fund spending from FY 2002-03 to FY 2012-13, I previously concluded that Minnesota does not have a "spending problem."  However, this conclusion ignores the shorter term trend from FY 2008-09 to FY 2012-13.

State general fund spending is artificially low in FY 2010-11 because of education funding shifts and federal recovery dollars that show up in the form of reduced state general fund spending in that biennium.  For a better "apples to apples" comparison, it is useful to compare the spending trend from FY 2008-09 to the FY 2012-13 planning estimates, ignoring the FY 2010-11 data point.  From FY 2008-09 to the FY 2012-13, real per capita state general fund spending will increase by 9.5 percent.

A portion of this growth is the result of the buy-back of an education funding shift from FY 2010-11; the growth from the buy-back of the shift does not represent an actual increase in spending, but rather the undoing of an accounting maneuver from the previous biennium.  However, even if we ignore the buy-back of the funding shift, real per capita state general fund spending will increase by 6.2 percent from FY 2008-09 to the FY 2012-13 planning estimate.

This 6.2 percent growth in spending from FY 2008-09 to FY 2012-13 is almost entirely the result of growth in health and human service (HHS) spending.  In fact, if we ignore HHS spending and the buy-back of the education funding shift, real per capita general fund spending would decline slightly from FY 2008-09 to the FY 2012-13 planning estimates.  A careful review of the numbers reveals that growth in HHS spending is the primary driver of growth in state general fund spending.

The rapid growth in HHS spending is driven largely by two factors.  First, the aging of the state's population is contributing to a sharp rise in HHS costs as increasing numbers of seniors require medical care, including nursing home care.  This trend is described fully in the January 2009 report of the Budget Trends Study Commission [PDF].  Second, the ongoing increase in health care costs is pushing HHS expenses ever higher.

Based on the projected growth in HHS spending from FY 2008-09 to FY 2012-13, one could reasonably argue that Minnesota has a spending problem.  However, this spending growth is not driven by creation of government programs, but by increasing demands on and the rising cost of existing programs in the HHS area.  While state policymakers are not responsible for these trends, it nonetheless falls to them to do what they can to address the strain that the trends are placing on state government.

To date, no one has found a satisfactory solution to rising HHS costs.  Pawlenty's plan to eliminate funding for General Assistance Medical Care (GAMC) will result in a large number of low-income Minnesotans going without health care coverage and large increases in costs to county governments.  Recently DFL leaders have announced "a 16-month temporary fix" to the elimination of GAMC, although this plan also shifts costs to counties.

Acknowledging the spending problem in no way diminishes the severity of Minnesota's revenue problem.  From FY 2002-03 to FY 2012-13, real per capita state general fund revenue is projected to decline by nearly 13 percent; this revenue decline was underway even before the economic collapse of 2008.  The reality of Minnesota's revenue problem is undeniable.

At the same time, the strains on the state budget resulting from growing HHS costs are also undeniable.  The solution to this problem is neither easy nor apparent.  However, a good starting point would be to acknowledge that Minnesota has both a revenue and a spending problem.

*All inflation adjustments in this analysis are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

**No inflation adjustment is applied to the planning estimate of FY 2012-13 spending because this amount is arguably already expressed in constant FY 2010-11 dollars due to the fact that the official planning estimate ignores the impact of inflation on most spending categories.  However, by not applying any inflation adjustment, the FY 2012-13 per capita spending amount in this article probably overstates real per capita general fund spending in FY 2012-13 because some categories of spending are adjusted for inflation due to statutory requirements.  This confusion results from the inconsistent manner in which inflation is treated in the official state spending forecast; this confusion could be avoided by applying an appropriate estimate of inflation to all components of the state budget.  For more on this subject, click here.

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