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Federal Money Won't Solve Long-Term State Budget Woes

February 11, 2009 By David Greenwood-Sanchez, Policy Research Associate

President Obama's American Recovery and Reinvestment Plan is welcome news for Minnesota. A recent study by the National Conference of State Legislatures has estimated that this plan could bring $3.3 billion to Minnesota, including approximately $1 billion for fiscal stabilization (ie. budget deficit financing).

This would come as something of a godsend for the state, which faces a $5.5 billion -- and likely greater -- deficit over the next two years. However, while Minnesota should most certainly welcome federal aid, we should remain ever aware that this is only short-term relief for a budgetary problem that extends much deeper.

In fact, this problem has been going on for quite a while. Since 2003, Minnesota has mended its budgetary imbalances using a variety of myopic accounting tricks and one-time financing solutions that have failed to address the fundamental concerns of our state. Governor Pawlenty unveiled his latest set of tricks in his Jan. 27th budget address.

Unfortunately, it seems that our days of short-term gain are now becoming our long-term pain. This time around, there are no tobacco lawsuit reserves left to bolster our revenue; now we have to borrow against future earnings. There is no more inflation to remove from our accounting procedures; this budget deficit already fails to include inflation in expenditure estimates. There is no money left to remove from local governments either; since the most recent "unallotment," our city services have been stripped bare.

The danger of fiscal stabilization money is that it may inadvertently support Minnesota's failing economic policies at a time when they most desperately need to change. However, the intention of the money is much different. As  the President said in his inauguration speech, "we'll help struggling states avoid harmful budget cuts, as long as they take responsibility and use the money to maintain essential services like police, fire, education, and health care."

However, in the Governor's budget proposal, each of these essential services will confront serious hardships. Police and fire departments will face program cuts and/or layoffs stemming from a proposed 25% cut in local government aid. Education will take a hit as the state postpones over $1.2 billion in school funding to the next biennium. Health care will be struck the hardest of all, as upwards of 113,000 adults will be given reduced access to health care.

The Obama administration has gotten it right; states need to exercise fiscal discipline, but they cannot, and should not fall back onto cutting essential services. The federal government is providing fiscal stabilization money precisely to this end.

Here in Minnesota, we need to ensure that this plan is carried through. The massive $5.5 billion deficit has created something of a politically opportune moment for conservative policymakers to slash crucial government services, ostensibly as a necessary means of balancing the state budget. The fiscal stabilization, if used according to the Governor's current proposal, will act as a one-time subsidy to continue the state's failing policies. Moreover, it will continue the state's practice of short-sighted budgeting, without ever combating long-term structural problems. Or, if used according to Obama's proposal, the money will provide desperately needed services that promote a high quality of life, while helping create the foundations for sustainable economic growth.

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