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Minnesota's Schools Further Imperiled by Looming Deficit

September 08, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

As noted in Friday's report, state investment in Minnesota school districts has fallen dramatically over the last six years and is expected to continue to decline through fiscal year (FY) 2011. A decline in real per pupil aid to schools is also anticipated in the FY 2012-13 biennium.  To make matters worse, the decline in state aid to schools in FY 2012 and 2013 could be greater than anticipated due to a looming state budget deficit.

The graph below shows total per pupil state aid to Minnesota school districts based on projections for FY 2009, 2010, and 2011 and planning estimates for FY 2012 and 2013.  The amounts in this graph are based on information from the most recent "Price of Government" report from Minnesota Management & Budget expressed in constant FY 2009 dollars per pupil.*  The red portion of the FY 2010 bar represents federal recovery dollars that are being used to replace a one-time $500 million cut in state general education aid in FY 2010.

There is a modest decline in state aid from FY 2009 to FY 2010 even after factoring in federal recovery dollars.  The slow erosion of state aid continues in FY 2011, 2012, and 2013.  By FY 2013, state aid to school districts is projected to be 2.1 percent less than it was in FY 2011 (and 16.4 percent less than it was in FY 2003).

Unfortunately, in the absence of major change in policy at the State Capitol, the two percent decline from FY 2011 to FY 2013 represents a "best case scenario" for Minnesota public schools.  The Price of Government projections upon which these aid levels are based do not reflect state aid cuts that may occur as a result of the massive $6.4 billion dollar budget deficit projected for the FY 2012-13 biennium.  The deficit will create additional pressure to reduce state aid below the levels listed in the Price of Government report.

The $6.4 billion structural budget deficit projected for FY 2012-13 is approximately equal to the deficit projected for FY 2010-11 based on the February 2009 forecast.  However, in balancing the FY 2010-11 deficit, the state had resources that may not be available in FY 2012-13.  For starters, there is no indication from Washington that more federal recovery dollars will be available to help shore up state finances.  For example, the federal recovery dollars used to backfill the $500 million cut in state general education aid in FY 2010 will likely not be available in the next biennium.

As noted yesterday, real per pupil state aid to Minnesota school districts declined sharply in FY 2004-05 in response to a large state budget deficit.  Without a new infusion of federal recovery dollars, will the same thing happen in FY 2012-13?  In the absence of a change in strategy at the State Capitol, this is a distinct possibility.

A prudent use of federal recovery dollars would have been to provide temporary relief while balanced long-term solutions to the state's budget crisis were pursued.  To address their budget crises, governors in most states proposed not only spending cuts, but tax revenue increases.  This was not the case in Minnesota, where Governor Pawlenty proposed more tax cuts that would have only swelled the size of the state's deficit.  (Fortunately, the legislature was able to block these tax breaks, which largely benefited corporations.)

Pawlenty used federal recovery dollars to provide temporary relief, but did not lay out a strategy for providing long-term structural balance to the state budget.  Furthermore, the governor refused to compromise with the legislature, thereby ensuring that the state would have a huge deficit in the FY 2010-11 biennium, thereby allowing him to use his unallotment authority to balance the budget without legislative input.

And balance the budget he did, but only for the FY 2010-11 biennium.  Because of his ideological blinders, the governor could not consider serious revenue increases and thereby was forced to rely exclusively on one-time federal recovery dollars combined with spending cuts and a plethora of shifts.  These enabled Pawlenty to balance the FY 2010-11 budget, but left Minnesota with a huge deficit for the upcoming FY 2012-13 biennium.  Without revenue increases, the governor was unable to obtain a long-term structural balance in the state budget.

In his June unallotment announcement, Pawlenty expressed the vague hope that an economic recovery would somehow rescue Minnesota from the looming deficit.  However, the state's budget projections already assume an economic recovery based on estimates crafted by state finance experts.  Unless the economic recovery is dramatically stronger than that anticipated by the experts, the huge projected budget deficit for the FY 2012-13 biennium will become a reality.

With the state facing a huge budget crisis, school districts can have no assurance that they will  be spared from a further erosion of state aid in FY 2012-13 even greater than that indicated in the above graph.  This will in turn contribute to more property tax increases and a further erosion of funding for public education.

However, all is not lost.  New state leadership can pursue a balanced and long-term solution to the state's structural budget problems.  Such an approach should include both reform of state spending and increases in state revenue.  This is the best way to ensure that funding for education and other critical public investments can be maintained without further property tax increases.


*Inflation adjustments in this article 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.  All dollar amounts are expressed in constant FY 2009 dollars.



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