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Meeting with Jay Kiedrowski and John Gunyou
8301 Creekside Circle,
Bloomington, MN 55437
co-chair, and John Gunyou, member,
State Budget Trends Study Commission
Johnson, chair; David Broden, Marianne Curry, Bill Frenzel (by phone),
Paul Gilje, Jim Hetland, and Wayne Popham (by phone)
Context of the meeting:
As part of the Civic Caucus on-going work in areas affecting Minnesota and
its governance, today we're looking at the state's fiscal outlook for the
Welcome and introductions--Verne
and Paul welcomed and introduced our guests for today,
Jay Kiedrowski, co-chair, and
John Gunyou, member, State Budget
Trends Study Commission.
Kiedrowski is a Senior
Fellow in the Public and Nonprofit Leadership Center at the University of
MN’s Humphrey Institute of Public Affairs specializing in public finance,
organizational development, and leadership. Kiedrowski retired from
Wells Fargo in 2004 as the EVP of Institutional Investments after a 17
year career. Previously, he was MN Commissioner of Finance, Minneapolis
Budget Director, and a MN Senate researcher. He has served on a dozen or
more nonprofit boards over the last 25 years. He was the Treasurer of the
Guthrie Theater, and is currently the Chair of the Greater Metropolitan
Housing Corporation. Kiedrowski holds BSME and MA degrees from the U of
MN, and an EdD from St. Mary's University of MN.
Gunyou is city manager
of Minnetonka. He previously served as finance director for the City of
Minneapolis; and was Minnesota’s finance commissioner in the Carlson
administration. He was also a partner with the largest economic consulting
firm in the Rocky Mountains, ran Minnesota’s original and largest Internet
company, and was an executive with Minnesota Public Radio. Gunyou has
taught at several universities, and has degrees in finance and economics
from the U.S. Air Force Academy, UCLA and University of Colorado. He has
authored numerous articles and books, and writes political commentary.
Comments and discussion--During
Kiedrowski's and Gunyou's comments and in discussion with the Civic
Caucus, the following points were raised:
1. Major revenue-spending gap imminent for 2009
Legislature--It is possible that the gap between projected
spending under current law and revenues at present rates for the upcoming
2010-11 state general fund will be in the vicinity of $4 billion to $5
billion when official projections are announced by the State Department of
Finance on December 4, Kiedrowski said. General fund spending for the
current biennium is about $35 billion.
said the spending-revenue gap has these elements:
--A $1 billion shortfall that was built in to the
2010-11 biennium when the Governor and Legislature enacted the budget for
--A $1 billion shortfall that would result if
current law were unchanged for the upcoming biennium. This includes
inflationary increases that do not need to be automatically included.
--Another $2 billion to $3 billion shortfall from
the impact of the downturn in the national economy on state revenues and
on state expenditures for counter-cyclical areas such as welfare programs.
took note of an October 2008 update from the Minnesota Department of
Finance that provided bleak economic news for the rest of 2008 and into
2009. See http://www.finance.state.mn.us/ Global Insight, Inc., a
firm that makes economic forecasts used by the state for its budget
forecast, is now predicting a 3.3 percent decline in gross domestic
product, for the fourth quarter of 2008, but that number could rise to 4
percent as conditions have continued to worsen, Kiedrowski said.
As part of
preparation for presenting a budget to the 2009 Legislature, the
Department of Finance has asked state agencies to present budget proposals
that assume a 95 percent spending level from the current biennium, which
could produce savings of about $1.5 billion.
2. Commission seeking more stability in state
budgeting--In light of the fact that Minnesota's budget system
seems to have been on a rollercoaster for several years, leaders in the
Minnesota House (Rep. Ann Lenczewski) and Senate (Sen. Richard Cohen)
led the way in
establishing a bipartisan, statutory State Budget Trends Study Commission
Kiedrowski is co-chair with Kevin Goodno, and Gunyou is also a member.
of the commission probably will be completed before the end of 2008,
Kiedrowski, said. The commission has yet to make its final
recommendations. Therefore, he said, what he and Gunyou have to say today
should be regarded as informal interpretation of the direction that the
commission seems to be going.
the Senate, and the Governor each made five appointments to the
commission. Among its members are four former state commissioners of
finance: Pam Wheelock, Peggy Ingison, Gunyou, and Kiedrowski.
3. Demographic changes--Kiedrowski
outlined major changes in state demographics that will have a significant
impact on state budgets in coming years:
a. Big growth in
ages 55-74--The largest growth
in state population is among the 55-74 age group, he said. Such a
development has major budget implications because people in this age group
tend to use more services, and they are leaving the tax-producing work
b. More elderly than
school children--For the first
time in the state's history, in the year 2020,
will have more persons over 65 than school children.
c. More elderly and
school children than workers--By
2030, the state will have more persons in so-called dependency ages
(persons over 65 and school children) than persons who are employed.
Shortage of educated workers--Even
though the state is seeing a significant increase in immigration, the
state always has had a problem attracting workers, because of our cold
weather and distance from other population centers, Kiedrowski said. The
problem is complicated by the fact that more students are leaving high
school before graduating, which means that our work force is becoming less
5. Volatility in the revenue-expenditure system--The
income tax is most volatile, Gunyou said, followed by the sales tax. The
property tax is least volatile. Fixed tax rates apply to income and
sales, he noted. Thus when people earn or spend less or more, the impact
on tax revenues is immediate.
property tax system is different, he noted. In good times property taxes
don't go up as fast as sales and income taxes, and in bad times, they
don't decrease as fast. Property taxes are paid yearly, and values are
established not more than once a year. Unlike sales and income tax
rates, property tax rates on a given parcel of property are not fixed in
advance. The rates are derived according to how much local government
decides to spend and by total property values in the community. As a
result of a change in property values, taxes on a given home could rise or
fall, depending upon how property values changed on all other properties
in the community.
6. Gasoline taxes also volatile--In
response to questions Kiedrowski and Gunyou noted that Minnesota gasoline
tax revenues aren't growing as originally expected, despite a recent
increase in state rates, because people are buying less gasoline.
7. Fees and charges less volatile--The
portion of the state's budget that comes from various fees and charges,
such as hunting and fishing licenses, is less volatile than the portion of
the budget that comes from sales and income taxes, they said.
8. Broadening the sales tax base?--Broadening
the sales tax base to include food and clothing wouldn't make as much a
dent in volatility as might be expected, Gunyou said. True, the sales tax
would be applied to necessities for which there is less volatility in
purchasing, but much discretion is possible for bargain-seekers, who
simply won't buy as many expensive items during hard times.
9. State revenue-expenditure gap is getting
ever more challenging--Looking
ahead to the next 25 years, Gunyou said that by extrapolating past trends,
and taking into account changing demographics, one can expect that state
revenues, at present tax rates, could grow about 3.9 percent year, with
expenditures growing at 5.4 percent a year, a difference of 1.5 percent.
Compounding that difference over 25 years produces a budget gap of
health expenditures in the state budget have been rising at 8.5 percent a
year and would eat up the entire state budget by 2033, Gunyou said. In
response to a question, Gunyou and Kiedrowski confirmed that the biggest
growth in public health expenditures is occurring in long-term care, with
the bulk of that expense in the last three months of life.
10. Proposals for special legislatively-ordered
expenditures not included--In
discussion it was noted that K-12 leaders are proposing a $4 billion
increase for the next biennium. Such an increase is outside--and would be
in addition to--other projected increases.
11. Weber-Brandl report recalled--Kiedrowski
noted that in November 1995 John Brandl, former dean of the U of M
Humphrey Institute, and Vin Weber, former member of Congress from
Minnesota, made major recommendations to improve the state's budgeting
process. See: http://www.gda.state.mn.us/pdf/agenda.pdf. Major
principles in that report:
--A target should be set for spending and targets
should be established for all major expenditure areas.
--Eligibility for government benefits should be
limited to the most needy.
--Funds should go to citizens, not bureaucracies.
--Expand choices for users and government
--Enable families and communities to provide some
12. Possible recommendations from current
commission--The commission meets next Tuesday and hopes to
complete its report by December 15, Kiedrowski said. He outlined several
a. Re-establish a
permanent long-range planning function in state government--The
State Planning Agency, abolished a few years ago, should be
b. Make demographic data an integral part of
critical importance of accounting for changes in the nature of the state's
population requires that demographic data be updated and accompany
economic and budgetary forecasts every biennium.
inflationary factors in expenditure forecasts, but don't automatically
include them in budget proposals--It
is important for lawmakers to know the dollar impact of including or not
including an inflation factor in forecasts of expenditures for upcoming
bienniums. Such numbers should be included for information purposes
only, not as providing any direction for lawmakers.
overly-optimistic forecasting when times are good--Kiedrowski
said all four former finance commissioners agree that during good times
state forecasts should be related to average growth over a long period of
time, rather than assuming continued high growth in the good times. If
forecasts are "normalized", but above-average revenues are realized, those
dollars can be placed in reserves, to be used when economic downturn
e. Don't balance the
upcoming biennial budget by passing expenses on to the following biennial
budget--In adopting the
biennial budget, the Governor and Legislature should also demonstrate that
the following biennial budget will also be balanced "structurally". That
is, nothing is being postponed that would cause an automatic unbalanced
budget in the following biennium.
f. Set realistic
budgetary reserves--The state
has had a goal for about 25 years of having a 5 percent budgetary
reserve. The number was established more or less arbitrarily. The
reserve amount needs to be determined as guaranteeing that any deficit
will be covered--based on past experience--in 19 out of 20 years
g. Guard against
short-term borrowing for cash flow purposes--The
state always needs enough cash on hand to avoid short-term borrowing,
because such borrowing represents an immediate signal to credit-rating
agencies to reduce the state's credit rating.
h. Address the achievement gap in K-12
a standpoint of assuring a good supply of workers in coming years, the
state must increase high school graduation rates so that more students
will go on to college and then become part of a well-trained work force.
i. Take action on
health care--A permanent
public-private group is needed to continually advise the Governor and
Legislature on necessary steps to control increases in health
Asked what steps are
most urgent for the 2009 Legislature, Kiedrowski said (1) set the size of
the budget reserve, (2) guarantee a structurally-balanced budget for the
following biennium when adopting a budget for the immediately upcoming
biennium, (c) adjust budgetary forecasts during prosperous times to levels
that would prevail in average, less prosperous, times.
13. Leadership on fiscal discipline--It
was noted by a Civic Caucus member that both at the state and federal
levels it is likely that the lawmaking body, whether a Legislature or
Congress, is more likely to increase rather than decrease proposed
budgets, even budgets submitted by the most profligate Governor or
President. Thus strong executive leadership is essential in
14. A "perfect storm" for more constitutional
amendments on taxation?--Kiedrowski said he is opposed to
constitutional amendments that would give exclusive access from a part of
the state's general revenue to some state services. Thus, he opposed the
amendment adopted by the voters in November that gave 3/8 of a penny of
the sales tax to outdoors, clean water and the arts.
Caucus member said it appears that the current fiscal situation, coupled
with the precedent set in November, could produce another constitutional
amendment in 2009. The fiscal gap will be enormous. Advocates for many
services will be seeking significant increases. Resistance to tax
increases will be high. The Legislature and Governor are likely to be at
odds. A pressured Legislature might be tempted to acquiesce in to an
influential group's urging, such as that of education, and submit a
constitutional amendment for dedicated funds, which doesn't require
approval by the Governor. Thus the state general fund would gradually be
eaten up as taxes get dedicated to one function or another.
this stage in the meeting Verne thanked Kiedrowski, who had to leave
early, for being with us today. Gunyou remained for additional
16. Difficulty in gaining state support for
city manager of the city of Minnetonka, said that United Health Care, in
Minnetonka, at the intersection of Bren Road and Hwy 169, has been seeking
the right to double its headquarters space. The city of Minnetonka
supports the effort, as do state development officials, because it would
add jobs. But Minnetonka is unable to convince the Minnesota Department
of Transportation (MnDOT), to build a needed Bren-169 interchange because
of lack of funding. MnDOT officials have suggested that if Minnetonka
could build the interchange, MnDOT might be able to pay the city back over
time, but cities do not have the tools necessary to front such a large
project. Clearly the interchange would benefit many different commercial
interests, depending upon their distance from the interchange, he said.
Therefore, some kind of an assessment for benefiting property owners,
based on distance from the interchange, might be considered, but
Minnetonka doesn't have the authority for such an approach. Gunyou also
supports an interchange at 169/494, which is off the table for lack of
17. Question of relative need for light rail transit (LRT)--In
response to a question, Gunyou said Minnetonka supports a new LRT line
that would go from downtown Minneapolis to Eden Prairie. In light of the
state's fiscal problems, the need for major highway projects, and the fact
that all LRT lines mainly serve downtown destinations, a Civic Caucus
member wondered why officials would want to be attaching such high
priority to LRT.
18. Thanks--On behalf of the Civic
Caucus, Verne thanked Gunyou for meeting with us today.