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Marx, Chief Fiscal Analyst, MN House of Representatives
8301 Creekside Circle #920,
Bloomington, MN 55437
December 17, 2010
David Broden, Janis Clay, Paul Gilje, Jim Hetland (phone), Dan Loritz
(chair), Tim McDonald, Wayne Popham (phone), Clarence Shallbetter
Summary of Marx’s comments:
Veteran Chief House Fiscal Analyst Bill Marx provides projections and
context from a recent
Management and Budget (MMB) economic forecast. Marx describes a projected
$6.2 billion shortfall in
state government’s biennial budget beginning
July 1, 2011.
He outlines factors contributing to the shortfall, including carryover
from the current biennium. He describes various options for dealing with
the shortfall, including delaying more payments of school aids, delaying
income tax refunds to citizens, cutting spending, and raising taxes.
Welcome and introductions—Bill
Marx has been in service to the Minnesota legislature since graduation
from Winona State University in 1975. He is chief fiscal analyst at the
Minnesota House of Representatives, a non-partisan office.
Comments and discussion—During
Marx’s visit with the Civic Caucus, the following points were raised:
Understanding the $6.2 billion shortfall for the upcoming biennium
Marx began by sharing
a number of charts to help people understand a shortfall of $6.2 billion
that was projected in November by MMB.
the current biennium budget was balanced—First,
one must remember that actions balancing the budget in the current
biennium affect a projected shortfall in the upcoming biennium. The
Minnesota state general fund is projected to yield $30.2 billion in
revenue for the biennium ending June 30, 2011. The Legislature essentially
spent $34.4 billion in the current biennium. Such an apparent unbalanced
budget was possible because additional spending beyond the $30.2 billion
was paid for by one-time federal stimulus grants and other spending shifts
totaling $4.2 billion. A spending shift occurs when the Legislature
promises certain dollars—in this case $1.4 billion to school districts,
letting them spend that much in the current biennium. However, the
Legislature postpones, or shifts, the receipt of those dollars to early in
the following biennium, paid for from state revenues in that biennium, not
the current biennium. While waiting for promised revenues to arrive,
school districts need to borrow from the bank, and pay interest, or use
existing fund balances if they have them.
Projected revenue in the upcoming biennium—For
the biennium ending June 30, 2013, the state general revenue fund, under
current tax rates, is projected to grow from $30.2 billion in the current
biennium to $32.0 billion, plus a $400 million projected general fund
balance in the current biennium, a total of $32.4 billion in available
dollars. Were the Legislature to appropriate exactly the same dollar
figure ($34.4 billion) for the 2012-13 biennium as the 2010-11 biennium,
the upcoming budget already would be $2 billion short, with no changes in
enrollment in K-12 or higher education, with no changes in case load in
social services, with no increase in required debt service payments, and,
of course, no increase in any other spending, including salaries.
Furthermore, if the
Legislature were to “pay back” school districts for the $1.4 billion shift
(that is return
aid payments to school districts to 90% current year/10% next year from
the current 70%/30%),
another $1.4 billion would be added to the shortfall, making a total of a
$3.4 billion shortfall. That amount would be needed simply to balance the
books with absolutely no change whatsoever in revenue rates and spending
from the 2010-11 biennium, but with projected growth in the general fund.
shortfall for 2012-2013 is $6.2 billion, not $3.4 billion, a difference of
$2.8 billion. That amount is what the MMB projects would be needed to pay
for additional principal and interest on already-committed long-term debt,
for increases in personnel caused by changes in K-12 and higher education
enrollments (without increasing any per pupil allotments), for changes in
special education case load, for changes in social service case load (such
as for long term care and for developmental disabilities), for changes in
prison enrollments, and other changes caused only by different numbers of
people being served. Higher salaries or higher expenses because of
inflation are not included, except for provisions already in federal law
that require certain inflation factors as a condition for a state to
continue to receive matching federal funds.
The MMB projected $6.2
billion shortfall doesn’t include any cuts in spending, any tax increases,
any salary increases or any higher spending for new or expanded services
beyond any changes already in current law. The MMB also projects a $5.1
billion deficit in 2014-15.
The forecast may be
found on the state’s management and budget website:
In the process of
forecasting, the state begins with a report put together by a national
forecasting organization (Global Insights, Inc. or GII), and then
localizes it to the state. For example, the car excise tax is based on
expected growth in national auto sales; in this case, the growth rate is
unadjusted as there is not enough excise revenue to warrant looking at how
Minnesota sales might differ.
Projected increases in spending—27.5 percent or 8.1 percent
From the FY 2010-11
biennium to the FY 2012-13 biennium general fund spending is projected to
increase 27.5 percent. This dramatic increase results from much ‘one-time
use’ money being spent. This includes the $1.4 billion in school shifts.
During this past year the state purchased the same levels of service, but
spent less from the general fund due to the use of federal stimulus money,
federal medical assistance, and the school aid payment shift. Adding in
the spending from those sources in FY 2010-11 and subtracting the
repayment of the school aid payment shift in FY 2012-13 results in the
spending change between bienniums totaling $4 billion, or 8.1 percent. “An
8.1 percent increase on a biennial basis, or 4 percent per year, is not
that unusual in the state’s history,” Marx said. It’s a case of using
one-time money to buy more services than the state had general fund
revenue to pay for.
Of all spending
categories, health and human services, education, and debt service have
the most dramatic growth, based on the increase in case load and direct
costs. Education growth is not as dramatic as that of health and human
services. Debt service is higher in FY 2012-13 because bond refunding
lowered cost in FY 2010-11.
There is no inflation
included in projections unless that is explicitly written into law. In
general when you hear that no inflation being built in, it is not built in
across the board—from state employees to the K-12 funding formula.
Working with Senate counterparts
There are 12 employees
in the House Office of Fiscal Analysis . The Senate has a similar office
that is part of Senate Counsel, Research and Fiscal Analysis. Minnesota
Management and Budget has a director with a comparable staff—or a bit
larger—that puts together the governor’s forecasts. They stay in
communication to keep each other informed. They communicate on technical
issues. They often talk among themselves on the analysis of important
situations as shared with legislators.
Government Aid (LGA)
LGA will be considered
for spending cuts. In the 2010 session the Legislature voted to reduce
aids for local governments by $400 million for the biennium.
“There has also been
talk about restructuring LGA. I suspect there will be significant
disagreements over how to get at it.”
Options for resolving the budget gap
Does the leadership
ask you privately, a participant asked of Marx, what the options are to
budgeting options, and then there are the politics of it. Taking the broad
perspective, the options are cuts, shifts, and revenue increases.”
The first and easiest
thing that could happen would be not to pay back the school spending shift
from 70%/30% to 90%/10% in FY 2012. If I were a school district business
manager I would be asking my school board to decrease spending.
We can always shift
more for schools, Marx said, but it’s a horrible budget practice. Many
schools would probably prefer it to cuts, but it’s not a generally
accepted accounting practice and rating agencies look at it as an issue.
It is better to cut spending or raise revenue than to shift, but
politically spending cuts and tax increases are very difficult.
There are other shifts
that could be looked at, though not on the scale of K-12 schools. LGA
would be more challenging. Shifts for the University of Minnesota have
been talked about but would yield a smaller amount of money. We cannot
shift aid to MnSCU because they are essentially a state agency—so instead
cuts would be required. The state could also delay the last employee pay
date in June.
income tax refund payments has significant revenue potential, but
extremely undesirable political potential. If legislators were to delay
refunds from April 2013 into July 2013 they could shift more than $1
billion to the next biennium.
“The thing about
shifts is that once they are there, they are permanent—until you spend
money to pay them back.” There is language in the law (M.S. 16A.152, Subd.
2) that says any surplus goes to build the reserves first (presently spent
down), then to pay back education shifts.
There are other ways
to get at the budget, without raising revenue:
Roughly 40 percent of
the budget is contained in K-12 education. In the last 2-year period the
Democratic Senate included cuts to K-12 Education; the Democratic House
and Republican Governor did not.
The next biggest area
is health and human services, at 28-30 percent. No doubt that will be cut.
A practical challenge is that we have ‘maintenance of efforts’ agreements
with the Federal government. We have been trying to look into those.
The next largest
budgeting areas are higher education and local government aids and
property tax aids. Then the remaining 10-12 percent of the budget is state
agencies and government—we can cut there but won’t save all that much
money. Debt service is in there and can’t be cut; prison services and
components of public safety are included. The Department of Revenue is
included as well, showing how challenging it is to cut funding—since
Revenue collects taxes.
There are a number of
active committees that are dedicated to reform, a member observed. Can
they have an impact?
Yes, and that would
affect projections. But the state has had reform committees lots of times.
It is hard to redesign. “As someone once said to me,” Marx said, holding a
piece of paper and then folding it in half, “you can take this paper and
re-form it, but it is still a piece of paper.
Difficult choices ahead
A participant asked
Marx for his outlook for the budget. “I’m not sure how we’ll get out of
this one. In past recessions we had turned around by this point.”
The ongoing budget
problem will be solved only with a permanent resolution—not shifts.
Marx commented that
for many years the goal has been that we don’t want to harm people. In the
1980’s we had an income tax surcharge—people felt it immediately. In this
case now we are instead trying to keep people from feeling pain. It’s not
unlike at the federal level fighting a war without a war tax.
surprised bond houses haven’t made a big deal out of it—perhaps because
every state is in the same boat.” With the sovereign European states the
reckoning has come. “I suspect if we keep doing this Minnesota’s day will