The 2013 Legislature will be considering a
budget for the fiscal year 2014-15 biennium, which runs from July 1,
2013, through June 30, 2015. It's important to note that most figures
discussed here apply to a biennium, which is comprised of two
individual fiscal years. FY 2014, for example, runs from July 1, 2013,
through June 30, 2014, while FY 2015 runs from July 1, 2014, through
June 30, 2015. Whenever two years appear after the fiscal year
abbreviation (e.g., FY 2012-13), the date is referring to two fiscal
years, or a biennium. Whenever one year appears (e.g., FY 2012), the
date refers to one fiscal year.
The November 2012 state budget forecast projects a general-fund
surplus for the FY 2012-13 biennium, a deficit for FY 2014-15 and a
surplus for FY 2016-17. Bill Marx noted that the projected surplus
for FY 2012-13 is $1.3 billion; the projected deficit for 2014-15 is
$1.1 billion; and the projected surplus for FY 2016-17 is $300
The $1.3 billion recently projected general fund surplus for FY
2012-13 has gone to pay off the K-12 education aid shift from previous
years. After the November 2012 forecast predicted the $1.3 billion
surplus, the money was appropriated, as required by law, to reduce
past years' education aid payment shifts. The shifts allowed the state
to pay only part of the school aids owed to school districts in the
current year and move the payment of the balance of those aids to the
following year. The shift strategy has been used to reduce state
spending on a one-time basis.
The education aid payment schedule was
changed after the November forecast so that school districts will now
receive 82.5 percent of the revenue they are due in the current fiscal
year and the other 17.5 percent in the following year. That is an
improvement for districts from the previous payment schedule (64% /
In response to a question, Marx pointed out
that when school districts were getting paid only 60 percent of their
promised aids from the state, the districts had to use reserves or
borrow money. The shift payback allows districts a better ability to
invest or pay back borrowing.
The November 2012 forecast predicts a general fund deficit of $1.1
billion in FY 2014-15, mostly due to increases in health and human
services spending. Revenues for the FY 2014-15 biennium are
predicted to be $35.8 billion, while expenses are predicted at $36.9
billion. Marx said debt service and an increase in K-12 pupils helped
cause the projected increase in expenses, but "health and human
services are the big driver." He pointed out that, although both
revenue and spending were projected to be lower than was thought
earlier, the projected $1.1 billion deficit was the same in the
November forecast as was projected at the end of the 2012 legislative
For the FY 2016-17 biennium, the forecast projects a $300 million
general fund surplus ($38.7 billion in revenues and $38.4 billion in
spending). There is a structural problem in FY 2014-15, but not in
FY 2016-17. "Whatever we do to solve FY 2014-15, unless we do it on
one-time basis (e.g., through payment shifts), will also help FY
2016-17," Marx observed.
Most spending estimates in the forecast do not include adjustments for
inflation. Marx said inflation adjustments, using projected
Consumer Price Index figures in both FY 2014 and FY 2015, could add
about $900 million to spending in the biennium.
He said agency appropriations do not build
in inflation for salary increases, supplies, utility costs, etc., and
no inflation is built into K-12 funding formulas. Some human service
formulas build in inflation, but in general inflation is not built
into the forecast for spending. But inflation is somewhat built into
the revenue side, since the forecasts take into account that people
may move to different tax brackets if their incomes increase.
"In a simple way, inflation is not built
into the spending side, but it is built into the revenue side," Marx
summarized. "But the way things actually work is a lot more complex
The November 2012 state budget forecast projects annual increases in
general-fund revenues during four out of the next five years. Marx
said the forecast projects the following annual changes in general
- FY 2013 up by 4.5 percent over FY 2012;
- FY 2014 down by 1.4 percent over FY 2013;
- FY 2015 up by 3.3 percent over FY 2014;
- FY 2016 up by 4.9 percent over FY 2015;
- FY 2017 up by 2.9 percent over FY 2016.
He pointed out that there is less certainty
the further the projections go out into the future.
The drop in FY 2014 revenues was predicted
for several reasons, primarily (1) an expectation that growth in
employment will slow down or stay flat in FY 2014 and (2) the
realization of more capital gains and companies' paying more dividends
before Dec. 31, 2012, because of expected tax rate increases on those
categories of income in 2013. Because of these factors, the forecast
moved more revenue into FY 2013 from what had previously been forecast
for FY 2014.
Federal grants make up the largest share, nearly one-third, of state
revenue. For the $61.9 billion in revenue for all state funds for
the FY 2012-13 biennium (as of the end of the 2012 legislative
- Federal grants are the biggest slice of the revenue pie at 31.0
percent. That figure includes some federal stimulus money, so the
federal grant money will drop a bit during the current year, because
no more stimulus money will be coming into the state. The largest
areas of the federal grant funds are for highways and health and
human services, including Medicaid. This only includes federal funds
administered by the state, so it does not include, for example,
federal money that goes directly to the University of Minnesota.
- The income tax (at 26.3%) and the sales tax (at 18.4%) are the
next biggest sources of total state revenue.
- Gambling revenue is only a miniscule part of total state
revenue. In response to a question, Marx said lawful gambling taxes
in FY 2012-13 are $54 million, while taxes on pull-tabs, tip boards
and the state lottery amount to $62 million. This accounts for less
than two-tenths of one percent of a $62 billion budget, he pointed
Health and human services and K-12 education
receive two-thirds of state spending. When breaking down the total
$62.6 billion in all-funds expenditures by program for FY 2012-13,
health and human services (at 41.7%) and K-12 education (at 25.2%)
together account for over two-thirds of the state budget. (As noted
above, the state has now put $1.3 billion into education to pay back a
shift in education funding from previous years. That payback is not
reflected in these figures.)
The general fund provides for more than half of all state spending.
- The general fund accounts for 53.2 percent of total state
spending for the FY 2012-13 biennium.
- Federal funds are the next highest expenditure category,
accounting for 29.0 percent of total state spending.
Income and sales taxes make up three-fourths
of general-fund revenue. For FY 2012-13, individual income taxes
make up almost half (46.8%) of general fund revenue, with sales taxes
at 27 percent; the two together make up approximately 75 percent of
general fund revenue.
Businesses and cabins pay statewide property
taxes. In response to a question, Marx explained that since 2001,
businesses (commercial-industrial property) and cabins
(seasonal/recreational property) pay statewide property taxes (4.6
percent of general fund revenue). As a result, those properties do not
pay property taxes for local school district operating fund referenda.
The statewide property tax raises about $800 million a year and is
assessed at a uniform statewide rate. It is calculated as a dollar
amount, adjusted for inflation, and the amount is not subject to
legislative approval each year.
The principle behind this 2001 change is
that the people residing in the school district, who vote on the local
referendum levy, would actually pay for it. One of the other changes
made in 2001 is that the local school district levy for the general
education fund was eliminated. The statewide property tax has helped
pay for that change.
In FY 2012, general fund revenue surpassed its previous high.
Prior to now, general fund revenue was at its highest-ever annual
level ($16.6 billion) in FY 2008. It dropped after FY 2008, when
income and sales taxes dropped due to the economy. We surpassed the FY
2008 level in FY 2012, when general fund revenue reached $17.1
Nearly three-fourths of general-fund spending goes to K-12 education
and health and human services.
- K-12 education (43.2 %) and health and human services (30.4%)
are the two highest general-fund spending categories in FY 2012-13.
- The next highest general-fund spending is for property tax aids
and credits, which includes local government aids (8.0%), followed
by higher education (7.3%).
- Compared with FY 2010-11, projections show that general fund
expenditures for K-12 education will increase by $3.8 billion in FY
2012-13. The main reason for the increase is the payback of former
shifts in state payments of school aids. The shift artificially
reduced FY 2010-11 payments and shift payback is artificially
increasing FY 2012-13 payments. "These are not normal budget years,"
- Health and human services general fund expenditures in FY
2012-13 are projected to increase by $2.3 billion over FY 2010-11.
Most of this growth is due to growth in Medical Assistance payments
- both in the amount of the payments and the number of persons
In actual dollars (not adjusted for
inflation) total state expenditures will have approximately tripled
from FY 1991 to FY 2015. Total expenditures were about $10.5
billion in FY 1991 and are projected to be $32 billion in FY 2015.
But, Marx said, in comparison with growth in personal income, state
revenue has not increased in 20 years. Minnesota's price of state
and local government has increased and decreased over the last 20
years, but ended up in FY 2010 at about the same level as in FY 1991.
The price of government is figured as state and local revenue as a
percentage of personal income. Total state and local revenue amounted
to approximately 16 percent of personal income in both FY 1991 and FY
2010, with nearly seven percent of that coming from local revenue and
approximately 9.5 percent coming from state revenue in both years.
Several sources question whether the current general fund reserves of
$1 billion ($350 million in the cash flow account and $648 million in
the budget reserve) are high enough. Marx said the National
Conference of State Legislatures recommends that reserves should be at
five percent of spending, which for FY 2012-13, would amount to a
recommended reserve of $1.8 billion. Also, a Minnesota Department of
Management and Budget report several years ago recommended that the
reserves should be higher and should float as a percentage of
"$1 billion is a little helpful in reserves,
but we faced a $5 billion problem two years ago," Marx observed.
Income and sales tax revenue and health and human services spending
are very dependent on the economy. Marx explained that in a
slowdown or recession, as people's incomes drop, more of them become
eligible for health and human services programs. "If the
economy slows or goes into recession, our two big revenue sources
don't grow and one of our big spending categories does grow, " he
He observed that a big issue facing
Minnesota is "how to take the state's revenue and spending structure
that has those big factors in it and make it more sustainable and
economy-proof." He said the best revenue source for state and local
governments from a stability perspective is the property tax, "but we
like to stay away from the property tax."
An interviewer commented that we could
operate the income and sales taxes in the same way as the
property tax: set the needed revenue levels
and float the rate. Marx agreed that would be possible.
Changes in the economy have resulted in lost sales-tax revenue. An
interviewer asked how much revenue is lost because of not collecting
sales taxes on many Internet sales transactions. Marx replied that the
estimate is that the total FY 2011 lost sales-tax revenue from such
untaxed transactions totals $400 million: $149 million in lost taxes
on Internet sales; $55 million on catalog sales and $190 million on
sales by remote sellers who do not collect sales taxes.
Marx pointed out that the mix of purchases
of goods vs. services has changed radically in the last 60 years. In
1950, consumer purchases were 61 percent for goods and 39 percent for
services. By 2010, the numbers had more than reversed: consumers spent
67 percent for services and 33 percent for goods.
Because Minnesota generally applies sales
taxes to goods and not services, sales-tax revenue is not growing as
fast as income-tax revenue. Marx said that health-care provider taxes
apply to some things, but there are no sales taxes on physician fees,
lawyer fees, etc.
"Our economy is changing," Marx said. "Maybe
our tax structure should be, too." In discussing the need for tax
reform, Gov. Mark Dayton has said that the outdated sales tax code
hurts Minnesota's Main Street retailers.
The immediate priority for legislators in the 2013 session will be
balancing the FY 2014-15 budget, currently forecast to run a $1.1
billion deficit.He emphasized that it is very difficult to remove
the state from what happens in the economy. When an interviewer asked
if the state needs to do reform instead of tweaking, Marx responded
that the November forecast "could put a reverse on reform efforts,
because it says FY 2016-17 is OK. More people will be looking at what
can we do to make things even better."
He predicted there will be a greater
recognition of things like the Internet sales tax issue. "Lots of
people want to redo things," he said. "The Governor is looking at a
broad array of taxes for tax reform. On the spending side there is not
as extensive discussion."
He continued. "There are those who would
argue we've done a lot of changes in human services in the last few
years, where we've reduced services or restricted services or tried to
deliver services in different ways. Some have been successful; some
have not. In education, it's hard to predict there will be lots of
changes. Education is a tough area to deal with; it's hard to give
school districts less than they're getting now."
It's hard to get people to take a long-term view of taxes and
spending. An interviewer commented that no attention is given to
what it could cost to run government services at the federal, state
and local levels. "There is no indication anybody out there is running
a parallel agenda that attempts to attack the fundamental costs of any
of these big systems. They're totally captured by the existing ways of
Marx responded, "It's really hard to get
people to look at the longer term." He suggested there should be more
time for deliberations on budget decisions, recalling that the
Governor, the Speaker of the House and the Senate Majority Leader made
the final decisions on the FY 2011-12 budget. "There's not a lot of
detail there. It doesn't leave a lot of room to be deliberate." He
suggested that perhaps there could be a process for the Governor, the
House and the Senate to "buy in earlier."
The state is the most efficient raiser of revenue, but local
governments are making the decisions on the vast amount of state
spending. An interviewer commented that the ultimate signature on
the checks for the vast amount of state spending is a local signature,
such as a school district or county official. "The spending is local
in the end," he said. "The state is appropriating the money and the
locals are spending it."
"It goes back to who's the most efficient
raiser of revenue," Marx replied. "In 1971, we decided the state is
more efficient at collecting revenue and it's better to raise money
for education through the income and sales taxes than through property
taxes. Local governments are much less efficient at collecting local
sales and income taxes than the state."
When asked if there is any way to get local
governments to handle the spending more productively, Marx replied
that it's a political question as to whether the state or local
governments make better spending decisions.
In response to a comment that the state
needs to be structuring incentives right, Marx asked, "Should you
allow small school districts to continue operating by giving more
sparsity aid or should you force something else to happen? All of our
funding formulas and structures encourage one kind of behavior or
another or certainly allow one kind of behavior or another. Those
ought to be thought about when we're putting them into law, because
they get to be very difficult to change when you're trying to change