Peter Nelson, Public Policy Director for the Center of the American
No justification for new
Civic CaucusFocus on CompetitivenessInterview April 19, 2013
Dave Broden, Paul Gilje (coordinator),
Randy Johnson, Dan Loritz (chair), Peter Nelson, Dana Schroeder, Clarence
Shallbetter. By phone: Audrey Clay, Janis Clay, Pat Davies, Sallie Kemper.
Summary of Discussion:
Peter J. Nelson, director of public policy for the Minneapolis-based
Center of the American Experiment, asserts that his March 2013 report,
Minnesota Spending 101: Smart Budgeting for an
Era of Limits, finds no
justification for new state spending at this time. His report shows that
all-fund state spending, adjusted for inflation, has increased from $8.1
billion in 1960-1961 to $61.9 billion in 2012-2013. Per capita spending,
also adjusted for inflation, grew from $2,341 in the 1960-1961 budget to
$11,433 in the current budget. Both measures have increased almost every
biennium since 1960-1961. Nelson compares Minnesota's spending in various
categories both nationally and with 10 peer states and finds that
Minnesota's spending in almost every category ranks high in both
comparisons. On the top end, Minnesota ranks second nationally in its
state and local spending on public welfare per person under 200 percent of
the federal poverty guideline and higher than all 10 of its peer states.
On the bottom end, Minnesota ranks 48th in state spending, excluding local
spending, on corrections per person in prison or under community
supervision and lower than all 10 of its peer states. Nelson advises state
policymakers, "We don't need to spend more. It's very clear that in
comparison with other states, we're not spending too little."
Peter J. Nelson is director of public policy for the Minneapolis-based
Center of the American Experiment. The Center is a local think tank,
focusing on public policy issues. It emphasizes free market, conservative
principles. Its mission is to build a culture of prosperity for Minnesota.
Nelson devotes most of his time researching and
writing on a range of policy issues, including health care, energy, state
budgets and state governance. He regularly consults with state
policymakers on these issues and contributes commentaries to the
StarTribune, Pioneer Press, and other local newspapers across Minnesota.
Nelson received a B.A. in economics from Wheaton
College in Illinois and a law degree from the University of Minnesota,
where he was a member of the Minnesota Law Review.
Peter J. Nelson, director of public policy for
the Minneapolis-based Center of the American Experiment, authored the
Center's March 2013 report on Minnesota state budgeting,
The study used Minnesota Department of
Management and Budget (MMB) figures from 1960 to today on general-fund
spending and all-funds spending to look at how that's changed over the
years. He decided to focus on all-funds spending, because there are
fluctuations through the years in what we spend or don't spend from the
general fund. Also, federal funds are incorporated into all-funds spending
Using a variety of data sources, the report also
compares Minnesota's spending in various categories on a per capita or
per-person-served basis with spending in 10 similar states, called "peer
states." "That starts answering the question of how generous our state
programs are relative to other states," Nelson said. In the report, Nelson
draws a number of conclusions about Minnesota's state and, in some cases,
Looking forward, there will be a lot of pressure
on the state budget, coming from a number of sources.
1. Baby boomers will start needing long-term
care services in four or five years. They started retiring in 2008, but
the real pressure will come from future needs for long-term care.
2. Globalization raises competitive issues.
Decades ago, we were a much more localized economy, so we could get away
with higher spending without facing competitive issues.
3. Growth in health care spending is outpacing
growth in revenues. No one has figured out how to control health care
costs. Health care spending is projected to increase by 8.5 percent
annually, much faster than projected increases in revenues.
4. Pension fund liabilities may require
dipping into the general fund. That leaves fewer funds for other
5. The federal debt could result in fewer
grants to the state of Minnesota. Currently, the state counts on federal
grants for about 20 percent of its total spending and 30 percent of its
general fund spending.
Minnesota must strike the right balance between
spending and letting the private economy work in a way that lets us
prosper as a state.
"We depend on the private economy for our
future prosperity," Nelson said. "Any time we have to raise taxes to fund
more spending, it subtracts from the private economy, unless all that
spending is going to productive things. We spend a lot of state money on
very productive things that do promote growth in the economy, but we have
to be careful."
Inflation-adjusted spending has increased almost
every biennium over the past 50 years.
Spending from all funds,
adjusted for inflation, increased from $8.1 billion in 1960-1961 to $61.9
billion in 2012-2013, a 667 percent increase, or 7.6 times. Per capita
spending, adjusted for inflation, also increased almost every biennium. It
grew from $2,341 in the 1960-1961 budget to $11,433 in the current budget,
an increase of 388 percent, or 4.9 times.
Total state spending as a proportion of the
overall state economy has been pretty consistent at about 11 percent over
In the past four years, however, it has registered
closer to 12 percent, but that's to be expected during a recession, Nelson
State spending has grown at roughly the same
rate as the private economy since 1985.
An interviewer commented
that this shows that state spending is tracking with the economy. Nelson
said that begs the question of whether state spending should be tracking
with the economy. "Or should state government be becoming more efficient?"
he asked. "I think growth in state spending should be something less than
growth in the private economy."
The proportion of general fund spending going to
K-12 education and health and human services is much more now (73.6
percent) than 10 years ago (63.4 percent).
Both areas of spending
as a proportion of general fund spending grew by about five percentage
points over the past 10 years. Other priorities suffered some from this,
like higher education, which fell from 10.1 percent of general fund
spending in 2002-2003 to 7.3 percent of general fund spending in
In response to a comment by an interviewer,
Nelson said he plans to do more studies on health and human services and
education. "That's where all the money is," he said.
In 2010, total Minnesota state and local
government spending per capita was $10,534, 15th highest in the country.
Among 10 peer states (those 10 states with average state and local
government salaries nearest to Minnesota's average) only Massachusetts had
higher spending per capita. The peer states include Colorado, Illinois,
Iowa, Maryland, Massachusetts, Michigan, Nevada, Oregon, Pennsylvania and
In 2008-2009, Minnesota spent $11,098 per pupil
on K-12 education, 15th highest in the country.
That amounted to
$599 more than the national average. Only three peer states, Maryland,
Massachusetts and Pennsylvania, spent more per pupil than Minnesota.
Nelson chose 2008-2009 data because of the K-12 education shifts in recent
years, which would have made state-to-state comparisons difficult. (The
education shifts, which happened over several years, involved the state
delaying aid payments to school districts in order to try to balance the
overall state budget.)
"Originally, I thought of the K-12 education
shift as a gimmick," Nelson said. But he now believes the K-12 shift
accomplished the same thing a budget reserve fund accomplishes. "The state
should have a larger budget reserve fund; $653 million is not enough," he
said. "Many people, including the commissioner of Minnesota Management and
Budget, say you need about five percent of the total budget, which is
about what we used during those years with the K-12 shift."
An interviewer asked if we should spend more to
get kids graduated from high school and to get them trained for jobs. "I
don't think we need to spend more there; that's an area where we need to
start spending differently," Nelson replied.
In 2010, Minnesota state and local governments
spent more on public welfare per person below 200 percent of the federal
poverty guideline (FPG) than any other state besides Alaska.
Minnesota's spending ($8,680) was about twice
the national average ($4,389). (These numbers appear low because not every
person below 200 percent of the FPG receives public welfare. Actual
spending per person who actually receives public welfare would be much
An interviewer asked why Minnesota's spending on
this measure is so high compared to other states and the national average.
Nelson responded that we have one of the lowest poverty rates in the
country and one of the lowest uninsured rates in the country, so those
factors don't explain Minnesota's high spending. He said we have a lot
more people using our public programs relative to our poverty rates and we
have much more generous benefits. Minnesota, for example, provides
Medicaid for single adults. Also, the state has made a decision to put
much more money into disability and long-term care. "That's a value
decision that we've made," he said.
In 2010, Minnesota spent $12,030 on public
research universities per enrolled student, eighth highest in the nation
and almost $1,700 more than its closest peer state, Wisconsin.
Nelson commented that Minnesota's public university budgets are under
scrutiny after reports of high spending on administrative expenses.
In 2010-2011, Minnesota's spending on
undergraduate student aid programs per student amounted to $4,119, 14th in
But the state spent more per student than any of its
10 peer states. Nelson noted that Minnesota did cut spending on higher
education over the past couple of years. However, the state continues to
rank high because a number of other states cut higher education more
deeply than Minnesota.
Minnesota spends dramatically less than most
states on corrections.
Minnesota's 2011 spending per person in
prison and under community supervision was $4,119 and ranked third lowest
in the country. (It's important to note that this measure includes only
state spending, not state and local spending, as some other measures do.)
An interviewer was surprised that Minnesota
ranked so low on the corrections measure. Nelson responded that Minnesota
has the fewest people in prison and "Minnesota clearly has different
policies on whether people go to prison or are put in community
supervision." He did say that some people have suggested his figures on
corrections spending in Minnesota may be too low, because the counties do
a lot of the spending on corrections and local spending is not included in
Minnesota's spending per capita on interest on
state general debt ($111) ranked 35th in the nation.
Among the 10
peer states, only Iowa and Nevada ranked lower.
Following the meeting, an interviewer asked
Nelson why he chose to leave out local spending in his analyses of
corrections spending and spending on interest for general debt. The
interviewer noted that Minnesota's spending per capita on interest for
debt looks small when local debt is not included and that counties run
large parts of the corrections system here. Not including local spending
in those areas may be missing a large part of spending, the interviewer
Nelson responded that he only used state
spending in those two categories because he believed it would offer better
comparisons with other states. He said he would go back and look at those
The report doesn't offer enough information to
judge whether Minnesota is spending too much or too little.
interviewer asked why the report did not include more about outcomes.
Nelson responded that measuring outcomes is very difficult. "This is a
modest first step in that direction," he said. "Looking at state spending
per person or per pupil or per low-income person gives us a little bit
more information about how the state spends its money. But it doesn't give
us enough information to know whether we're spending necessarily too much
or too little. It does pull out certain issues and it begs us to ask some
More care is given to spending outside the
An interviewer asked whether public programs funded
through the general fund were run more carefully and more efficiently than
programs with a more direct funding source. "This is just based on my
theory, but I would say that programs with a direct funding source are
generally run more carefully because their budgets are based on more fixed
revenue sources," Nelson said. The Department of Natural Resources budget,
for example, is largely set based on the fees they can get every year.
"That fee is set in statute; it's a fixed fee. Raising these fees on
hunters is not an easy job. Revenue supporting the general fund, however,
comes from corporate taxes, income taxes and sales taxes which grow with
Minnesota must self-finance, but we must guard
against becoming a high-tax state.
In response to a question,
Nelson said he agrees with Labor and Industry Commissioner
Ken Peterson, who spoke with the Civic Caucus on
April 12, 2013, that Minnesota must
self-finance. "We're on our own up here," Nelson said. "We don't have the
natural resources that other states have. The fact that we have to
self-finance means we must be very careful about not being a high tax
state. We depend on revenues from the jobs that come from private
companies to support state spending, the good things that government does,
and that will be compromised in the future if we become a high tax state."
Advice to policymakers: "We don't need to spend
An interviewer asked what advice Nelson would give to
Governor Mark Dayton and the Legislature. He replied his advice would be,
"We don't need to spend more. Relative to other states we are
comparatively spending more on all of these basic functions of government:
education, public welfare, etc. It's very clear to me that in comparison
with other states, we're not spending too little."
"We have a budget deficit of $600 million,"
Nelson continued. "What the Governor and the DFLers in the Legislature
have been proposing is to fix that $600 million problem with $1.8 billion
to $2.6 billion in tax increases. I think that's incredibly unwise to do,
considering the competitiveness issues that presents for our businesses
and for the people who live here. It doesn't recognize the fact that tax
rates absolutely do matter. People do move away from Minnesota and, more
importantly, people are dissuaded from moving to Minnesota. People and
companies will choose not to move here."
"It's better to have some certainty over what
our spending levels are going to be and what our taxes are going to be,"
he said. "Businesses don't like to see tax rates jumping up and down. We
dealt with this recession without raising taxes and without cutting
spending too much. Being able to do that has basically created the
certainty that people want. If Democrats must raise taxes, I'd say fix the
problem we have with $600 million in higher taxes; don't add more
The state may need statutes or constitutional
amendments to restrain spending.
Nelson said his ultimate
conclusion is that it's not a time to raise spending. "We're clearly
spending enough on our priorities relative to our peer states. I don't see
any justification for new spending. I think maybe we could benefit from
more institutionalized mechanisms to restrain spending, through statutes
or constitutional amendments."
The Civic Caucus
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tax-exempt educational organization. The Core participants
include persons of varying political persuasions, reflecting years of leadership in politics and
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David Broden, Janis Clay, Bill Frenzel, Paul Gilje,
Jan Hively, Dan Loritz (Chair), Marina Lyon, Joe Mansky,
Tim McDonald, John Mooty, Jim Olson, Wayne Popham and