Facing a nearly $5 billion budget deficit meets the criteria of being up to your buttocks in alligators. As you know, when you are up to your butt in alligators, it is hard to remember that what you are trying to do is drain the swamp.
See a long snout and beady eyes gliding through the water at you, and you will flail away to fend it off. You may break your shovel in the process. The thrashing around may ruin the bit of ditch you have completed. That doesn’t matter; surviving to another day does.
Minnesota will survive to another day. The two parties in the Legislature, the governor and myriad advocacy groups will thrash around. Some package of spending cuts, revenue enhancements and accounting trickery will get us through the biennium. Then, in two years, we will face the same dilemmas again, or even worse ones.
Minnesota’s problem is that whenever the alligators snooze in the sun on a distant sandbar, we don’t dig very hard. When something rouses the gators into famished action, we bemoan our own inactivity. But as the immediate danger passes, we again lean on our shovels.
It isn’t because we lack good engineering. Bipartisan blue-ribbon study commissions are an old Minnesota tradition. Their wisdom is disclosed at press conferences, editorial writers endorse their findings and then we ignore their warnings and advice until it is too late.
Just such a group, the Budget Trends Study Commission, with five members appointed by the Minnesota Senate, five by the House and five by the governor, released its report a year ago. It began by noting that an earlier study, the 1995 Within Our Means report, had been largely ignored in the heyday of the 1990s boom economy.
The current crisis is complicated in that it includes two categories of problems. Some are cyclical and others are structural.
Cyclical problems are short-term ones related to the business cycle, the repeating patterns of economic expansions and recessions that have gone on for centuries. Falling sales tax receipts because people are not buying vehicles or big-screen TVs are a cyclical problem, as are higher unemployment compensation and Medicaid outlays as more people are out of work.
Structural problems deal with longer-run changes independent of any boom-bust cycle. The technology that allows 2,000 iron miners to produce nearly as many tons of ore as 40,000 did in 1950 is a structural change. So are the increases in health care costs in the last 25 years and the aging of the baby-boom generation. So is a slowing of the rate of economic growth relative to some other states.
The structural ones were forecast in the 1995 report. The state economist and state demographer jointly have presented the trends to any group willing to listen. But the public reacted as to the the boy who repeatedly cried wolf.
Well, now the wolf is here. It arrived at the same time as the worst cyclical downturn in 80 years. It is our own fault that the required adjustments will be so hard.
The summary of the budget trends commission puts it well:
- Minnesota is experiencing a major, long-range demographic shift.
- Despite continuing to rank high among many indicators, Minnesota’s economy has underperformed relative to the nation.
- Demographic and economic factors will lead to lower growth of state revenues over the next 25 years.
- Minnesota has a long-term structural budget problem with expenditures likely to outpace revenue growth.
- Health care growth will be the most important factor in rising state expenditures.
- State revenue volatility makes budget instability more difficult to manage.
- Minnesota’s general fund tax base has grown more volatile in the past decade.
- Shifting consumption patterns have reduced Minnesota’s sales tax base.
- Minnesota’s statutory budget reserve ceiling has not grown to an appropriate level.
We have lost precious time. In the boom years of 1997-2001, we ran state surpluses of about $13 billion in inflation-adjusted 2008 dollars. About half went to one-time tax rebates or permanent cuts. A third went to higher spending. Less than a sixth went into budget reserves.
Department of Finance figures show that, adjusted for inflation, overall outlays went up about 5 percent from fiscal year 2000 to fiscal year 2009. But health care spending increased 54 percent. That meant other categories, like higher education, intergovernmental aid and economic development, had to decrease. In-state tuition at the University of Minnesota and MNSCU institutions increased 68 percent and 55 percent from 2000 to 2009.
Unless we drastically change what procedures we choose to fund, health care outlays will only increase over time as the population ages and medical technology advances. But that requires a discussion about our society’s basic priorities that we don’t seem willing to have. The same is true for the effects of tax and public investment policies on economic growth.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.