Capitol Update for December 5, 2008

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This week’s update from lobbyist John Tuma:
“An economist is a man who states the obvious in terms of the incomprehensible.”
Alfred A. Knopf

State Budget Forecast Predicts Largest Deficit in Modern History

Those that are not budget wonks need not read beyond this paragraph to understand the magnitude of the problem.  The November forecast was released yesterday and it predicts the largest state budget deficit in modern history.  If spending and revenue remain the same for the present biennium ending on June 30, 2009, the state will be in the red $426 million wiping away the razor thin reserves the state has in the bank at present.  Presently the state’s cash in the bank is only $155 million for the budget reserve and $417 million of excess revenue collections that were calculated last October.  The state’s economic forecasters predict that if our revenues and spending remain the same for the next fiscal budget starting in July 2009 and going through June of 2011, we will face a shortfall of $4.847 billion.  This budget deficit does not take into account inflation, which the state’s economists estimate would be around $650 million for the future biennium. On top of that, you could add another $650 million to restore the budget reserve to pre-2008 levels and $350 million to restore the cash flow account to historic levels as well.  If you include all that, the tab for a complete budget solution is just shy of $6.5 billion.  That is approximately 18 percent of our present biennial budget.

Now for you budget wonks.  First, what does the forecast mean for this biennium’s program funding?

If you recall, the 2008 Minnesota Legislature used almost all of its budget reserve to help fix the budget crisis with the hopes of the economy turning around this summer.  Oops, bad bet on the part of the state with the economy actually getting significantly worse.  At the end of last session, the state’s actual budget reserve was only $153 million.  As a result of an account shift, that reserve is now at $155 million.  This amount is only a quarter of what is considered fiscally prudent for protecting this biennium’s budget.  The reserves are not necessarily meant for a crisis in a future budget, but simply meant to help make sure the state is solvent during the existing budget cycle.  Last year’s Legislature dipped into its $650 million budget reserve because it was in the middle of the biennial budget and simply balancing its ledgers for this biennium ending June 30, 2009.  Prudence would dictate that it needs to replenish the $650 million budget reserve for the next biennial budget.

Fortunately for the state, revenue collections since the close of last session have been running ahead of forecast through the end of October of this year.  As of October, the state has actually collected $417 million in excess of the forecast used to create the present budget.  That $417 million essentially acts as an additional reserve in the bank.  It is the opinion of legislative staff that the Governor/Finance Commissioner cannot unilaterally cut (unallotment) state programs until this $572 million ($155 million budget reserve plus the $417 million collection surplus) is exhausted.

This November forecast predicts that the $572 million we have in the bank will disappear over the next seven months and we will finish the fiscal biennium $426 million in the hole.  Therefore, if the Legislature does nothing regarding this biennial budget and the state runs out of money prior to June 30 as predicted, the Governor then can unilaterally cut programming to balance the budget.  It appears that our reserves are sufficient to keep us afloat through the beginning of session, but expect the Governor and the Legislature to move quickly to make some early cuts in January to the present budget.  Not only will this insure a balanced budget ending in June, but will give them a little bit more of a buffer when solving a larger budget crisis for the next biennium.

It should be pointed out that the projected sales tax revenue is down about 8.7 percent.  Therefore, the $600 million in new revenue we were expecting from the sales tax dedication is actually somewhere in the neighborhood of $550 million

The future budget cycle will be daunting.  The debt service forecast creates significant limitations for the future.  Assuming future capital budgets are $725 million in even-numbered legislative sessions, which represents the 10-year average of past major capital budgets, and $120 million in odd-numbered years, the state’s voluntary debt service guideline of 3 percent of non-dedicated general fund revenues will be exceeded in each of the next three bienniums in part because of projected reductions in revenue.

The conclusion is we will face significant challenges this coming session in the funding area, but thankfully the voters of Minnesota have given us an instrument of great value.  Now I sort of know what Thomas Edison must have felt like when he discovered a new invention.  “Wow, now here is something that may be actually useful!”

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