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Despite Conservative Rhetoric, Spending Down

July 11, 2011 By Jeff Van Wychen, Minnesota 2020 Contributor

General fund spending trends over time can be difficult to analyze due to a number of factors. For example, from a superficial perspective, state general fund spending appears to have grown from $26.6 billion in FY 2002-03 to $30.2 billion in FY 2010-11—a growth rate of 13.2 percent. However, this simplistic conclusion is misleading because it ignores the impact of inflation, population growth, state takeovers, funding shifts, and one-time federal dollars.

Each of these factors needs to be adjusted for in order to provide a true “apples-to-apples” comparison over time.  (The accompanying box provides the rationale for these adjustments.)

After making these adjustments, state general fund spending has actually declined by 14 percent from FY 2002-03 to FY 2010-11. The decline in real per capita state general fund spending over this period tracks fairly closely with the decline in real per capita state general fund revenue (17 percent).

These facts contradict the right wing claim of “out of control” growth in government. When properly adjusted, state general fund spending is much less than it was eight years ago. In fact, we would have to return to the 1990s to find the last biennium in which general fund spending—properly adjusted—was lower than the FY 2010-11 level.

Just as past growth in general fund spending has been exaggerated, so to has projected future growth. Conservatives in the state legislature claim that their proposed budget will actually increase state general fund spending by either 6 percent or 12 percent in the next biennium. Both figures are misleading because they ignore the impact of one-time dollars, discussed above. Non-partisan Minnesota Management & Budget stated in its February forecast that “to more accurately compare biennium to biennium spending, it is necessary to mitigate the effects of these one-time factors.”

Based on an apples comparison, general fund spending under the Republican end-of-session budget for FY 2012-13 would actually be about $400 million less than in FY 2010-11. Legislative Republicans are in fact cutting spending below the FY 2010-11 level, which—properly adjusted—was already 14 percent less than the level of spending eight years earlier.

In order to keep pace with inflation and population growth, state general fund spending will have to increase to $36.4 billion in FY 2012-13. If projections of general fund spending under the GOP budget are accurate (and they probably are not, because of the statutory requirement to willfully ignore the impact of inflation on most parts of the state budget), it will be over $2 billion short of this mark.

Anti-tax zealots like to rant about rampant growth in state government revenues and expenditures. In fact, properly adjusted there has been no real per capita general revenue or expenditure growth in the last decade. To the contrary, there has been a sharp decline. The proposed GOP budget continues this decline. A partial list of the consequences of this approach are:

  • Nearly 140,000 Minnesotans will lose access to health insurance
  • Thousands of elderly and disabled people would be forced to move from home and community-based services into more expensive nursing homes
  • Cuts in funding for 129,000 special education students
  • Reductions in medical research and education funding
  • Reduced transit options and increased fares
  • Delayed issuance of business permits due to staff reductions
  • More cuts in higher education funding
  • Over $1.2 billion in property tax increases by 2014 (including cuts to the renters’ property tax refund)
  • Cuts in public safety and other local services and infrastructure
  • Reduced funding for clean water activities
  • No funding for smart investments like early childhood education
  • Pink slips for thousands of public employees and an unknown number of private sector employees, resulting in reduced consumer demand and further weakening the economy.

Some might attempt to justify these harms on the grounds that they will be “good for business.” However, under the “no new tax” regime of the last eight years—during which Minnesota lead the nation in cutting real per capita own-source revenue—Minnesota’s economic performance relative to other states deteriorated.

The proposed conservative budget would continue these failed policies by forcing yet another round of spending reductions on state government and inflicting more harm on Minnesota’s economy, property taxpayers, students, and most vulnerable residents. It is time for the legislature to accept the fact that Minnesota’s deficit is largely a revenue problem and that revenues must be part of the solution.

 

An “Apples to Apples” Comparison of General Fund Spending

A meaningful “apples to apples” comparison of general fund spending over time requires that adjustments be made to remove fluctuations that are the result of factors other than actual growth in real public expenditures. The adjustments made in this analysis include the following:

  • Inflation. The things that government purchases—from gasoline to nursing home care—has grown in cost over the last eight years. Like consumer purchases, government purchases need to take into account erosion in the purchasing power of the dollar to provide meaningful comparisons over time. This analysis adjusts for inflation using the implicit price deflator for state and local government purchases, which is the appropriate inflation index for adjusting general fund finances according to the State Council of Economic Advisors.
  • Population growth. The more people living in a state, the greater the demand for public services. This increased demand can be adjusted for by examining expenditures on a per capita basis.
  • State takeovers. Occasionally the state takes over a major public function from local government. The most notable example of this in the last decade was the shift of general education funding off of local property taxes and into the state general fund. The resulting growth in general fund spending was not the result of “more government,” but rather how existing government functions were paid for. A more valid comparison over time can be made by including the full cost of general education in the general fund expenditure total of each biennia.
  • School funding shifts. The state occasionally postpones aid payments to school districts until after the end of the biennium in order to balance a budget within the biennium. In the past, these aid shifts were later “bought back.” General fund spending is artificially deflated in the biennium when the shift occurs and artificially inflated in the biennium in which it is bought back. The impact of these shifts can be adjusted for using data from state forecasts.
  • One-time federal dollars. In the FY 2010-11, state general fund spending was artificially lowered due to receipt of $2.3 billion of federal stimulus dollars. The spending was still occurring—it just wasn’t showing up in the state general fund because it was being paid for with federal dollars. The impact of these one-time dollars can be adjusted for using data from the February forecast.

Arguably, other adjustments could be made to provide an even more valid comparison over time of general fund spending levels. For example, the growth rate in Minnesota’s elderly population—which is projected to be five times greater than the growth rate for the non-elderly population over the FY 2012-13 biennium—will create an additional demand for state health care and nursing home expenditures. However, making this adjustment would be extremely complicated. This analysis is limited to adjustments that are relatively uncomplicated and straightforward.

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