Shifty Budget Solutions Have Run Their Course

December 21, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Governor Pawlenty was in a self-congratulatory mood after the release of the November forecast, touting the “projected $399 million balance at the end of the current two-year budget cycle.” When we scrutinize the numbers closely, the real legacy of “no new tax” policymakers is a gaping budget hole which dwarves anything seen previously.

The only reason that Minnesota has any kind of surplus is because the state--at the insistence of Governor Pawlenty--shifted $1.9 billion of state funding for K-12 education into the next biennium. This further puts the screws to Minnesota public schools by compelling them to drain their reserves or borrow short-term. The $1.9 billion shift technically put the state budget in balance for the current biennium, but enlarged the deficit in the next biennium by $1.9 billion.

Actually, Governor Pawlenty has his least appreciated friends to thank in part for the positive balance in the current biennium--President Obama and the federal government. Federal recovery dollars designed to rescue struggling state budgets infused $2.3 billion of assistance into Minnesota. According to the November forecast budget document, this included $1.46 billion from a higher federal matching rate for Medical Assistance and $816 million in state fiscal stabilization funds.

Furthermore, when Pawlenty came into office in 2003, the state had a $600 million plus general fund budget reserve. At the end of Pawlenty’s tenure, the budget reserve is zero. In addition, the state’s cash flow account today is also down significantly relative to what Pawlenty inherited when he came into office.

Draining the state’s reserves in order to achieve a short-term balanced budget and is yet another legacy of “no new tax” budget policy.

Also gone is the up-front portion of state tobacco settlement dollars, which amounts to approximately $1 billion. Among other things, these settlement dollars were to fund a medical education endowment. The up-front tobacco settlement dollars and the long-term good they could have accomplished was traded away to patch up an earlier state budget deficit. This is yet another example of long-term resources being exhausted in favor of a temporary budget fix.

Some real budget cutting did occur during Pawlenty’s tenure, but most of that was at the expense of local governments, not state government. Total real (i.e., inflation-adjusted) per pupil state aid to school districts fell by 14 percent, real per capita state aid to counties fell by 34 percent, and real per capita state aid to cities fell by 46 percent.

This point has been made many times by Minnesota 2020 over the last three years, but it bears repeating one more time as our lame duck governor exits office: local governments have reduced real per capita revenue much more than state government over the last eight years. On a statewide basis, local property tax increases were not the result of real local spending growth, but of the state decision to solve a disproportionate share of the state’s budget problems on the backs of local governments and local property taxpayers.

Other property tax increases were driven by cuts to the renters’ property tax refund (or circuit breaker). After several years of trying, Governor Pawlenty finally succeeded in slicing $52 million from the renters’ credit in the current fiscal year. The renters’ credit is the single most progressive feature of Minnesota tax policy; the 27 percent reduction to the program will result in significant property tax increases for Minnesota’s lowest income households.

Much of the state’s current red ink is the result of the great recession and its lingering aftermath. However, Minnesota was experiencing big deficits long before the 2008 recession. Furthermore, many states dealt with their deficit problem through a balanced approach involving both spending cuts and tax increases. But not the Gopher State.

The hallmark of Minnesota budget management over the last eight years can best be described as “shifty.” Budget deficits have been shifted into the future or on to other levels of government or on to property taxpayers; the shifty approach to budget balancing consists of two strategies.

The first strategy is to pick the low hanging fruit--the easy solutions. Drain the reserves, exhaust state endowments, push state expenditures into the future so the next governor and legislature will have to deal with them. As a result of these strategies, future policymakers’ budget options are far more limited and unpleasant.

The second strategy is to shift the budget problem to local governments and property taxpayers. A disproportionate share of state budget “solutions” has been to cut revenue sharing with local governments. This shifts the problem to counties, cities, towns, and school districts, compelling them to make the hard decisions regarding spending cuts and tax increases. It forces local officials to make the tough decisions that state policymakers didn’t have the courage to tackle.

The shifty approach to state budget deficits has had only one clear winner: it allowed “no new tax” politicians to claim that they did not increase state taxes. There are many losers, including property taxpayers, local officials, and future leaders who will have to deal with a far worse budget situation with far fewer options.

It appears, though, that the shifty budget balancing has run its course. In 2011, state policymakers need to make real changes in state finances that involve both real expenditure reductions and reforms and real tax increases, rather than simply shifting the state’s problem on to others.
 

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