The New FY 2014-15 Budget: A Balanced Approach
For the foreseeable future (at least through the 2014 election), political dialogue in Minnesota is likely to be focused on the tax and spending increases enacted during the 2013 legislative session. We have already heard complaints about historic growth in the state general fund and “largest ever” tax increases.
To gauge the magnitude of the growth in the state general fund, this analysis will focus on revenue projections from the non-partisan House Fiscal Analysis Department. Specifically, the analysis presented here will focus on biennial general fund “current resources,” which represents all of the revenue coming into the general fund over the course of a biennium, excluding the balances carried forward from the previous biennium. “Current resources” is the revenue measurement used to determine if the state’s budget is structurally balanced.
Based on the recently passed budget, state general fund current resources for the upcoming FY 2014-15 biennium are projected to be $38.4 billion—over $3 billion greater than the $35.2 billion projected for the current FY 2012-13 biennium. This represents a 9.3 percent increase in nominal dollars.
Let’s not mince words. Nine percent plus growth in state general fund revenue over the course of a single biennium is significant. However, like all statistics, this one needs to be evaluated in context. First, projected growth in state revenue is somewhat less than the projected 9.7 percent growth in Gross Domestic Product. In other words, growth in state revenue will not outpace growth in the economy; state revenue as a percentage of the economy will decline, albeit slightly.
Second, growth in state resources needs to be examined relative to population growth and inflation. The combined rate of inflation and population growth from FY 2012-13 to FY 2014-15 is approximately 5.7 percent. In other words, most of the growth in general fund revenue was necessary to keep pace with inflation and the need to provide services to a growing state population. In constant FY 2013 dollars, annualized state general fund revenues in FY 2014-15 will be approximately $3,395 per capita; this is 3.4 percent greater than the FY 2012-13 level of $3,282 per capita.
Third, while state revenues are increasing from FY 2012-13 to FY 2014-15 under the new state budget, real per capita general fund current resources will still be significantly less than they were over most of the last decade, as illustrated below.
The increase in state revenue agreed to during the 2013 legislative session will restore general fund current resources to approximately the level that they were at in FY 2008-09, but leave them significantly short of what they were in each of the three preceding biennia. For example, annual real per capita general fund current resources in FY 2014-15 under the newly passed budget will still be over $400 (10.9 percent) less than they were during the peak biennia of FY 2004-05.
The situation confronting the 2013 Legislature boiled down to the fact that the Great Recession—combined with a decade of “no new tax” state policies—had dramatically depleted real per capita state revenue, to the point where it was at a near 20 year low. As a result:
- Real per pupil state aid for K-12 public schools in FY 2013 is 13 percent less than it was in FY 2003 based on Minnesota Department of Education projections. The result of this decline in state aid has been expanded class sizes, fewer course offerings, and burgeoning school property taxes as school districts increased local levies to replace a portion of lost state aid.
- Important initiatives such as statewide all-day Kindergarten and early childhood education have been neglected for at least a decade. Expenditures in this area offer a strong return-on-investment, as Minneapolis Federal Reserve Bank Research Director Art Rolnick and others have pointed out.
- Real state support for the University of Minnesota and the MnSCU system had plunged by 35 percent over the last decade, while tuition skyrocketed. Pricing low- and middle-income students out of higher education opportunities is the wrong direction to go in an information-based global economy that places a premium on “brain power.”
- County and city property taxes had grown well beyond the rate of inflation and population growth. This growth in property taxes was not due to growth in local government spending (real per capita county and city budgets have actually declined over the last decade), but to a 43 percent decline in real per capita state funding for property tax relief programs.
The choice confronting the state policymakers in 2013 was to allow this dismal status quo to continue or to change course. To their credit, they chose the latter. However, the new course did not simply involve a restoration of each and every spending cut; rather, limited resources were targeted in a way that produced a better bang for the buck.
For example, state policymakers did not try to replace all the property tax relief dollars that were cut from the state budget over the last decade, but restored a portion of past cuts through programs that were better targeted, such as the new homestead credit that did a better job of directing tax relief to low and moderate income families and a reformed city Local Government Aid formula that did a better job of sending aid to cities with the greatest need. Furthermore, the new expenditures in the budget were items like early childhood education that have a proven track record of providing a strong return on investment.
Despite the outcry from the right regarding “out of control” spending and tax increases, the new budget agreed to by Governor Dayton and the Legislature was a balance between reinvestment and reprioritization. Spending was increased, but it was prioritized so that growth in the state budget was kept below the rate of growth in the economy and well below levels seen a decade ago. Important tax and budget reforms remain, but state policymakers made big strides in the right direction during the 2013 legislative session.