Thursday, December 04, 2008

If It's Not One Thing, It's the Same Darn Thing. My cousin Melvin told me that many years ago and I have to say it is one of the more simply profound statements I have heard and sadly fitting when looking at the state budget heading into big-time negative territory for the second time this decade. Yes, that's the SS Minnesota to our right, leaking red ink like there's no tomorrow. Maybe it hit the iceberg of the housing bubble or was attacked by a submarine firing tight-credit torpedos (or maybe I should just stop with the analogies).

At any rate, it was announced today that the revenue shortfall for the remainder of this fiscal year (which ends June 30, 2009) is projected to be $426 million. That's small change, if anything in the hundreds of millions can be described as "small," compared to the projected revenue shortfall for the 2010-2011 biennium estimated to be $4.8 billion, a more than five-fold increase in the shortfall from the $936 million shortfall estimated at the end of session.

The largest portion of the change comes from a $3.3 billion drop in state revenue since the end of session. The remainder of the shortfall comes from a $580 million increase in state expenditures (most of which are in the area of health and human service costs) over the same time period. Add these two numbers to the $936 million end-of-session shortfall and you've got a nice, tidy, $4.8 billion shortfall.

It was a very somber message delivered by Chief State Economist Tom Stinson (pictured speaking) as he outlined the reasons for the downturn in state revenue. According to Global Insights, the firm hired by the State Department of Managment and Budget (formerly the Minnesota Department of Finance now combined with the Minnesota Department of Employee Relations), the recession (yes, it is a recession) began in late 2007 and will likely last at least until late 2009. This basically stunts state revenue growth for an entire year. What makes this particular recession even more puzzling is that given the breadth of the economic crisis and the degree of damage in some sectors, knowing when the turn-around will begin is more difficult to gauge. The only safe assumption at this point (if there is a safe assumption in economics) is that this recession is going to be more severe than those experienced in the early 1990s or shortly after the terrorist attacks in September, 2001.
So, where from here? Needless to say, this is going to be a painful, painful legislative session. The budget story in the StarTribune this morning said as much, as legislators acknowledged that there is no way to "tax our way out of this" and that cuts will have to be made. What further complicates matters is that every reserve or pot of possible one-time money has been tapped over the past six years, so all cushions are gone. One area that will receive a lot of attention is that of health and human services, which continues to grow at a rate well above inflation. It will likely take a combination of state tax increases (if they can get around the Governor), program cuts, and property tax increases to get things to balance. Needless to say, I won't be planning a June vacation.
I don't know what to say about the prospects for education. Given the magnitude of the budget problem, I wouldn't expect any increase outside of the money going onto the formula from the change in the permanent school fund, but at its current amount, that won't even replace the loss of the $51 in one-time money approved last session. There is the possibility that the funding shift could be changed from 90% current year/10% subsequent year to something lower. That generates "balance sheet" money, but raises school district borrowing costs, making it a less-than-optimum option. Further, there is no guarantee that any revenue generated would stay in education.
Harry Truman once said, and I paraphrase, something to the effect, "give me a one-handed economist, because they are always saying 'on the other hand.'" I only wish Tom Stinson and his team would have been able to go to another hand for a rosier synopsis this morning. The only positive about having one hand today is that we didn't need to go to a second hand to count the number of billions we are in the hole. Hopefully, that will hold true as we move through 2009.
Minnesota Managment and Budget Documents:

But There was a Demonstration. The small group pictured at the right showed up outside Room 15 of the State Capitol and chanted for higher taxes, especially on those in the upper-income brackets, to avoid making cuts to health and human service programs. In the background, you can see a State Trooper approaching. Right after I took this shot, the Trooper instructed the demonstrators that they could no longer chant or wave their signs and being polite Minnesota protesters, they complied. I honestly don't know how I feel about this. Scandinavian that I am, noisy demonstrations make me a bit uncomfortable--heavens, all those emotions--but in my advancing years, I realize that these people are ticked off and as long as they aren't taking hostages, why not let them scream (well maybe not scream, but shout with vigor) and wave their signs. I'm sure they'll be back during the session. Frankly, I'd be worried about the state of our democracy if they weren't.

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