Wednesday, December 02, 2009

In the World of Hurt Department. The revenue projection is in and it is not good news. As I reported yesterday, whispers on the street had the revenue shortfall at about $1 billion and it came in about $200 million above that at $1.203 billion.

The primary reason for the revenue shortfall is the precipitous drop-off in income tax collections since the end of the 2009 legislative session. Income tax collections are $827 below the amount estimated in June which accounts for nearly 70% of the revenue shortfall. The bulk of the remaining shortfall comes in the form of less in terms of sales tax collections and capital gains taxes.

Falling wage levels--resulting from both unemployment and underemployment--are at the base of the problem with income tax collections. State Economist Tom Stinson believes that the economy has turned the corner and is performing increasingly well, but that even though Minnesota's economic performance overall was better than what was estimated in February 0f 2009, that performance did not translate into more jobs and/or higher wages.

All of this makes the 2010 session one that is going to be extremely painful. It's my opinion that if the shortfall had been half of this amount, the session would have been relatively short, as a number of relatively small adjustments could have been made to limp things through to the 2011 session. It would have been painful and tough, but it at least looked doable. At $1.2 billion, it no longer looks that way.

The forecast throws a monkey wrench into plans for a large bonding bill. The state's debt service is currently at 3.7% of total budget, well above the 3.0% guideline currently being used to estimate how much long-term debt the state should undertake. There is still sentiment to put together a large bonding bill, but it will be interesting to see if the Governor and Legislature can agree on both the magnitude and nature of such a bill.

As bad as the 2010 session looks, it's the 2011 session that's going to have legislators (and gubernatorial candidates) shaking their heads. Page 8 (the next to last page) in the Minnesota Managment and Budget document entitled "News Conference Handout" shows the painful prospects that lie ahead. The $5.4 billion projected shortfall is bad enough, but one look at the details shows that a gimmick-free, pre-unallotment, inflation-included budget shortfall would surpass $8 billion.

The $5.4 billion number does include the buyback of the aid payment shift to school districts from 73%/27% to 90%/10%, but does not include the nearly $1 billion in unallotment to the state's General Assistance Medical Care budget, the approximately $500 million in early recognition of property taxes, and $1.2 billion in inflation. It's hard to count the failure to fund inflation as a cut, but it would mean an erosion of purchasing power. Whether the Legisalture and the Governor can agree to include any or all of these changes as part of the permanent budget going forward to mitigate the size of the revenue shortfall for the coming biennium remains to be seen. I'll go out on a limb here and say the discussions are going to be political. It's also extremely important to remember that another federal stimulus package is highly unlikely.

State Economist Stinson did say that the economy is getting better and that while improved performance may not make the job appreciably easier for the remainder of this biennium, it may make things better for the 2012-2013 biennium. As he pointed out, however, higher economic performance resulting from the rebound are already built into those projections.

In other words, the day of reckoning is upon us to some extent. Senator Larry Pogemiller's (DFL-Minneapolis) comments in this morning's StarTribune clearly bear out that sentiment. The gimmicks are gone and we are now going to have to look at both the revenue and expenditure side of the state budget equation to come up with solutions that provide the services needed by the state's residents and also create greater stability in the system as a whole.

What does this mean for education? I don't really know and I don't think anyone does, at least at this point. I remarked today that we did dodge a bullet to a large extent last session, but we'll be dodging buckshot during the 2010 session. How much we get hit is anyone's guess, but it will be difficult not to at least be touched by more than a few pellets.


Managment and Budget Documents: http://

MN Post Article #1: http://

MN Post Article #2: http://

Star Tribune Article: http://

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