Monday, February 28, 2011

Rosier Budget Forecast. It's still not a whole bed of roses, but the February budget forecast improved by over $1 billion and the projected budget shortfall for the next biennium now sits at $5.0 billion, down from the $6.2 billion forecasted shortfall predicted in November. The billion dollar improvement almost exclusively comes from increased tax revenues, with income tax collections projected to grow by approximately $489 million and sales tax collections projected to grow by an additional $249 million in the next biennium.

The fund balance for the remainder of the 2011 fiscal year also improved dramatically, growing to an estimated $663 million, with the boost in the revenue position being achieved through both increased revenue collection ($97 million) and lower than expected state expenditures ($167 million). Most of the expected correction in the expenditure category comes from a $165 million expected decrease in health and human services expenditures.

Even with the improved revenue situation, expect little movement in the legislative landwehr that is currently in progress. Republican legislative leadership continues to rule out any talk of tax increase, while Governor Dayton--while dropping the temporary 3 percentage point income tax surcharge for income tax filers with incomes in excess of $500,000--has not dropped his call for an increase to high-income earners in Minnesota through the creation of a new tier with a tax rate of 10.65%.

It is important to draw a distinction here (and it's a distinction that you are going to be hearing about a lot throughout the remainder of the legislative session) about the two aspects that contribute to budget shortfalls: the structural and cyclical elements that contribute to budget shortfalls. The structural aspect of the deficit speaks to the balance between revenue and expenditures given an expected level of economic performance. Ideally, revenue and expenditures match, but the vagaries of economic performance create cycles when revenue collections are higher due to higher levels of economic activity, hence the cyclical aspect of budget forecasts.

What we experienced with this budget forecast is a sharp increase in economic performance and an accompanying increase of nearly $1 billion in new revenue collection. This, more than any other aspect, contributed to the improved budget situation, especially as it relates to the next biennium. We frankly don't know if economic performance will continue to soar as it has since last November. A situation may exist (and we hear it all the time from denizens across the entire political spectrum) where the state may be able (conceivably) to "grow" our way out of the deficit, but that is highly unlikely. New permanent revenue in the form of a tax increase or permanent cuts to the expenditure base will have to be part of the final budget solution or we will find ourselves riding the economic performance roller coaster with projected surpluses or shortfalls showing up with the corresponding levels of economic performance.

Think of it this way. Two runners are jogging around the track. One runner is your classic distance runner; moving along at a steady pace. The second runner's pace goes up and down unevenly. After a couple of laps, the second runner falls behind the first runner and depending on the level of energy the second runner has expended, may fall well behind the first runner. After resting up a bit, the second runner may pick up the pace and get closer (and sometimes catch up to or pass the first runner). However, the second runner cannot maintain the fevered pace employed to close the gap with the first runner and will likely fall back behind once again.

In this example, the first runner is the structural budget. The second runner is the cyclical nature of the budget, with its speed an expression of the economic cycle (the better the economy, the faster the pace). Ideally, the runners should run as closely together as possible, but the business cycle simply varies too greatly for that to happen. Thus, state governments need to have budget reserves and cash flow accounts to buffer the state's fortunes during economic downturns. What has happened over the last decade and a half in Minnesota is that there has been a reluctance to make difficult decisions (especially during the Ventura administration, when rebates were handed out like candy) and we've ridden the booms-and-busts of the business cycle.

That will likely end this year. Whether the final resolution contains higher taxes, lower base expenditures, or a combination of both remains to be seen, but suffice to say, the last time the "can" was kicked, it went completely off the road and there won't be another opportunity to employ the same mentality as the Governor and Legislature face the budget situation this session.

Interesting? Can be. Exciting? Sometimes. Nerve-wracking? Every minute.

Budget Forecast Link:

Visitors from the Deep South. You may remember my posting of Minneapolis StarTribune columnist Katherine Kersten's column regarding the impressive gains being made in Florida in terms of overall achievement and the narrowing of the achievement gap over the past decade. A group of Florida education officials addressed both the House and Senate Education committees today, describing some of the measures they have undertaken in an attempt to meet their education goals. The team of presenters consisted of Patricia Levesque, Executive Director of the Florida Foundation for Excellence in Education and member of former Florida Governor Jeb Bush's education policy staff; Dr. John Winn, former Florida Commissioner of Education and current Chief Program Officer for the National Science + Math Initiative; and Dr. Jay P. Greene, endowed Professor of Education Reform at the University of Arkansas and a Fellow at the George W. Bush Institute.

There is no argument that what Florida has accomplished has been extremely impressive. They have put together a comprehensive response to some of the more pressing issues facing the nation's education system. While still trailing Minnesota in some measures of achievement, Florida's achievement growth over the past decade and a half has outpaced Minnesota's.

Here are some of the initiatives Florida has employed to raise achievement:
  • Grading schools on an A-to-F scale.
  • Rewards and consequences for results.
  • End of social promotion.
  • A command focus on reading by the end of third grade.
  • Higher expectations for graduation.
  • Bonuses for schools and teachers for promoting Advanced Placement.
  • More choice (but still not as much as Minnesota).
It's all made for an interesting stew in Florida and, as I said before, it's hard to argue with the results. But as I reported in my response to Katherine Kersten's column, Florida resources, while still trailing Minnesota in nominal terms, have grown at a faster rate over the last decade than Minnesota's have. Further, Florida appears to have focused its resources in certain areas--especially the promotion of reading--that have produced both short and long term achievement gains.

Dr. Winn also made what I believed was a very pertinent point in regards to how a state agency should help local school districts implement state goals. This is an area where Minnesota needs improvement. This isn't an indictment of the performance of the Minnesota Department of Education (MDE), but with continuing staff cuts at the Department and a seemingly on-going set of disparate education programs being promoted, often one right on top of the other, it is extremely important that as we take our next steps to improve education performance that MDE work closely with school districts in a supportive and partnership role as opposed to being, for lack of a better term, an agency of "scolds."

In all, it was an afternoon well spent as it is interesting to see what other states are doing. While the degree of challenge may differ state-to-state and the elements needing the greatest amount of attention likewise may vary, the similarities in challenges facing school districts throughout the country certainly outweigh the differences and we can all learn lessons in "what works" from other states. So thanks to everyone who made this possible.

Florida Foundation for Excellence in Education Link:

Alternative Licensure Deal Reached. Governor Dayton announced today through a letter to legislative leadership that a deal has been reached on the alternative licensure issue. It appears that a conference committee will be called and that the changes suggested by the Governor will be added to the legislative package (there was one significant difference between the House and Senate bill in the area of recognition of alternative licenses issued in other states) and the conference committee will then be passed.

It's nice to see this hurdle cleared (if it indeed has been cleared). This was viewed as the low-hanging fruit of the session, as both legislative leadership and the Governor have expressed an interest in getting an alternative licensure system in place. Hopefully, we'll see positive movement by the end of the week.

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