Thursday, December 6, 2012

It’s Worse than you think: Quick Thoughts on the Minnesota Fiscal Forecast

Official reports list the upcoming budget deficit for the State of Minnesota as $1.1 billion.  This according to the state economist and the fiscal forecast.  Yet while $1.1 B is bad enough it is really worse than that, and could deteriorate.

Consider some basic facts.

When the 2011 government shutdown was averted $2.4 billion was borrowed from K-12 and the state also borrowed approximately $700 million from the tobacco endowment.  These were both one time revenue sources that need to be paid back.  Add these two obligations to the $1.1 and the real deficit is closer to $3.8 B.

Critics will say that the $3.8 B figure is wrong, asserting that the fiscal forecast does indicate that about $1.3 B will be shifted to pay back K-12 from current surplus.  this is on top of $3.2 M already paid back (but for the sake of argument we will ignore this even though it should be counted toward a larger state obligation for revenue).  But as my grandmother used to say money does not grow on trees and it comes from somewhere.  That $1.3 is coming out of something,a present one time surplus in the current budget cycle that one cannot necessarily count on in the next cycle.  This money represents an obligation to the state and therefore money is stilled owed and must be paid back.  The same can be said about the tobacco bonds.  Thus the $3.8 is a fair figure on the obligations owed by the state beyond current projected revenues to meet spending in the next budget cycle that is roughly the same as it is now in the current one.

It gets worse.  The forecast also notes that the anticipated gaming proceeds to help finance the new Vikings stadium are significantly behind projections.  If they do not pick up then the State (taxpayers) are also on the hook for this additional obligation which could potentially been a few hundred million dollars.  This makes the bad deal for the state look even worse.  Stay tuned on this.

But it gets even worse.  If the fiscal cliff kicks in and hits the state or even if the economy simply slows down, revenues decrease and the deficit gets even worse.  Even the fiscal forecast tells us that.

Thus, the $1.1 B deficit may very well really be one that is over $4 B.  We are back to where we were two years ago.  No surprise.  The last budget was done with gimmicks and tricks.

 We cannot continue to repeat the mistakes and tricks of the lack decade and continue to push the problem down the line.  Yes tax increases may be needed to address the problems here but that is probably not enough.  New revenue sources are needed but cuts may also be needed.  The question will be who carries the burden or takes the cuts.  Will it come from the poor?  Healthcare?  Education?  Higher ed?  Cities?

The issue now is how honest does the DFL want to be in confronting the reality of the budget.  Will it use real numbers, eschew gimmicks, and base projections on realistic assumptions?  This is the challenge for the Governor and the legislature.

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