The Entirely Unsurprising New Minnesota Budget Deficit

So yet again the Minnesota State budget is in the red.  The fiscal forecast projects a $186 million
deficit for the remainder  of the biennium, exploding to $586 million for the 2020-21 cycle. If the state is lucky it will only be that amount, but the possibility is far more.  How did this happen again that Minnesota is facing a deficit.
There are three forces driving the new deficit in Minnesota: state policy, the state and national economy, and federal policy.  Only the first is within control of the state, the other–to use the language of economics–are exogenous.
State policy is the first problem.  Simply stated, there has been bipartisan fiscal irresponsibility.  When the budget surplus grew to well in excess of a $1.65 billion earlier this year the Republicans thought the solution was to cut taxes, the Democrats to increase spending.  We did  both.  What was ignored were all the structural problems in the budget and budget process such as counting inflation for revenues for revenues and not obligations.  There was ignoring commitments to K-12, to pensions, and local governments.  There was funny number budgeting when it came to  infrastructure and other projects.  The budget was simply not honest.  But in addition, when there was a surplus no one wanted to say “Save for a rainy day,” thinking that the economy would continue to grow and perform well (generating continued and growing tax revenues) and that the federal government would continue to subsidize the state’s programs.  Instead, the political horizon was the next election cycle and not the long-term fiscal health of the state.
But all good things come to an end.  Since 2009 the US has been in an economic recovery and growth.  Economic fortunes have improved for many but no economic expansion lasts forever and there are signs of a slowing US economy.  A slower state or federal (or even international in a global economy) means less tax revenues for the state.  Uneven growth in Minnesota may mean 2.3% unemployment for the Twin Cities but it is not so good in greater Minnesota.    Minnesota’s politicians premised spending on an infinitely growing economy and that is not happening and the fiscal forecast notes that.  The economic slowdown is largely beyond control of state policy makers, and it is the second driver of the deficit.
Third, the big imponderable is whether Congress and the president agree to a tax reform bill.  Depending on what is in it, it could have huge implications for the state.  One proposal would reduce or eliminate the federal for state and local taxes.  For big spending and social welfare states like Minnesota that could be a big hit.  Elimination of the Obamacare individual mandate, or elimination of health and medical deductions, or doubling the standard deductions (which affect non-profits) could impact the state.  Additionally, while a few tooth-fairy believing supply-side trickle down economists believe the tax cuts will boost the economy, most disagree and thing it is more possible that it throws the economy into reverse and slows it down more.  On top of which, if the federal government needs to make more  cuts to make up for the projected budget hemorrhage, they may come from federal health care spending and money transferred to states such as Minnesota.
What most people and many legislators fail to grasp is that nearly $46 billion budget for Minnesota only represents the State’s part of its fiscal obligations.  Minnesota is actually obligated to spend billions more than that, with that money coming from the federal government.  Cut federal government spending and Minnesota will still have the obligations but not the revenues.
Thus, a slowing economy and federal tax reform and budget cuts could thus transform the not so rosy Minnesota  budget deficit into an ever greater one.  Had the governor and legislature thought through this when they rushed to spend and cut taxes they might have been able to plan and cushion for it.  But alas, they did not do this...yet again, leading to the entirely unsurprising new Minnesota budget deficit.

Addendum:  Recently someone questioned my expertise on budgets and economics and asserted  I was "merely a dumb political scientist."  Perhaps I am but lets think about this.  In graduate school I amassed nearly enough credits to have a masters in economics.  At Hamline for 15 years I taught in the business school, teaching graduate (masters and doctoral level) classes in economic policy, and I taught local economic development at the HHH school at the UMN.  Oh, and I worked as a housing and economic planner for several years and also was a researcher at the UMN Institute on Race and Poverty doing work on racial and economic segregation and policy.

March 15–Day of Decision for Cautious Minnesota Democrats

By March 15, we will  have a better idea of what Minnesota Democrats in the legislature are made of.  But if early indications are correct, timidity, cautious, and maybe disorganized are the words that best describe the DFL majority approach to governing this year.
    First, why is March 15, so important?  This is the first committee deadline at the state legislature.  Every year the legislature agrees to deadlines for legislation.   These deadlines are referred to a committee deadlines.  For a bill to have legs or remain viable it must pass some committee in its house of origin by a certain date.  If it does not, the bill is presumed dead and theoretically it may not be taken up again.  This year the first committee deadline is March 15, for policy bills.  Thus a bill introduced in the House of Representatives must pass a committee by March 15, for it to live another day. 
    The second critical deadline is March 22.  For any bill that passed in one chamber by March 15, its companion bill in the other body must pass a committee by March 22.  Finally, March 29, is a third deadline for major appropriation and finance bills.  These deadlines do not apply to bonding, budget, and tax bills.
    What all this means is that expect to see by March 15, votes on critical issues that include guns, same-sex marriage, election reform, and a host of other issues that the DFL majorities have bee holding hearings on for the last several weeks.  What committees do with those issues in next several days will be the clearest sign so far regarding how the DFL is interpreting the 2012 elections.
    But one does not really need to wait until March 15; instead, the DFL is proving to be timid, cautious, and inept at governing and it really seems to have defined its mandate from last year as more rejection of the GOP for over-reach that a call for boldness and change.  Just consider a few examples.
    Guns.  The DFL seem all hot and bothered to legislate on guns with proposals for universal background checks and bans on assault weapons placed on the agenda.  Yet soon the assault weapon was pulled and then this last week Representative Paymar’s bill for background checks was effectively made DOA with an NRA-sponsored one that commanded 74 sponsors.  The bill follows the NRA line of targeting those with mental illness as the cause of gun violence.  Maybe it will pass, but anything that does pass will largely be ineffective or fail to address the multi faceted problems  of guns and violence in Minnesota.
    Reproductive Rights.  Perhaps the biggest disappointment this past week was a 71-58 vote in the House to ban insurance coverage for abortion for women who secure their health care coverage  under the Exchanges being set up in Minnesota pursuant to the Affordable Care Act.   Even DFLers supported this bill.  For the tens if not hundreds of thousands of women in Minnesota who will get their health care coverage through this bill it means that they will not be able to exercise their reproductive rights unless they have their own money.  This limit may very well be unconstitutional  under the Minnesota Constitution.  But regardless of the constitutionality, this shows a DFL party hardly united and supportive of women’s rights.
    Same-sex marriage.  Legalizing same-sex marriage portended to be the hot button issue of the 2013 session that would vex the DFL.   Was the demise of the Republicans last November due to overreach on the social issues and the constitutional amendments?  The DFL seems to have accepted that view and has moved very cautious on same-sex marriage.  It was not clear that the majority wanted to move on this issue and Dayton’s tepid stance on the issue–I will sign the bill if it reaches my desk–is hardly a major legislative push on the topic. 
    But now to complicate the issue a Star Tribune poll on same-sex marriage suggests that a  majority opposes legalizing it.  The poll may be flawed but regardless of that, it adds support to DFL inaction on the issues.
    Election reform.  Right from the beginning the DFL seems to be pursuing election reform issues that really will not make much difference.  It is concentrated its efforts on voting reform.  Yes,  changing absentee voting to early voting is not a bad idea but largely two major recounts in this state have shown that voting is not a major issue.   However, even with this issue the House Elections Committee seems to puttering around.  The biggest problems are in the areas of lobbyist reform, legislature disclosure, revolving door,  and unlimited soft money contributions to parties and the caucuses.  There is no movement let alone bills on this topic.  The response by the legislature?  Some legislators and the governor want to raise contributions to candidates–hardly a reform and instead more of a bill of convenience for them.
    Taxes.  Governor Dayton’s Minnesota Miracle round two is dead.  Efforts to extend sales taxes to services and clothing and services are dead as the governor has withdrawn support for both.  The misfire on taxes best describes how timid and inept the DFL politics seems to be this session.
    The tax proposals were dead even before the governor nixed them.  While the economic theory behind taxes services is good, the governor played the politics all wrong.  He never brought the DFL in from the start to get them to buy into the tax reform and it was Tom Horner and not Dayton who had originally proposed sales tax reform.  Dayton was pushing an idea he did not prepare his party for and he also pushed ideas that had significant and powerful lobbyist and special opposition to.  There was no way the DFL was going to support an issue opposed by major interests that fund their party, caucus, and candidates.
    Moreover, Dayton forgot that the DFL has a two year term and the Senate four.  House DFLers on taxes and a range of issues have very different interests in moving bills on these topics.  They will seen the voters sooner.  In addition, the DFL is still very much a coalitional party with those from the urban cores, suburbs, and Iron Range having very different interests.  Dayton who was so smart as a gubernatorial candidate in bringing these different interests together has fallen largely flat in doing that legislatively.  Finally, this is the same DFL that was consistently out-foxed politically by Governor Pawlenty–they were unable then to use their majorities effectively and the same appears true now.
    I remember my hardcore DFL friends telling me over a year ago that Dayton and the DFL  were biding their time for the second two years of the governor.  Their theory was that with the GOP out and the DFL in real change would happen.  I am still waiting.