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Minnesota’s financial woes match those of other states

Minnesota has to recognize that it has a structural budget deficit — and it must avoid using accounting gimmicks.

Last week a report [PDF] was issued by the national State Budget Crisis Task Force indicating that six populous American states have “long-term budget burdens that are limiting their ability to pay for basic services.” While not included in the study, Minnesota faces many of the same problems.

Jay KiedrowskiJay Kiedrowski

The task force, chaired by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch, found that:

  • Medicaid spending growth is crowding out other needs. Minnesota is confronting a similar problem. While some positive changes were made in the Medicaid program in 2011, the cost curve needs to be bent further downward.
  • Federal deficit reduction threatens state economies and budgets. The sequestering of federal budget dollars that is scheduled to begin this coming January will have the impact of reducing federal dollars to Minnesota state and local government. With already constrained resources, this will make it much more difficult to balance Minnesota budgets.
  • Underfunding retirement promises create risks for future budgets. Minnesota is ahead of many other states on pension funding. While not at 100 percent funding yet, changes were made in 2011 to increase employee and employer contributions to ensure that benefits would be secure.
  • Narrow and eroding tax bases and volatile tax revenues undermine state finances. Minnesota Revenue Commissioner Myron Frans is touring the state showing Minnesotans that our tax system is unbalanced. Property taxes and income taxes appear adequate, but sales taxes are insufficient. In 2011 alone, over $400 million of sales taxes were lost to lack of collections on e-commerce transactions. 
  • Local government fiscal stress poses challenges for states. The League of Minnesota Cities found large deficits facing Minnesota’s cities in the future. Cutbacks in federal and state funding are the dominant contributor.
  • State budget laws and practices hinder fiscal stability and mask imbalances. Minnesota has used “gimmicks” to balance its budget in recent years. In 2011, Minnesota borrowed money from future tobacco-settlement receipts to pay for current obligations. The state also “shifted” school payments inappropriately to balance the budget.

The State Budget Crisis Task Force recommended that state government finances become “transparent and accountable.” How should Minnesota do that?

Recognize structural deficit

First, Minnesota has to recognize that it has a structural budget deficit (i.e. in a normal year Minnesota revenues are less than expenditures). Second, Minnesota must avoid using accounting gimmicks. The way to ensure that they are not used is to balance not only the current budget but also make sure that a projection of the following biennial budget is balanced as well. Finally, we need bipartisanship to develop solutions for all Minnesotans.

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Many actions are going to be necessary to fix Minnesota’s budget imbalance. First, Minnesota needs to reform its revenue system. For too long, Minnesota has underutilized its sales tax. We need to expand the sales tax to include clothing, personal services and online purchases to offset the need for further property-tax increases.

Minnesota’s collected tax revenues as a percent of personal income has been below the national average for five of the last seven years. With the existing shortage of revenue compared to expenditures, Minnesota needs to raise revenue at least to the average of all the states.

Revenue cannot be the only budget response. Minnesota needs to reduce spending as well.

Many states have reduced expenditures on infrastructure like roads and transit and on higher education. But reducing investments in the future is not the right way to address expenditures.

Seek input of state employees

Minnesota needs expenditure reform. How can we get the same amount of service with fewer dollars? How can we redesign our public services? Our state employees need to be brought into the discussion of reforming state spending. They are dedicated and have good insights about better ways of spending state dollars.

Unfortunately, we have not been fair to our state employees. They have not received a general pay increase in five years. Next year, state employees must be given a pay increase.

Build budget reserve

We also need to continue to build our budget reserve. Budget stability leads to better decision-making and more consistent service delivery.

Minnesota, like many states, is under fiscal stress. While we are in better condition than many states, we are not fiscally healthy enough. We have work to do. When considering candidates for the Legislature this fall, look for those who go beyond the typical rhetoric to talk about what they are prepared to do put Minnesota back in good financial condition.

Jay Kiedrowski is a Senior Fellow at the Public and Nonprofit Leadership CenterHumphrey School of Public Affairs, University of Minnesota. He served Gov. Rudy Perpich as commissioner of finance.

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