Human services crowding out all other categories of spending by Minnesota government

Back in 2009, the Budget Trends Study Commission painted a grim picture of a Minnesota fiscal future utterly dominated by one spending area: health and human services. The report highlighted historical rates of growth, demographic pressures feeding that growth, and concluded that if historical trends persisted, “in order to achieve balanced budgets over the 25 year time horizon, expenditures on all other segments of the budget, including K-12 education, would have to remain essentially flat.” New information suggests this vision is not a visit from the Ghost of Fiscal Future; it’s unfolding right before our eyes today.

The annual release of Census data on state and local government finances provides information on Minnesota’s tax collections, spending levels, and spending priorities, which enable comparisons to other states. But some of the best insights come from examining the information for an individual state to see how tax collections and spending patterns have evolved. We have been publishing our summary of this Census data, How Does Minnesota Compare, for nearly 50 years and after looking back over many years one thing has jumped out at us as reflected in the table below:

Twenty years ago Minnesota’s “high tax, high service” governance model was reflected in most areas of government. When looking at government spending relative to state personal income – which helps control for differences in wealth between states – Minnesota spent more than the national average in 13 of 18 major expenditures categories in 1992. Based on the just-released FY 2012 data, that ratio has completely flipped. Now we spend more than the national average in just five categories. Whereas Minnesota spending once far exceeded national averages in areas like K-12 and higher education, we now trail national averages.

Many would be quick to attribute this trend to the practice/philosophy of tax cuts followed by tax restraints that marked the period 1992-2012. It’s undoubtedly a contributing factor.  According to the latest Census figures, total state and local tax collections per $1,000 of income in Minnesota in 2012 were 9.9% above the national average,  down from 13.3% above the national average in 1992.  However, its difficult to attribute this trend and the magnitude of the changes entirely to the modest relative change in tax collections.

That suggests something else – something very powerful – is at work, and the first category of spending in the table suggests what the culprit is.

The Census Bureau defines “public welfare” spending as “support of and assistance to needy persons contingent upon their need.” This category includes a wide variety of programs and expenditures for low income households, the disabled, and – above all – the elderly. It includes payments to health care providers for medical care, support of private and public welfare agencies and organizations, and cash assistance to needy individuals and households – in short what we might more generally call “human services.” Minnesota has long been recognized as a state that looks after its most needy and disadvantaged. It’s part of our ethic, it’s generated many excellent returns, and it’s a hallmark of being a great state.

But the crowding-out effects on other government services that are also critical to our success are very real. Consider this:

  • The 46.8% higher spending translates into $8.4 billion in spending above the national average per biennium.
  • Public welfare spending grew by 75.8% between FY 2002 and FY 2012 – roughly 2/3rds faster than personal income growth over the same period (45.9%).
  • Viewing the trend through another lens:  public welfare spending grew about 1.5 times faster in the last decade than total taxes collected (75.8% to 52.3%).

No spending which grows some 50% faster than income or taxes over time is sustainable – especially a spending area of this magnitude. And perhaps most disturbing of all: the full force and fiscal impact of the “silver tsunami” is still years ahead.

Lots of questions deserve to be asked. How much of the growth is driven by demographics? Does Minnesota have substantially more generous programs? A broader scope of programs? Greater eligibility? What opportunities are there to streamline bureaucracy, consolidate programs, and otherwise improve the cost efficiency of program management? Efforts are being pursued, but answering these questions is difficult because the complexity of spending in these areas perhaps rivals only the property tax system in terms of general incomprehension.

The warnings of the Budget Trends Commission are playing out before our eyes. It would seem program benchmarking and other assessments need to be done, and soon, for the sake of taxpayers, beneficiaries of these programs, and the rest of government.

This post was written by Mark Haveman and originally published on Fiscal Fitness, the blog of the Minnesota Center for Fiscal Excellence.

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Comments (5)

  1. Submitted by Frank Phelan on 12/19/2014 - 11:34 am.

    Follow The Money

    The web site of the Minnesota Center For Fiscal Excellence does not say anything about where it gets its funding, at least from what I can tell. But given the make up of the Board of Directors, it seems that a more correct title would be the Corporate Center For Fiscal Excellence. No shame in that, but one wonders how mush government largesse the state ladles on to the employers of the board members.

  2. Submitted by jody rooney on 12/19/2014 - 12:16 pm.

    This is actually pretty interesting

    I agree with the author’s suggestions.

    “Lots of questions deserve to be asked. How much of the growth is driven by demographics? Does Minnesota have substantially more generous programs? A broader scope of programs? Greater eligibility? What opportunities are there to streamline bureaucracy, consolidate programs, and otherwise improve the cost efficiency of program management?”

    We all think of welfare as cash payments but I would like to see a further breakdown of expenditures. But I suspect a lot of the cost is medical which of course would significantly increase dollar expenditures. Given that we have one of the longest life expectancies in the nation I would think that there would be a lot of subsidized care.

  3. Submitted by Ray Schoch on 12/19/2014 - 02:14 pm.

    This little article

    …would seem to be a relevant response to the first paragraph in this morning’s “Glean” on MinnPost: “Minnesota’s leading business group [the Minnesota Chamber of Commerce] wants state lawmakers to scrap the new minimum wage law that allows for inflationary increases after the hourly rate reaches $9.50 in 2016. Officials with the state Chamber of Commerce said Thursday it was a priority to get rid of a wage-escalator provision. The chamber’s labor policy director, Ben Gerber, says the business lobby also wants to slow specified increases that will push the current $8-per-hour minimum wage up by $1.50 over the next two years.”

    Continuing to suppress wages will only exacerbate the problem described by the Minnesota Center for Fiscal Excellence. We’ll be shooting ourselves in the foot, since keeping wages low will simply push more people toward the use of the wide variety of state services now in place to provide assistance to low income households, the disabled and the elderly. They’ll be doing that of necessity, since the C of C’s proposal to keep wages low and going lower, since they wouldn’t be related to inflation, will simply increase the number of people in the bottom half of the population in terms of income. As the article states quite clearly, “No spending which grows some 50% faster than income or taxes over time is sustainable…”

    The elephant in the room – the question NOT asked by the Center for Fiscal Excellence, and certainly not addressed by the self-serving proposal of the C of C – is this: Will the new minimum wage, specifically INCLUDING the wage-escalator provision, provide significant help in addressing this problem?

    I lack the number-crunching ability and resources to address the question myself with any degree of expertise, but it does seem to me that if more Minnesotans are earning enough money that they don’t NEED to make use of “human services” through the state because their economic situations are stable, or even improving, then growth in this sector might be contained so that it doesn’t consume an inordinate share of the state budget. I don’t know that to be a fact, but it certainly seems plausible.

  4. Submitted by Noel Martinson on 12/19/2014 - 04:57 pm.

    More Questions

    What is the interaction between the increase in public welfare spending and other categories seeing a decrease e.g. corrections?
    How many of these categories have reduced budgets because of reduced need? The argument put forth here seems to assume the categories are not connected except for the slice of the budget they get. We learned a long time ago that public health and public utilities are strongly connected, that investments in safe drinking water and sanitary sewer can help reduce or eliminate spending on certain types of disease. I think it would be prudent to understand how the different areas depend on each other and whether increased investment in one area can help decrease the need for investment in another. Then we could apply a more informed investment strategy in all of these areas that might maximize the benefit.

  5. Submitted by DENNIS SCHMINKE on 12/19/2014 - 11:01 pm.

    HHS Budget Crowding

    This is how it goes with Dem-Party/liberalism/progressivism. The costs of income redistribution, along with the care and feeding of public sector unions will eventually crowd out essential government activities (and quality thereof)–the things government is SUPPOSED to be doing–education, roads/bridges, police-fire, courts.

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