Minnesota shutdown report: Long-term economic impact ‘minimal’

Last summer’s 20-day state government shutdown — created when the Republican-led Legislature couldn’t agree with DFL Gov. Mark Dayton on how to solve the state’s budget deficit — didn’t hurt state finances too much, a report released today says. But there were other significant downsides for employees and the state’s construction projects.

Said the State Government Shutdown Executive Summary, from the Minnesota Management and Budget Department:

The long-term economic impact of the shutdown is expected to be minimal as state tax collections continued to be  processed during the period. A temporary increase in state unemployment, accompanied by the temporary reduction in private sector employment related to highway construction and state building projects, are expected to have only a marginal impact.

Many of the state’s services continued during the shutdown because a judge ruled they were essential, but 19,000 employees were laid off for the nearly three weeks. While that was tough on those employees, who generally received unemployment benefits for some of the time, it saved the state millions of dollars in salaries.

Some report highlights:

  • The break in government service lasted 20 days (July 1- July 20), making it the longest and most expansive shutdown in the state’s history to date.
  • 80 percent of state spending continued during the shutdown. July of 2010 equaled about $2.6 billion, while July of 2011 spending was about $1.8 billion.
  • In broad terms, immediate shutdown costs were offset by estimated compensation savings:
    • The state recognized $49.7 million in lost, unrecoverable revenues.
    • The shutdown created additional costs for the state, now and into the future. Preparation costs were about $7.1 million while recovery costs were about $3 million. These impacts are not complete and further program costs may still be incurred in the future.
    • The state and federal government saved approximately $65 million in payroll during the shutdown. This is a direct cost to state employees laid off during this period.
    • Lost productivity and indirect impacts are not included in the cost calculation.
  • Over 200,000 staff hours were redirected from normal operations in preparation and recovery of the shutdown.
  • 19,000 state employees were laid off. Costs related to unemployment compensation were about $10.420 million.
  • The court-directed Special Master costs totaled $59,295.
  • Over 1 million pieces of correspondence (costing $552,000) were sent in preparation to the shutdown to citizens, stakeholders and vendors.
  • Other costs related to information systems activities, security and other costs accounted for an additional $155,000.

Still, there were significant downsides for the state, including:

  • Widespread frustration among the public occurred in response to the stoppage of highly visible public programs such as the delay or break in processing various permits and licenses, state websites being shut down or dormant, the closure of state parks, and a lack of information of what services continued and those that did not.
  • The shutdown impacted the private sector in numerous ways such as the halting of highway construction projects, closing of state parks, delays in professional licenses, and delays in permitting.
  • The shutdown created a challenging and difficult environment for the state workforce. Employee stress and frustration increased dramatically due to the uncertainty of the situation. Thousands of employees went without a paycheck and had the added stress worrying about whether they would have health care coverage.
  • While a Memorandum of Understanding was agreed to with state employee unions, the implementation of the MOU created additional complications for employees and management. Over 300 frequently asked questions were written and posted to a state website so employees and managers could obtain clarification about layoff, compensation, use of employee benefits, and the process of recall once the shutdown ended.
  • Various budget calculations were difficult to determine as the shutdown spanned three separate pay periods, the layoff of hundreds of employees that complete budget work, changes in the priority service list as court proceedings occurred over the 20-day period, and additional employees returned to work to perform additional critical services. To further complicate matters, the state was in the midst of implementing a new statewide accounting and procurement system on July 1.
  • Extensive media coverage of shutdowns and employee layoffs generally make critical government computer systems more vulnerable to cyber-attacks through increased threat volume and activity. Although the limited amount of security staff that were retained to monitor critical systems for signs of attack and to remediate critical vulnerabilities prevented serious fallout during Minnesota’s shutdown, routine monitoring and vulnerability patching was curtailed. In addition, hundreds of staff hours were spent in advance of the shutdown trying to develop and implement plans to shut off and subsequently reinstate physical and system security clearances for thousands of employees.
  • Agencies made every effort to maintain acceptable and established levels of risk management. However, the increased workload among critical state employees, reduced staffing complements, continuously changing program parameters, and uncertain conditions limited the state’s ability to sustain high levels of oversight and internal controls.

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Comments (3)

  1. Submitted by Rachel Kahler on 11/22/2011 - 05:12 pm.

    So…what was the grand total? I calculate that it left the state at least $5 million in the hole more than the initial budget deficit. The -$5 million was tipped by $10 million in unemployment. If you ignore the 1-time costs of shut-down and recovery, the state and federal government gained about $5 million.

    However, if you factor in that the unemployment would have only covered 2/3 of the time that the state employees were laid off (3 weeks shutdown minus the 1 week waiting period), the proportion of which would increase over a longer time span. Considering that private sector unemployment jumped, as well, it’s not unreasonable to expect that most of the state employees would have remained jobless for as long as the shutdown lasted. Thus, the unemployment benefits would likely have remained constant, providing at most, 50% of the wages that the state employees earned actually working. This would reduce government income and likely increase unemployment/underemployment-related expenses.

    I would be interested to know what consumer-based numbers looked like during those 3 weeks as compared to the previous and following 3 weeks. Did sales shift to more reduced-priced markets? Did sales simply drop? I also wonder how many of those people got deferred mortgage payments either through an agreement with their banks or through supplemental insurance. It seems to me that the $5 million “savings” may actually have cost far more to the citizens of Minnesota than can be reported directly by what the state recorded.

  2. Submitted by John Olson on 11/23/2011 - 07:13 am.

    The more significant outcome from last summer’s shutdown may very well be that what once was thought to be “unthinkable” isn’t so unthinkable after all.

    With an (arguable) neutral fiscal impact of the 20-day shutdown, one side (or both) can simply walk away from future budget negotiations and let the state shut down again knowing that the last time it happened it wasn’t so bad after all.

  3. Submitted by Margaret Sch. on 12/01/2011 - 01:46 pm.

    So the economic impact on the state was “minimal”? I very much doubt that the same is true for lots of small businesses (such as businesses surrounding state parks that were closed) around the state. What a bad memory. I hope it will not be repeated, and that legislators and governors will do what it takes to make appropriate compromises and thus carry out the mandates of democracy.

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