Minnesota state finances are bleeding

I want to flag a couple of recent developments in the area of eroding state finances that make neat, if gruesome, bookends. Minnesota is far from alone in these troubles, but it’s also far from the top of the heap in its overall financial standing.

One is the ProPublica package [1] [2] from earlier this week on the collapse of many states’ unemployment insurance funds. To date 14 states have had to borrow from the federal government, further compounding the fiscal straits they’ll face in the next few years, and nearly 20 more have dwindling UI trust fund reserves that may force them into borrowing before long.

Minnesota is one of those states. The ProPublica report led me to phone up an economist at the U.S. Department of Labor to learn a little more. Currently, as I report here, Minnesota has less than two months of UI reserves left. A year’s worth is considered healthy.

The second development involves the emergence of documentation that state tax bases have become more closely tied to the business cycle–which is another way of saying more recession-vulnerable–as a result of the bubble years. A pair of Federal Reserve Bank of Chicago economists did a presentation on the growing volatility of state revenue systems last month, and as it turns out, Minnesota state economist Tom Stinson has been studying the matter as well. (To make a long story short, and somewhat over-simple: Through-the-roof revenues from capital gains and bonus income during the bubble years both distorted and inflated state revenues, and led states to cut taxes and expand spending in unsustainable ways.)

One thing the public at large hasn’t been given to understand is how long these state-level fiscal crises are going to be with us, and how chronic the budget-cutting is going to become unless states raise taxes. For example, how soon do you suppose Minnesota is projected to re-attain the same level of annual revenue it was receiving before the fall crash last year? According to Stinson, the answer is fiscal year 2014.

Comments (1)

  1. Submitted by dan buechler on 06/11/2009 - 07:03 pm.

    Good work!!

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