What does the debt deal mean for Minnesota? Nothing good

Just two years ago, President Obama and Congress opened wide the federal spigot, pouring $5.9 billion into Minnesota state government and millions more into local units of government.

Now the stimulus funding is over and the feds have embarked on a 10-year debt reduction plan intended to curtail the flow of federal funds to programs that assist states, local governments, nonprofit organizations and individuals.

Former State Finance Commissioner Jay Kiedrowski, now a fellow at the University of Minnesota’s Humphrey School, says the federal spending cuts could add to the state’s already serious budget problems.

Kiedrowski says the state already is projecting a $1.8 billion budget shortfall for the 2014-15 biennium and that assumes an “average economic recovery.” He said he would not be surprised to see the deficit number grow when the state officials issue their November budget forecast, and that it could even project a deficit for the 2012-13 budget that was just enacted.

Jay Kiedrowski
Jay Kiedrowski

“I think Minnesota is facing a tough time,” says Kiedrowski, who served on a task force that recently tried to broker a balanced solution to the state’s budget shortfall. With Republicans opposing any tax increases, DFL Gov. Mark Dayton and lawmakers settled on accounting gimmicks and one-time money for $1.4 billion to help close the budget gap.

Others states in trouble, too
Minnesota is hardly alone. A recent report by the Center on Budget and Policy Priorities said “the vast majority of states (37 of 44 states for which data are available) plan to spend less on services in 2012 than they spent in 2008 — in some cases, much less.”

Assessing the impact of the federal Budget Control Act of 2011 is difficult because so much is unknown.

The legislation included immediate 10-year discretionary spending caps projected to generate $917 billion in budget savings and created a special bipartisan congressional committee to recommend at least $1.5 trillion in additional cuts over the same period. If the committee and Congress don’t deliver by Dec. 23, the legislation will trigger automatic cuts of $1.2 trillion.

To get the first $917 billion in savings, the appropriations committees in the two houses will have to allocate the cuts among the subcommittees responsible for various program areas.

Steve Francisco, federal policy director for the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits, is nervously awaiting the outcome of that process.

Francisco says many Republicans in Congress want to shield defense spending from any cuts, leaving domestic programs to absorb the entire hit. Discretionary domestic spending accounts for just 19 percent of the entire federal budget.

Steve Francisco
Steve Francisco

He says it could mean huge cuts for programs such as special education, public housing, job training, mental health, substance abuse, literacy, Pell Grants for college students and home heating assistance for low-income families.

“It’s very scary,” Francisco says. “I don’t know how they think it is going to work if you take the federal government out of the equation and say, ‘We can’t respond to these problems.'”

John Pollard, a spokesman for Minnesota Management and Budget, says federal funds account for roughly 27 percent of the state’s total operating budget for the 2012-13 biennium. The bulk of that funding is concentrated in just four areas: Medicaid, cash and food assistance to individuals, highway planning and construction, and special education.

Pollard says the state also could see increased borrowing costs resulting from the lowering of the nation’s credit rating and increased social-service caseloads as a result of the stagnant economy.

At the local level
Local government officials also are nervous about the pending federal cuts. “I think, overall, there is a lot of concern,” says Kevin Frazell, who tracks federal legislation for the League of Minnesota Cities. “Clearly discretionary domestic programs are going to take a huge hit.”

Frazell says one program of major importance to cities is community development block grants, which provide federal funding for housing, infrastructure, economic development, planning and other activities. Last year Minnesota cities received a total of $62 million in grants, he says.

Jim Solem, who spent his career as a top official for several state and regional agencies, believes the biggest problem for state and local officials as a result of the pending federal budget cuts may be “mid-term planning.”
“How do you start anything without knowing whether the [federal] money is going to be there or whether the rules are going to be changed?” he asks.

Most states’ FY12 spending below pre-recession levels

Most states' FY12 spending below pre-recession levels
Source: CBPP analysis of governors’ budgets and other state budget material

Over the last several decades, the federal government has become an increasingly unreliable fiscal partner in the nation’s intergovernmental relations system, with many federal aid programs coming under the knife.

That’s a dramatic change from the heady days of General Revenue Sharing, a program initiated by President Richard Nixon. Between 1972 and 1986, the feds returned more than $83 billion to state and local governments with few strings attached.

To Nixon, the program was a way to reduce the federal red tape associated with categorical aid programs, put dollars where the problems were and allow to local officials to design solutions that fit their needs. To Democrats, it was a way to tap revenues from the federal income tax and reduce reliance on more regressive local taxes.

General Revenue Sharing ultimately fell victim to the federal deficits in the 1980s brought on by President Ronald Reagan’s initiatives to increase defense spending while cutting taxes.

Zhirong (Jerry) Zhao, a professor of public finance at the Humphrey Institute, says, “When this program is mentioned by city folk, it’s always a bit wistfully — like you might talk about your first love or the day your parents handed over the keys to the car.”

A few economists and scholars have advocated reviving General Revenue Sharing as a way of stimulating the economy and helping states weather the current fiscal storm. “States are being cut off just at the time when they most need federal assistance,” wrote one economic consultant.

But that is unlikely to happen. More than a decade ago, political science professor Bruce Wallin wrote a book entitled, “From Revenue Sharing to Deficit Sharing.” That title still accurately characterizes federal fiscal policy regarding state and local governments.

Steven Dornfeld, a former newspaper reporter and editor and former public affairs director of the Metropolitan Council, writes about public policy. He can be reached at sdornfeld[at]minnpost[dot]com.

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Comments (3)

  1. Submitted by Ray Marshall on 08/18/2011 - 04:52 pm.

    Where does it say that state financial health is dependent upon federal funding and state and local government spending? In other words, government jobs and subsidies.

    Is that what the future holds for us? How sad.

    We have 18 Fortune 500 companies headquartered here. Why no mention of them?

  2. Submitted by Richard Schulze on 08/19/2011 - 07:10 am.

    Unfortunately, cutting government spending, as evidenced by the correlation between state governments cutting spending and state governments cutting jobs the past year, will lead to more job cuts in the near future that private enterprise has been so far been unable to make up for. When you start from the premise that government spending should always be less than it currently is, then you are simply starting all policy arguments from your own intellectual deficit.

  3. Submitted by Bernice Vetsch on 08/19/2011 - 10:26 am.

    Why, I wonder, is federal spending over 3% higher than in 2008 only in the three Big Energy states of Texas, Alaska and North Dakota?

    Grants to oil companies?

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