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State Budget

Issue

How should the Legislature address the state's $373 million budget shortfall? How should the Legislature reform government spending? How large a budget reserve should the state maintain?

Policy

The Department of Finance projects that the state will face a $373 million budget shortfall for the FY 2008-2009 biennium. This represents approximately 1 percent of the biennial budget. In addition, in FY 2010 and FY 2011, the state projects a structural deficit of $422 million and a structural balance of $211 million, respectively. However, the spending estimates on which the FY 2010-2011 figures are based do not include inflation. Including inflation, a structural shortfall of $1.245 billion is expected for the 2010-2011 biennium.
  1. General fund revenue. The Legislature should not increase general fund taxes. The state has a $34.5 billion budget for the FY 2008-2009 biennium, which is approximately 10 percent higher than the budget for the previous biennium. This is enough to fund the state's priorities. The budget deficit should be eliminated by reducing general fund spending, enacting spending reforms, and addressing the major cost drivers of the state's budget.
  2. Use of surplus revenue. A portion of any future surplus revenue should be used to pursue the following objectives.
    • Increase the budget reserve. The state's bond rating depends on sound fiscal management. The state should increase the budget reserve to 5 percent of biennial general fund expenditures.
    • Reverse revenue and spending shifts. Revenue and spending shifts are temporary budget-balancing strategies. They should be reversed when the economy and state revenues improve. For example, the Legislature could convert the capital equipment refund program to an up-front exemption and eliminate the June accelerated sales and excise tax payments.
    • Reduce/restructure taxes to promote economic growth. Business tax reductions/restructuring promotes economic growth by increasing the return on investment of Minnesota operations. For example, the Legislature could speed up the phase-in of a sales-only apportionment formula.
  3. Spending reform.Spending reforms are critical whether the state faces a budget deficit or has a surplus. Minnesota's demographic projections show that the number of Minnesotans who will likely be significant users of government services per 100 Minnesotans of working age (the dependency ratio) will increase 33 percent over the next 25 years. If the Legislature does not reform the programs that drive spending increases, tax increases are inevitable.

    4. Four principles guide the Minnesota Chamber's spending reform initiatives: (1) target resources to those in need; (2) finance individuals rather than institutions; (3) utilize competition; (4) reduce overhead expenses. The following spending reforms are examples of applying the four principles:


    • Competitive sourcing and reverse auctions: Allow competition to reduce costs and increase quality of government services. When services are competitively sourced, public-sector employees participate with private-sector companies in the bidding. The contract is awarded based on the cost and quality of the service provided. In addition, where appropriate, reverse auctions as authorized under current law should be utilized to reduce the cost of goods and services purchased by the state.
    • Environmental permitting: Streamline the environmental permitting process. At present, it can take more than a year to receive some environmental permits. In many other states, permits are typically received in months, not years.
    • Higher education: Focus more resources on students rather than institutions. Increasing student financial aid while state aid to institutions is declining will offset tuition increases for low- and middle-income students.
    • K-12 education: Increase school board flexibility to seek competitive bids for educational and noneducational services. Enhance site-based management to give schools greater control over program development and use of resources.
    • Long-term care: Tighten Medical Assistance eligibility requirements to reduce caseloads and increase the look-back period for determining assets and income eligible for MA estate recovery. In addition, expand long-term care financing options.
    • Public employee compensation: : Implement defined contribution retirement plans for new hires and phase-out the use of defined benefit plans. In addition, make public-sector wages and health care benefits comparable to those offered in the private sector and reform the Public Employee Labor Relations Act.
  4. Address cost drivers. The Legislature must address the cost drivers of the state's budget, namely health and human services costs. This area of the budget is expected to grow by 13.9 percent from FY 2008-09 to FY 2010-11. Many programs within this area will grow more rapidly than the 13-percent average.
  5. Inflation in the forecast.The Minnesota Chamber supports the Department of Finance's current policy of excluding discretionary inflation in budget projections, but disclosing the impact of inflation on the budget in its forecasts. Doing so does not presume that all budget areas will receive an inflationary adjustment, but it gives policy-makers the financial information necessary to make informed decisions regarding area-specific inflationary adjustments.

Business Impact

Over the last five years, the Legislature has proposed three major business tax increases - statewide property tax, foreign operating corporations and personal income tax - to balance past budget deficits and/or increase state spending. The Legislature will likely revisit these tax increases to balance the projected deficit for the remainder of the FY 2008-2009 biennium.

Chamber members have indicated that their preference for the use of future surpluses is not to increase spending, but rather to increase reserves, reverse spending and revenue shifts, and/or reduce taxes to promote economic growth. The state's budget reserve and cash flow account already are back to their pre-recession levels. Shifts that could be reversed are the capital equipment refund payment delay, converting the capital equipment refund program to an up-front exemption, repealing the June accelerated sales and excise tax payments, and repaying the special compensation fund for the dollars taken to balance the budget. Speeding up the phase-in of a sales-only apportionment formula is a targeted tax reduction that would promote economic growth.

The Minnesota Chamber believes that whether the state has a budget deficit or budget surplus, it should reform the way it spends money to become more efficient and provide taxpayers better value. In the long run, reforming spending systems could take some pressure off the Legislature to increase taxes. Avoiding general fund tax increases continues to be an important objective of Minnesota businesses. Our polling and Grow Minnesota! business retention visits show that being competitive requires employers to control all of their costs, including state and local taxes.

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