A recent chart from the Republican Party of Minnesota, reproduced below, purports to show that Minnesota’s general fund budget is growing about 12 percent faster than the state’s economy and about 25 percent faster than the rate of inflation from 2012 to 2017. The information in that graph is, however, generally inaccurate.
The Republican Party of Minnesota contends that the average of the House, Senate, and Governor’s budget proposals will increase state spending by 29 percent from a 2012 base. We are not told which year—2018 or 2019—is the end point of this analysis. (The Governor and both houses of the legislature each craft a budget proposal for the upcoming two-year biennium, which covers both fiscal years 2018 and 2019.) Without knowing what the end point of the analysis is, it is difficult to verify the accuracy of the other bars in the chart pertaining to inflation, population, income, and economic growth. For the purpose of the following analysis, we will examine the projected change in these factors from 2012 to both 2018 and 2019.
The first thing to note is that state government spending in 2012 was artificially deflated due to school funding shifts and the sale of tobacco bonds, which were used to reduce general fund spending for K-12 education and debt service. State spending in each of these areas was still occurring, but it was delayed (in the case of the school funding shift) or funded from non-general fund sources (in the case of debt service), thereby reducing general fund spending in FY 2012 to the tune of about three-quarters of a billion dollars. Because the official FY 2012 spending level is artificially low, growth measured relative to that level will be artificially high. Properly adjusting for the funding shifts would have the effect of reducing the projected growth in general fund spending by about five percent.
The above chart indicates an inflation rate since 2012 of about 4.5 percent; however, conservatively estimated, inflation in state government purchases is projected to be about 10 percent from 2012 to 2018 and about 12 percent from 2012 to 2019. Even if we use the Consumer Price Index (which, for reasons noted in a 2016 North Star article, is not an appropriate inflation measure for state and local government purchases), the rate of inflation would still be at least double that indicated in the chart.
The chart also portrays a 2.5 percent growth in Minnesota’s population, but, according to estimates and projections from the State Demographers Office, growth in the state’s population will be about 4.0 percent from 2012 to 2018 and about 4.6 percent from 2012 to 2019. Furthermore, both inflation and population growth apply independent spending pressures on the state general fund, so the two factors should be consolidated to show their combined effect. In order to maintain a constant level of services per capita at the FY 2012 level, state general fund spending will need to grow by about 14 percent from FY 2012 to FY 2018 and by about 17 percent from FY 2012 to FY 2019. The bars in the chart do not come close to representing actual inflationary and population growth pressures on the state general fund.
The GOP chart also portrays state median income growth of about seven percent. According to data from the American Community Survey (ACS), Minnesota median household income increased by 7.8 percent during the period from 2012 to 2015 alone. Median income will continue to grow from 2015 to 2018 or 2019, so the seven percent representation in the chart is wholly off base. Furthermore, aggregate figures such as state spending should be compared to aggregate income growth, not growth in the median. Aggregate Minnesota household income increased by 11.3 percent from 2012 to 2015; ACS data is not yet available for years after 2015, but if we assume that post-2015 household income grows at the same rate as projected personal income,* statewide aggregate household income should grow by 21 percent from 2012 to 2018 and by about 26 percent from 2012 to 2019.
The chart’s representation of growth in Social Security income is similarly troubled. (This bar is presumably included in order to gauge increased spending pressure arising from the aging state population.) While the chart indicates Social Security income growth of something under four percent, in reality, Minnesota Social Security income has already grown by 14.4 percent from 2012 to 2015 based on ACS estimates—and this growth is likely to accelerate in subsequent years as the wave of baby boomer retirements approaches its crest. Growth in Minnesota Social Security income from 2012 to 2018 or 2019 could easily surpass thirty percent.
In addition, spending pressure arising from the aging state population is not included in the rate of inflation or general population growth figures. Insofar as all of these spending pressures compound each other, they should ideally be portrayed in a single consolidated (stacked) bar, rather than in isolated discrete bars so that growth in state spending can be viewed in the proper context.
Finally, the chart shows a growth in the “economy” of approximately 17 percent. Economic growth is typically measured in terms of growth in the Gross Domestic Product (GDP). While the February budget forecast does not include projections of Minnesota GDP for 2018 and 2019, it does show projected growth in U.S. GDP—and that growth over the time frame in question is a lot more than 17 percent.
National GDP is projected to grow by 26 percent from 2012 to 2018 and 31 percent by 2019.† While projections for Minnesota GDP for these years are not available, statewide personal income—an imperfect but reasonable proxy for state economic growth—is projected to grow at about the same rate as U.S. GDP. In other words, projected economic growth will approximately match the rate of growth in state spending projected in the GOP chart. This is not surprising, since total state and local government own-source revenue as a percent of statewide personal income is projected to reach a thirty year low by FY 2021, even if no tax cuts are enacted during the current legislative session.
The bottom line is that the first five bars in the GOP chart, shown to contrast with spending growth, are off-base—and most of them woefully so. Because the height of each of these bars is significantly to dramatically understated, the effect of the chart exaggerates projected state spending growth relative to the factors represented by these bars.
Of course, no mention is made of what was accomplished with the increased state spending since 2012, including a halt to the decade long decline in real per pupil E-12 funding, the establishment of statewide all-day kindergarten, targeted property tax relief and an expansion of the Working Family Credit that contributed to a significant reduction in Minnesota tax regressivity, increases in funding for higher education that helped to stem the tide of soaring tuition, increased funding for county and city services to replace a portion of the state aid that was cut over the preceding ten years, and other investments in affordable housing and health care—all achieved without an increase in the effective tax rate paid by most middle-income Minnesotans.
*As projected in the February 2017 forecast Price of Government report.
†Based on projections from the February 2017 state budget forecast and earlier forecast documents.