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Executive Summary: Minnesota's Budget Surplus

by | Mar 3, 2016 | Economy, Education, Taxes, Transportation

The conservative effort to use the entire budget surplus to reduce state taxes—often referred to as the “give it back” campaign—is based on the premise that state revenues and expenditures have increased dramatically and thus all legitimate state expenditure needs should already be sated. However, a closer look at total state general fund revenue and expenditure trends, as well as spending trends in specific policy areas, reveals that this is not the case.

Distressing trends have emerged as a result of an extended period of state disinvestment extending back to the early years of the century. Real per pupil state aid to school districts and per capita aid to cities has declined, contributing to cuts in school district and city services. At the same time that local budgets were being cut, property taxes increased dramatically as local officials scrambled to replace a portion of what was lost in state aid. Tuition at public institutions of higher education has soared, as state residents found it harder to afford post-secondary education. Minnesota highways deteriorated and lost time and money associated with traffic congestion increased.

Beyond all this are the lost opportunity costs from the failure to make critical new investments. Chief among these is the state’s inability to systematically fund statewide pre-kindergarten (pre-K) education. Research demonstrates that pre-K education will not only help close Minnesota’s achievement gap, but will provide benefits to middle- and upper-income children as well. The long term benefits for the state resulting from pre-K include higher high school graduation rates, lower rates of teen pregnancy, greater family stability, lower crime rates, higher income levels, increased tax base, reduced social service costs, and a reduction in child care costs for families with pre-K children. Every year that Minnesota delays investing in pre-K will be another year in which these benefits will not materialize.

While real (i.e., inflation-adjusted) state general fund expenditures have increased relative to the nadir of fiscal year (FY) 2013, they remain significantly below the level that they were at in FY 2003—the first year of the full state takeover of general education costs. After properly adjusting for various accounting gimmicks (such as K-12 education funding shifts and the sale of future tobacco settlement revenue), total constant dollar general fund expenditures have increased by $345 per capita annually from FY 2013 to FY 2015. However, this increase needs to be contrasted with the striking $843 per capita decline that occurred from FY 2003 to FY 2013.

In other words, less than half of the real per capita expenditure reduction that occurred from FY 2003 to 2013 has been recovered over the last two years; as a result, FY 2015 general fund spending per capita was 11.9 percent less than in FY 2003. Based on February forecast projections of current law, real per capita general fund expenditures will remain virtually flat from FY 2015 through FY 2017.

Adjusted General Fund Expenditures

As a result of a recovering economy and tax increases enacted during the 2013 legislative session, real per capita general fund revenues are finally approaching the level they were at in FY 2003. In constant dollars, FY 2015 per capita current resources are 2.4 percent less than in FY 2003 and are projected to be only 1.5 percent less than the FY 2003 level by the end of the current biennium. However, this assumes that none of the projected surplus is used for tax relief.

Just as real per capita general fund expenditures are significantly below the FY 2003 level, so too are expenditures in specific policy areas. Inflation-adjusted state aid for Minnesota school districts per pupil, state support for higher education instruction per full-time equivalent (FTE) student, city Local Government Aid (LGA) per capita, and dedicated highway tax revenue per lane mile—while above the low point reached during the years following the Great Recession—are from 11 to 45 percent below the FY 2003 level.

Policy Areas

Anti-tax, anti-investment policymakers have argued that “…when we have a budget surplus, it means we collected more money than government needs.” The logical corollary of this assertion is that a budget deficit means that we have collected less taxes than government needs—a conclusion that would no doubt make conservative leaders blanch and was certainly nothing we heard from them during the recently concluded era of recurring budget shortfalls. In reality, the presence of a budget surplus simply means that state policymakers imperfectly predicted future levels of state revenues and expenditures and/or that a positive balance was carried forward from the preceding biennium.

Minnesotans should reject a faux fiscal conservatism that reflexively prevents any increase in state expenditures, even when it can be demonstrated that a partial restoration of past spending cuts can help restore the quality of public services and infrastructure, and that new investments in strategic areas can yield significant long-term benefits that will enhance Minnesota’s economy and quality of life. The state as a whole will be better served by a balanced approach to the projected budget surplus that weighs the appeal of tax cuts against the practical benefit arising from intelligent public investments.

Read the full report here.

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