The Economy and Budget: Minnesota and the Nation Legislative Conference January 12, 2011 Scott Pattison Executive Director National Association of State Budget Officers 444 North Capitol Street, NW, Suite 642 Washington, DC (202)

NASBO Rethinking State Government “How much a state spends often matters less than how it spends.” The Economist, January 23, 2010 Should certain parts of government continue to be funded - what’s the role of government? Peter Drucker,

NASBO Rethinking State Government “Containing growth in our health care costs… is something we absolutely need to do, because it is unsustainable at the rate that it’s been growing,’’ said Jay Gonzalez, Patrick’s budget chief. There are going to be some hard decisions.’’ “We now have to begin messing with Medicaid,’’ said [House Member Harriett] Stanley. Boston Globe 1/3/11 3

NASBO 4 Current Fiscal Situation: Overview

NASBO 5 Recent State Fiscal Situation The “Great Recession” - Extremely difficult fiscal period for states  States experienced significant shortfalls and large revenue declines Widespread budget cuts, layoffs/furloughs continue across the nation ARRA funds ending

NASBO MAJOR CHALLENGES TO STATE BUDGETS: Fiscal 2011 and 2012 Slow Revenue Growth Unlikely to return to 2008 levels until 2013 or 2014 Medicaid Enrollment Increase 8.5 percent growth in 2010, 6.1 percent growth estimate for 2011 Wind Down of Recovery Funds $151 billion in flexible funding ends in June 2011 Growing Long Term Liabilities The unfunded liability is at least $1 trillion Health Care Reform Uncertain costs

NASBO 7 Current Fiscal Situation: Indicators

NASBO Negative Spending Two Years in a Row, Increase in 2011 *33-year historical average rate of growth is 5.7 percent *Fiscal ‘11 numbers are enacted Source: NASBO Fall 2010 Fiscal Survey of States * Average The New Normal Worst Case Scenario

NASBO Balances as a Percentage of Expenditures * FY 2008, and 2009 are actual. FY 2010 is preliminary actual and FY 2011 is enacted. (percentages) State Balances Near Historic Lows for Many States

NASBO 10 Balances in MN and Selected States Source: NASBO Dec Fiscal Survey of States

NASBO Tax and Fee Increases Continue

NASBO 12 State Tax Revenue Growth in MN and Selected States Source: Fiscal Studies Program, Rockefeller Institute of Government

NASBO 13 Minnesota GF Revenue: Source: NASBO State Expenditure Report (estimated)

NASBO Budget Cuts Made After the Budget Passed ($ millions) *FY 2011 mid-year budget cuts are ongoing Mid-Year Budget Cuts Continue

NASBO 15 Current Fiscal Situation: Economic Overview

NASBO 16 Unemployment Rate in MN and Selected States Source: U. S. Department of Labor, Bureau of Labor Statistics

NASBO National Unemployment Rate Compared to MN 17 % Source: U.S. Department of Labor, Bureau of Labor Statistics

NASBO Who gets out first? Historical Boost to State Earnings and Employment due to Oil & Natural Gas 18 Source: Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter 2009

NASBO 19 MN Recovery Act Spending through 12/07/10 Source: Recovery.gov Funds Awarded*Funds Received* * Funds awarded: the sum of funds awarded by a federal agency to a prime recipient; Funds received : the sum of funds received from a federal agency by a prime recipient

NASBO 20 The Cliff: Temporary Federal Aid to States (FY ’11 totals include both ARRA & Education Jobs Funds) Source: Recovery Act data come from GAO Report to Congress, September 2010 In Billions Fiscal Year

NASBO 21 Background on State Spending Trends

NASBO 22 Spending by Funding Source (Percentage) Source: NASBO 2009 State Expenditure Report

NASBO 23 MN Spending by Funding Source (Percentage) Source: NASBO 2009 State Expenditure Report

NASBO 24 Total Expenditures Percentage Growth in Spending Categories Over 10 Years Sources: NASBO 2001 and 2009 State Expenditure Reports

NASBO 25 General Fund: Medicaid & Education Over 63% Source: NASBO 2009 State Expenditure Report

NASBO 26 MN General Fund: Medicaid & Education Over 70% Source: NASBO 2009 State Expenditure Report

NASBO 27 General Fund Percentage Growth in Spending Categories Over 10 Years Sources: NASBO 2001 and 2009 State Expenditure Reports

NASBO 28 MN G eneral Fund Spending Growth over 10 years Sources: NASBO 2001 and 2009 State Expenditure Reports

NASBO Percentage Change in Medicaid Spending and Enrollment 29 % Source: Kaiser Commission on Medicaid and the Uninsured Adopted

NASBO 30 State Spending from Federal Funds Source: NASBO 2009 State Expenditure Report

NASBO 31 MN State Spending from Federal Funds Source: NASBO 2009 State Expenditure Report

NASBO 32 Promising Practices

NASBO 33 Promising Financial Management Practices Add flexibility to the process Use contingencies Prudent use of debt Rainy day funds and reserves One time only revenue for one time only! Use of performance information Avoiding bad practices in good times

NASBO 34 Focus on Outcomes Focus on results and outcomes Spend funds for effective programs Improve management

NASBO 35 Model: The “Drilling Rig” Cuts and Savings: $97 million GF-S $6 million HSA Health Care Spending Plan: $4.2 billion GF- S and HSA New revenue buys:  Basic Health Plan coverage for 17,200 people  Dental care for adults  Partial restoration of cuts to community clinics  $98 million for new, higher Medicaid payments to care providers Examples of what’s not purchased:  Reduced Medicaid payments to teaching hospitals  25 percent of state grants to community clinics  Optional Medicaid coverage for workers with disabilities Key purchases with existing revenue:  Medicaid health care for 891,000 vulnerable children and adults  All current children’s health programs  Statewide public health programs to protect all citizens  Public health programs to improve testing, surveillance and follow-up for childhood diseases  Health insurance for 81,600 low-income people, which is 17,200 fewer than currently served

NASBO 36 What Can Be Done? Ask performance questions Ask for outcome data Use performance information to justify changes to programs.

NASBO 37 Outlook

NASBO 38 Long Term Spending Pressures Medicaid and Health Care K-12 and Higher Education Demographic Changes Corrections Transportation Infrastructure Pensions

NASBO 39 State Fiscal Outlook Austere state budgets for at least the next several years  Slow revenue growth; ARRA declines Health care reform will have an impact on state finances Tough competition for general funds Opportunity for reform, restructuring

NASBO 40 Scott Pattison (202)