The Economy and Budget: Minnesota and the Nation Legislative Conference February 10, 2010 Scott Pattison Executive Director National Association of State Budget Officers 444 North Capitol Street, NW, Suite 642 Washington, DC (202)

NASBO 2 Current Fiscal Situation: Overview

NASBO State Budget Gaps (in millions)

NASBO 4 Recent State Fiscal Situation The “Great Recession” - Extremely difficult fiscal period for states  States experiencing significant shortfalls and large revenue declines – many states still have not had revenues meet lowered projections Widespread budget cuts, layoffs/furloughs continue across the nation ARRA helping, but does not fully solve shortfalls

NASBO 5 State of the State Speeches Common themes include the need for a smaller and more efficient government, and prioritizing job creation At least 5 governors have called for tax hikes (AZ, IL, KS, NM, & WA), while others are looking at tax reform Several governors have called for increased federal aid Source: Stateline, January 22, 2010

NASBO 6 Current Fiscal Situation: Economic Overview

NASBO The “New Normal” is Here 7

NASBO National Recession is Likely Over 8 Chicago Fed National Activity Index (standard deviation from trend, 3-month average) Nov Source: Federal Reserve Bank of Chicago

NASBO 9 Unemployment Rate in MN and Selected States 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 10 Source: Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter 2009

NASBO 11 Current Fiscal Situation: Indicators

NASBO Negative Spending in Both FY 2009 and FY 2010 *32-year historical average rate of growth is 5.6 percent **Fiscal 10 numbers are appropriated Source: NASBO Fall 2009 Fiscal Survey of States * The New Normal?

NASBO 37 States with Negative Growth Budgets in FY Source: December 2009 Fiscal Survey of States

NASBO 14 Balances in MN and Selected States Source: NASBO Dec Fiscal Survey of States

NASBO State Revenue Down 16% in 2 nd Quarter, 11% in 3 rd Quarter Preliminary Oct. & Nov. data shows 6.5% decline in PIT ; 5.5% decline in Sales Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

NASBO 16 State Tax Revenue Growth in MN and Selected States Source: Fiscal Studies Program, Rockefeller Institute of Government

NASBO 17 Job Growth – “The Lag” Source: Washington Post; Bureau of Labor Statistics

NASBO Other States: CALIFORNIA 18 Source: December 2009 Fiscal Survey of States

NASBO 19 Other States: MICHIGAN Source: Michigan Office of Revenue and Tax Analysis, Dept. of Treasury, 7/31/09 May 2009 estimates

NASBO 20 Minnesota GF Revenue: Source: NASBO State Expenditure Report (estimated)

NASBO 21 American Recovery and Reinvestment Act (ARRA)

NASBO 22 American Recovery and Reinvestment Act – State $ Approximately $246 billion+ going to or through states State Fiscal Stabilization Fund - $53.6 billion:  $39.5 billion to schools and higher ed  $5 billion in incentive grants  $8.8 billion in flexible funds Medicaid Funding: $87 billion $48 billion to transportation: highway and bridges $27.5B; transit $8.4B; passenger rail $8B Also safety net expansions, economic development, other appropriated programs

NASBO 23 MN Recovery Act Spending through 12/31/09 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 24 The Cliff… Source: Statelin e.org

NASBO 25 Background on State Spending Trends

NASBO 26 Spending by Funding Source (Percentage) Source: NASBO 2008 State Expenditure Report

NASBO 27 MN Spending by Funding Source (Percentage) Source: NASBO 2008 State Expenditure Report

NASBO 28 Total Expenditures Percentage Growth in Spending Categories Over 10 Years Sources: NASBO 1999 and 2008 State Expenditure Reports

NASBO 29 General Fund Spending Growth over 10 years Sources: NASBO 1999 and 2008 State Expenditure Reports

NASBO 30 MN G eneral Fund Spending Growth over 10 years Sources: NASBO 1999 and 2008 State Expenditure Reports

NASBO 31 General Fund: Medicaid & Education Over 62% Source: NASBO 2008 State Expenditure Report

NASBO 32 MN General Fund: Medicaid & Education Over 72% Source: NASBO 2008 State Expenditure Report

NASBO Increases in Medicaid Spending and Enrollment 33

NASBO 34 State Spending from Federal Funds Source: NASBO 2008 State Expenditure Report

NASBO 35 MN State Spending from Federal Funds Source: NASBO 2008 State Expenditure Report

NASBO 36 Outlook

NASBO 37 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 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 Health care reform (what will it be?) will have an impact on state finances Tough competition for state general funds Federal deficits will impact states Demand for performance and results Opportunity for reform

NASBO Rethinking State Government “How much a state spends often matters less than how it spends.” The Economist, January 23, 2010 Strategic thinking: should certain parts of government continue to get general funds - what’s the role? Peter Drucker,

NASBO 41 Scott Pattison (202)