Home » Money » Where does Minnesota’s Money Go?

Where does Minnesota’s Money Go?

Heading into the new Legislative session at the start of the new year, we can expect that things are going to be different.  The DFL is in control of the House, Senate, and Governor’s office for the first time since 1990 – and comes in with a lot of pent-up demand from their own interest groups.  Attention tends to focus on social issues such as universal marriage, but we predict here that most of the time will be focused on the budget.

As discussed here, there is a structural imbalance of $1B per year obscured by a 2002 law that restricts how the forecasters are allowed to figure the state’s budget (though this is not without controversy – see the comments).  We can predict that this will be plugged primarily by flattening out tax rates and making the highest earners pay a similar rate to most of the state, 12.1%-12.3% of defined, taxable income.  And we have determined that, on balance, Minnesota is a remarkably average state in terms of its total size (represented by combined state plus local income) and net tax burden.

But what about expenditures?  How does Minnesota compare with the rest of the nation?

DaytonThe Census Bureau puts together a comprehensive balance sheet of state, local, and combined income and expenditures every year.  The state and local combined are the most fascinating because this is the only source for reliable data in a consistent format.  Combining state and local together is only fair because state laws in Minnesota and across the nation tends to regulate how local governments can raise taxes and operate. This also represents a “bottom line” to taxpayers, evening out local government aid and all the other strange effects that vary from state to state.   It takes time to put this data together, so the most recent year available is 2010.

That’s how we arrived at the conclusion that Minnesota is a very average state in terms of income – 9.0% of Gross State Product (GSP) in total taxes (ranked 21st), 4.0% from the Federal Government (34th) and 4.1% from fees and other collections (32nd) with an overall take of 17.1% (30th).  Nothing stands out in particular in the way we collect income.

Expenditures are also given in the same tables.  Government buys a lot of different things – education, public safety, roads, social welfare, financing, and many little details.  There are a lot of strange things that are run by government that no one ever thinks of, such as public utilities (water and sewer, sometimes electricity), municipal liquor stores, and so on.  It’s all in there in this “bottom line” of total government.

Given that there are a zillion little things that add up, this analysis was forced to punt back to basics.  The new Legislature will be looking to either cut or expand certain categories of spending – and some of them are so small that a major change would hardly register.  For the purposes of this post we’ll look at the big ones – leaving a quarter of the total state and local expenditures (everything 2% or less) in a big catch-all we’ll just call other.

It’s not pretty.  But it gives the big picture.

MN2010expOn the left we have the picture for state and local expenditures in 2010 as realized by state and local governments combined – $55.9B total.  The largest category is education, with 27.4% of the total spending.  Of this, 17.5% of total expenditures go to K-12 education, 7.8% to higher ed (colleges, trade schools, etc) and 2.1% to other things like adult education.  Human services represents the next highest category, at 21.0% of the budget, which includes all the nursing homes, assistance to vulnerable adults, and so on.  This also includes cash “welfare” payments, which at $700M is 1.3% of the total expenditure.  After that, total unemployment insurance, pensions, and so on are 12% of what Minnesota spends.  Highways are next at 7%, followed by public safety (police, fire, and corrections) at a total of 5%.  It gets really thin after that, with nothing else higher than 3% of expenditures.

USexp2010For the nation as a whole, the averages are not all that different.  Expenditures on education are about the same, 27.6% on average (rounded up to 28%!).  The average expense on human services is quite a bit lower, only 15% of expenditures, and Minnesota also spends a bit more on roads (due to the weather, no doubt).  But given that we’ve established that overall Minnesota is a very average state in income, and like nearly all states the budget has to be balanced every year, the differences are miniscule.  Even debt service is the same, about 3% of the overall picture.

What does this mean for the new legislature?  If Minnesota is looking for a place to cut, human services does stand out as the only area that is much higher than the national average.  But given our overall status as a very average state it’s hard to argue that the expense on taking care of each other is killing us.

Should we cut state government?  Expand it?  No matter what we do, any change would be a potential deviation from about what everyone else does all across the nation, at least on average.  Any significant change would require a lot of attention to the small details buried in “Other”, which is to say it would hardly make the headlines until the final number is announced.

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19 thoughts on “Where does Minnesota’s Money Go?

  1. There is a lot encoded in variations in state spending that few think about. For instance, industrial polluters want the budget of the MPCA reduced, not because it’s a significant part of state expenditures–it isn’t–but because they don’t want the state to have the capability to regulate pollution. Is this every discussed in public? Not much that I can see.

    Dayton ran on a platform of increasing government revenues by restoring a more progressive tax structure (“taxing the rich.”) I don’t know if he meant it, but in any event he had a good excuse for not doing it with right-wing Republicans running both houses of the Legislature. He won’t have that excuse now, nor will the DLF as a party. Will he and his party move on this, or will he prove, like Obama, to be “an echo not a choice?”

    • Yes, you hit on my main point here – cutting “welfare” or “PCA” will not save us a damned thing in terms of the budget. You want big savings? Cut K-12 or nursing homes. Go ahead, do it.
      Dayton is signalling that he wants major reform – which will include cuts here and there, swaps, and probably still a rise in rates at the top end. I think it’s largely justified and I am waiting for the details. I think it’s good to hold him to his original promises and if he really can find some areas to cut then explain why they can be left behind.
      But as a baseline, there is nothing way out of whack in this budget. I am a bit surprised, to be honest. I thought that over the years it got way more effed up than it did in bulk. It’s good to know this going into the session as the spin machines start up.
      You do realize I’m setting a baseline for a zillion future arguments that I can imagine coming, yes? 🙂

  2. This is good. I am surprised that we are so typical but not really. Can you do the same for Wisconsin? The tax data showed they were higher than us & I wonder what they spend it on if its any different. Thanks.

  3. The relentless refrain of “government waste” etc eventually makes most people start to believe it. That’s the intent. I really wish I had higher hopes and more respect for Dayton. A man who pursued that mega-offensive stadium scam as his highest priority is now going to cut waste out of government??? I say what Minnesota lacks is not money so much as leadership……

    • I hear ya on the stadium. Dayton held a meeting to discuss ways of getting the viddy gaming revenue up where they need it to be, about double what it’s coming in at now. Great. Just wonderful.

  4. Core inflation (CPI less food and energy) decreased slightly from 2.0% to 1.9%annual inflation, year over year.

    I think inflation should be allowed in the forecast budget and then every, biennium, the governor’s budget should subtract the 3/4 of the inflation rate spending from agency spending, as a change proposal. Ta da! Ba da bing! I think we have to think creatively, not just say, “I’m not going to budge on inflation.” If one side is not going to budge, that is non-relationship thinking, thinking in ways that alienate each other.

    Also there has to be a human face on inflation. Since you want it in and want new revenue to cover it. The affirmative has the burden of proof to articulate how that spending helps people.

    If the heart of your argument is that MN has been using accounting shifts budget reserves to cover the cash flow of agency spending, I think you should say that. I haven’t examined the whole education funding aspect and the shifts, so maybe we agree. I don’t think problems with accouting shifts should be conflated with the inflation issue.

    I think that if there are legitamate criticisms of Pawlenty budgets that would be a fruitful direction. I don’t think you have to go back to 1970.

  5. First of all, I think we agree that going back to Carlson’s 1998 budget is far enough for any reasonable comparison. That’s the last year I have excellent data available for (I’m guessing the first year a lot of this stuff was put on the web!).
    The accounting shifts have been written about elsewhere and I haven’t really said much about it. The idea that you would promise money next year as a way of balancing this year does seem very desperate – and more than a bit gutless. The use of budget reserves doesn’t bother me so much because the “Rainy Day Fund” was always in place for an event like 2008-2010 – although now we should look at repaying it when we can.
    How should we handle inflation? First of all, I want no laws restricting how a budget forecast can be done – except maybe requiring them to list all their assumptions up front so we know what went into it (although you don’t really have to legislate that, either).
    There was a proposal back under Perpich that every agency would be “sunsetted” every (I think) 4 years on a rolling calendar and put on a zero-base budget – start from scratch. The DFL hated this, but I think it was an excellent idea all around. I would support that as the way to be sure that we don’t just keep growing mindlessly. It takes some work, but it seems reasonable.
    Mostly, at this point, I want to hear what Dayton wants for major reform – he’s been talking about it for a long time but been short on details. I want to respond to his proposal because there is a lot that can be done – but with these posts I’ve come to understand the rough bounds.

  6. I can not believe that we are that close to average in so many ways. You would think that there would be some variance but there really is almost none. That is shocking to me.

    • Me, too. It’s really weird how close we are. That’s why I thought I’d take up Dale’s challenge of looking at a few other states – are they all the same? That would be stranger yet.

  7. On inflation, again.

    On the revenue side my understanding is that income tax brackets are adjusted for inflation. That rings out some inflation from the revenue projection.

    From my standpoint inflation is a budget management issue at the agency level. Logically an agency should request a budget increase if they project a service level increase. I will grant you that if they expect a price level increase in materials then they should make the budget office aware of that in a statement. As I understand an agency’s budget for salaries includes labor agreement increases, so their budget request is allowed to have that.
    Most agency budgets consist of salaries, so I would want to see how inflation for physical things could possibly impact a service level. Now there may be contracts that may or may not have inflation in them. That could be a budget issue, but again that is something I think where they get
    guidance from the budget office.

    Prior to the Moe Pawlenty law prohibitibng inflation in the forecast, there may have been planning estimates to reflect that every budgeting year (every 2 years) agency are allowed to submit budget proposals that have a positive cost. As part of the operations of any organization, some of these proposals are approved by both the governor and legislature. The way it worked before is that the planning estimate was designed to give decisionmakers and the public a rough guideline as to the level of increased spending that might be approved based on historical levels. This is not inflation per se. If motor vehicles has to start operating a new office because of increase population that is not inflation.

    A planning estimate with “inflation” is designed to acknowledge that in non-recession times, organizations normally expand in response to increase demand and demand for increased level of quality. In non recession times most organizations would not maintain the same level of spending the next year. The only reason it would is if customers are going away,

    The education spending shifts are important and if you are any readers have an analysis or website links, I would be interested in reading them.

  8. Just as a summary it is hard for me to understand how inflation is the cause of recurrent budget problems, because by the time the legislature passes the budget bills, they pass them if them within the constraint of forecast revenue.

    All agency finance officers are supposed to monitor their budgets monthly and if the budget office projects less revenue for a year, the budget office had better introduce some legislation adjusting agency appropriations. No agency has authorization to spend more than their appropriation.

    In case driven agency like health and human services, the revenue has to be there to spend to support if their appropriation is set by formula. They can not just spend and say oops.

    • I see the issue now. It’s way simpler than you think.
      The forecast is required by law to take inflation into account for future revenues but NOT for future expenses. So everything is off by about 2% a year. That is the $1B gap.
      It’s that the forecasts are simply wrong, and everyone knows it. They were forced to be that way. It’s really that stupid.

  9. No the forecasts aren’t wrong and not everyone agrees with you. You are Erik Hare. You are not the god of budgeting you think you are. I am!. If we were at Tom Reid’s hockey pub, I would only buy you 1 more pint of beer, rather than 2.

    Leaving inflation in or out of the forecast affects the forecast.

    But legislators still deny or approved increases or decrease to current law budgets.

    You haven’t demonstrated that there is a structural balance problem beyond FY 2015. You have only asserted it. The way way to address projected overages for ’14 and ’15 would be either to raise taxes temporarily and cut spending temporarily. Conservaties: rest assured: the forecast document shows that there is no fiscal problem in ’16/’17. If you hear Erik, Democrats or Gov Dayton saying permanent tax increases are necessary, don’t believe them.

    I propose this: : rather than talk about the forecast. Tell me how much spending above forecast revenue you want. And then tell me how you want to change the tax structure to fund the extra increment.

    • And I took the extra step of noting your disagreement in this post because I understand that this is not universally accepted.
      Also, I tried to make it clear that raising taxes on the top two deciles is what I expect to be proposed, but I’ll say it here – that is not the only possible solution. It is always possible to cut even if you do believe me that it’s a $1B structural problem. But – and I’m pretty sure this is a good prediction – the tax increase is very likely to be the way it will be plugged.
      If there is no structural deficit, I am against raising taxes UNLESS a very clear and pressing need is identified that we are not taking care of now. However, any kind of reform that might be proposed can and, IMHO, should work towards at least making the overall tax incidence flat – if not progressive.
      I am not calling for a tax increase simply to have a tax increase – that would be ridiculous. I expect a tax increase because I see a serious problem in the forecast that the DFL Legislature will have to fix. Your mileage, apparently, differs.

  10. What baffles me is if the ’14 and ’15 imbalance has something to do with the education shifts or with any Pawlenty, you probably would have said so. But you haven’t made that emphasis

    So your adherence to the inflation explanation in the forecast is strange. It would be more persuasive if you pointed out to policy changes done during the Pawlenty years. Then there would be structure to look at…

    So..if Pawlenty as governor put into place bad structure either in budget or policy. then it would be easier to see that there is a rationale for undoing that structure.

    Dayton in fact wanted an income tax increase his first year, but t he Republicans denied it. If their was bad structure in the first 2 Dayton years there, I think the readers would want to hear about. That makes the issue more substantive rather than about the forecast.

    • You’re right – I have to identify whatever tax cuts or increased expenditures created the imbalance. I’ll look for that and see what I can find I believe there were tax cuts during the Pawlenty / Republican Legislative era that account for it, given the regressivitiy of the tax incidence that was not there before, but I’ll look.
      Fair enough.

  11. I get what you are saying here. If inflation is 2% and the budget is just over $50 billion then not taking it into account leaves a $1 billion error. That is in the forecasting. But do we have to have it go up by inflation every year is what I think Smithson is getting at? Its a good question. Once again you said we are at 17% of the economy for total government and that does sound high. Could some be privatized for example?

    • Yes, that’s all I’m saying. And I guess that a 2% across the board cut in real terms would also take care of the problem.
      What can be privatized? I don’t see any big items that would make a big difference. County hospitals might be the easiest target, but I can’t see how it would make a big difference to the budget in the end – we’d still pay for services given to those who can’t pay. There isn’t much for liquor stores or electric co-ops in Minnesota, for example. Pennsylvania could (and I would say should) get out of the liquor biz but we aren’t in it.
      I’ll think about privatizing and where it might actually save. My first thought is that no, it wouldn’t change a thing.
      I’m glad you are focusing on the 17%, BTW, because it is the bottom line and it is a number that, as you said, is a bit high but not really high. It seems rather balanced to me, especially when you dig into it. I would hope you would find it high and my more liberal friends would say it’s too low. 🙂

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