What kind of state budget deficits lie ahead?

We’ve gotten several questions lately about what kind of deficits the state is anticipating. That’s actually a complicated question, so let’s break it down by biennium.

FY 2008-09, the biennium that just ended: Mid-July analysis that took into account the decisions of the 2009 Legislative Session and the Governor’s unallotment plan estimated that FY 2009 would end with a $188 million surplus. That $188 million carries forward into FY 2010-11 and helps balance that budget. But the July Economic Update from Minnesota Management & Budget reports that preliminary end-of-year figures came up $150 million below projections for FY 2009 (which ended June 30, 2009). But those numbers are just preliminary – we’ll know more about how FY 2009 really ended in the next economic update in October. Bottom line: the surplus for FY 2008-09 may be smaller than originally anticipated.

FY 2010-11, the biennium we just started: After taking into account both the decisions of the 2009 Legislative Session and the Governor’s unallotment decisions and line-item vetoes, the state was expected to have a balanced budget for FY 2010-11 – meaning no surplus or deficit by the end of the biennium. However, I just mentioned those preliminary close-of-09 figures, which suggest that we may have started the FY 2010-11 biennium with $150 million less than we expected. However, other data show a more positive direction. Preliminary August figures show that tax revenues for FY 2010 so far (July and August) were $40 million better than the projections. As always, budget officials warn us not to read too much into any one month’s figures – there are all kinds of timing issues that can throw things out of whack – so this may or may not signal a trend.

FY 2012-13, the biennium to come. After all legislative and gubernatorial actions were over, the deficit for the FY 2012-13 biennium was estimated to range somewhere between $4.4 billion and $7.2 billion. This range reflects the uncertainty about the impact of the Governor’s unallotment decisions and line-item vetoes in the next biennium: do those shifts and cuts continue into the future, or do things go back to the way they were?

Here’s how we identified those areas of uncertainty in our analysis of the 2009 session and unallotment outcomes:

  • If delayed payments to school districts are fully repaid, the deficit would increase by up to $1.8 billion.
  • If General Assistance Medical Care (GAMC) – a public health care program for very low-income adults without children – is restored, the deficit would increase by up to $890 million. This funding was line-item vetoed by the Governor and cut further under unallotment.
  • If the impact of inflation is taken into account, the deficit would increase by $1.4 billion.
  • If the economy does not improve as was forecasted back in February, the deficit could increase by an unknown amount. The July update notes that Global Insight (the state’s national economic consultants) is now modeling slower economic growth than they did in February. That would lead one to expect that, all things being equal, the FY 2012-13 deficit is likely to grow.

So, the low-end $4.4 billion figure assumes that $1.2 billion of the school funding shift is paid off and funding for GAMC is not restored in FY 2012-13. The high-end $7.2 billion figure assumes all of the school funding shift is paid off , funding for GAMC returns to normal in FY 2012-13, and the impact of inflation is included.

Bottom line: It’s really too soon to tell whether there’s a deficit opening up for FY 2010-11 and how big the deficit in FY 2012-13 will actually be.

We’ll have a better idea of what is happening we get the final FY 2009 figures in the October Economic Update, as well as a few more months of FY 2010 economic activity and tax receipts info. And of course, the big enchilada – including an updated economic model and updates in projected expenditures – comes in the November forecast.

-Nan Madden

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About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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