Strong budget reserve is fiscally responsible, essential to support Minnesotans in next economic downturn

In recent years, Minnesota has taken important steps to build up the state’s budget reserve. And thanks to this good work, the state has almost reached its reserve target of $2.1 billion.

But even as we’re building a strong budget reserve, some policymakers have suggested weakening the state’s rainy day fund. This is a mistake. A robust budget reserve is a critical part of adequately preparing for the next economic downturn. In the same way a family saves to withstand an unexpected serious illness or job loss, Minnesota builds this reserve so that when a recession hits, the state can avoid drastic cuts in critical services and continue to serve Minnesotans’ needs.budget-reserve-01

Adequate budget reserves are essential for states because their balanced budget requirements put them in a challenging position in a recession: the needs of their residents grow at exactly the same time as the resources to meet those needs are shrinking.

While the state currently projects a $1.4 billion positive balance for the upcoming FY 2018-19 budget cycle, the story was very different only a few years ago. Just six years ago, the state faced a $6.2 billion deficit for FY 2012-13. That’s three times what we currently have in our budget reserve. Policymakers made painful cuts, including in financial aid for college, nursing homes and other services for seniors, and services for Minnesotans with disabilities, that made it even harder for struggling Minnesotans to weather the recession.

Minnesota had a much smaller budget reserve at that time. The one we’re building today will be able to shield struggling Minnesotans from many cuts. Minnesota Management and Budget currently recommends a reserve that is 4.9 percent of general fund revenues. A reserve of this size would well prepare the state to absorb the shock of 95 percent of future economic downturns. Additionally, a healthy level of reserves will afford state policymakers the time they need to make more responsible tax and budget choices in tough economic times, instead of having to make hasty decisions to balance the budget.

Experts agree that a strong budget reserve makes for responsible budgeting. The state’s Council of Economic Advisers, The Pew Charitable Trusts, and credit ratings agencies all speak to the importance of strong reserves. Maintaining a healthy reserve also helps keep a positive credit rating because it can show the state has strong fiscal management. Rating agencies Standard and Poor’s and Moody’s look for budget reserves of 4 and 5 percent respectively. A strong credit rating means lower costs in maintaining our infrastructure, including building and repairing our roads, bridges, schools and libraries; and preserving our historic places.

It’s imperative to build and maintain a strong budget reserve when the state’s budget outlook is good, and Minnesota has made laudable progress. But with many economists estimating that the next recession might not be too far away, policymakers shouldn’t jeopardize the well-being of struggling Minnesotans and the state’s fiscal health by weakening our rainy day savings.

-Clark Biegler

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Five takeaways from the November Economic Forecast

The Minnesota Budget Project staff is currently at a conference in Washington, D.C., but given our wonky personalities we just had to take a quick look at today’s state Budget and Economic Forecast. Here are our top five takeaways:

  1. The forecast projects a $678 million positive balance for FY 2016-17. This figure is for the remainder of the current budget cycle, which ends on June 30. And it is after one-third of the positive balance is transferred to strengthen the state’s budget reserve.
  2. The November forecast also projects positive balances in the future. Today’s report shows a $1.4 billion positive balance available for the upcoming FY 2018-19 biennium. This figure assumes that the balance for the current biennium will remain for use in FY 2018-19. This forecast also gives us our first glance at the FY 2020-21 biennium, in which the state has a projected $1.5 billion positive balance.
  3. But the future balances do not take into account what it takes to maintain current levels of service. When the impact of inflation on spending is included, the surplus morphs into a much smaller $73 million in FY 2018-19 and into a $1.7 billion deficit in FY 2020-21. This means that to the extent the surplus is used for additional spending or tax cuts, this will come at the expense of keeping up with current commitments.
  4. The forecast expects weaker economic growth than projected earlier this year. The national economy is still expected to grow over the next several years, but now at a slower 1.5 percent in 2016 and hovering just above 2 percent yearly growth from 2017 through 2021.november-2016-forecast-gdp-growth
  5. The forecasters are moderately confident in these projections, but there’s more uncertainty than usual. IHS Markit, Minnesota’s economic consulting firm, assigns a 65 percent probability to their baseline economic forecast, and a 20 percent probability to their more pessimistic scenario where political uncertainty both in the U.S. and abroad weakens the economy and leads to a short recession starting late next year. The forecasters assign a 15 percent probability to a more optimistic scenario where incomes, housing and consumer spending are boosted by higher productivity, which increases national economic growth next year.

In the upcoming 2017 Legislative Session, policymakers will put together a budget for the upcoming biennium. The November Economic Forecast gives Governor Mark Dayton the baseline information he needs to put together his proposed budget for the FY 2018-19 biennium that he will release in January.

As they make tax and budget decisions this session, policymakers should focus on state investments that expand economic security and enable our families, children and seniors to thrive. This includes affordable health care and child care, and targeted tax credits so that Minnesota workers can better support themselves and their families.

Now is not the time to turn our backs on the progress we’ve made for a more sustainable tax system that allows us to invest in our communities. Large and poorly targeted tax cuts don’t spur economic growth – that hasn’t worked out for states like Kansas.

We’ve long called on policymakers to make responsible tax decisions. Caution is more important than ever, given today’s modest long-term revenue numbers. Making large tax cuts now would make it harder to effectively respond to what’s ahead, including an uncertain economy and potential large-scale federal changes to tax policy and funding for states. Our own state history has shown that when taxes are cut too much in surplus years, it makes it more difficult for the state to respond to the needs of our residents in the next economic downturn. Instead, we should invest in a more durable prosperity that reaches all Minnesotans.

-Clark Biegler

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Tax credits for working Minnesotans an important area of common ground

The long election season that just concluded shone a spotlight on the economic insecurity facing many across our state and across the country.

Policymakers must respond with effective and targeted strategies so that Minnesotans can support their families and get their kids off to a better start. In terms of tax strategies, Minnesota policymakers have two such solutions close at hand: the Working Family Tax Credit and the Child and Dependent Care Tax Credit make everyday Minnesotans a priority, and they are part of the unfinished business from the last session. (These credits were included in the 2016 tax bill that passed a divided Legislature with strong bipartisan support; unrelated technical glitches in the bill found after the legislative session was over prevented Governor Mark Dayton from signing it into law.)

The Working Family Credit (WFC) is a tax credit for working people with lower incomes, which helps them meet basic needs and support their families. It is our state’s version of the federal Earned Income Tax Credit, or EITC, which has a proven track record of supporting work, boosting incomes and getting children off to a stronger start in life. It is available to households with earnings from work, and the amount of the credit varies based on the size of the family.

The Working Family Credit is effective in reaching many of those Minnesotans who, despite working hard, are struggling to make ends meet, and the expansion proposal would make it work even better.

  • Nearly half of the families and workers who currently get the Working Family Credit live in Greater Minnesota, where wages tend to be lower and job opportunities can be more limited than in the Twin Cities metro area. In several counties in Greater Minnesota, more than 1 out of every 6 tax-filing households receive the Working Family Credit.
  • The Working Family Credit is also effective in reaching Minnesota’s communities of color, who also have had less access to opportunity. About 30 percent of those estimated to be eligible for the WFC are people of color.
  • The expansion would make the credit work better for younger workers and others who aren’t raising children in their homes. It includes reforms inspired by proposals from House Speaker Paul Ryan and President Barack Obama for the federal EITC to have the same kind of pro-work impact on these workers that it has for parents. Workers without dependent children can already qualify for the credit, but currently, these workers face an arbitrary age requirement that they be at least 25 years old, and single Minnesotans working year-round, full-time at $9.00 an hour make too much to qualify.

The Child and Dependent Care Credit also supports struggling working families. It is intended to help families afford child care, but the credit hasn’t kept up with rising costs. This is another credit that has received bipartisan support and ongoing interest; it has been a feature of Dayton’s budget proposals, and expansions have passed the Republican-led House in both 2015 and 2016. Expanding this credit is another good step, along with boosting funding for child care assistance, in making sure Minnesota parents can afford child care and employers can attract the workers they need.

In the 2017 Legislative Session, we are likely to face a tighter state budget situation, and at the same time, too many Minnesota families are struggling. That makes it even more essential to focus on proven and well-targeted strategies to boost the incomes of working Minnesotans. The Working Family Credit and Child and Dependent Care Credit deserve to be top priorities.

-Nan Madden

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Make economic opportunity available to all Minnesotans

Today’s the day thousands of your neighbors pull together to make Minnesota stronger during the annual Give to the Max Day fundraiser.

Our work at the Minnesota Budget Project is grounded in the belief that economic opportunity and prosperity should be available to everyone, regardless of who they are or where they live.gtmd16logoverticalcolorsafe

And our work is more important than ever. We’re fighting to expand the Working Family Tax Credit, which boosts incomes for everyday Minnesotans. And we’re protecting affordable health care and other critical supports for Minnesotans working their way into the middle class.

But we can’t do it alone. With your tax-deductible donation you’ll advance our shared values of economic security for all Minnesotans through policy solutions that enable Minnesota workers to keep our economy strong and growing.

Donate today and your gift could go even further – it will be eligible for the hourly drawings of a $1,000 GiveMN Golden Ticket, and one of the $10,000 Super-Sized GiveMN Golden Tickets.

We bring you the credible and timely analysis you rely on to better advocate for what’s important to you. Donate today for a stronger tomorrow for all.

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Refugees revitalizing Minnesota by contributing to economy and our communities

Refugees come to this country because they face persecution in their homelands, and the United States provides a safe space for them to rebuild their lives. A recent report shows that refugees are also important players in our country’s labor force and economy, and they work to become part of their new communities.

Refugee Integration in the United States, a joint report from the Center for American Progress and the Fiscal Policy Institute looks at how Somali, Burmese, Hmong and Bosnian refugees contribute to the economy when they come to the U.S. seeking a better life. Among the key findings:

  • Refugee men quickly join the workforce once in the United States, and in fact are often working at higher rates than U.S.-born men. Refugee women also join the workforce, and after 10 years are in the labor force at about the same rate as U.S.-born women.
  • Many refugees see substantial wage increases in their first 10 years in the country as they move into better jobs, and a significant number become business owners.
  • Refugees integrate themselves into their communities over time by learning English, buying homes and becoming U.S. citizens. More than three-quarters of Somali, Burmese, Hmong and Bosnian refugees become American citizens after 20 years.

The report also highlights the Twin Cities’ large refugee populations, pointing out that, “These refugee groups have played a significant role in the revitalization of Minneapolis and St. Paul; together with other immigrant groups, they have helped spur the cities’ population rebound after a mid-20th century decline.”

This report is an important reminder that refugees move to this country fleeing dangerous circumstances, and during their resettlement they relatively quickly join in the workforce, learn English and contribute to the communities where they settle.

-Clark Biegler

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Many workers being left behind in economic recovery

Minnesota’s economy has a number of strengths. Incomes are rising, poverty is falling, and unemployment is back to pre-recession levels. Minnesota out-performs our perhaps most comparable neighbor, Wisconsin, in measures including labor force participation and wages.

However, some Minnesotans are not sharing in the state’s success. Minnesota is mirroring the national trend that productivity growth no longer translates into wage growth for most workers, leading to stagnant wages and growing income inequality. Minnesota’s low-wage workers are earning about what they earned 15 years ago, and it’s not enough to make ends meet. We delve into how Minnesota workers are faring in our new report, Minnesota Economy Improving But Harsh Disparities Leave Too Many Workers Behind: The State of Working Minnesota 2016.

Minnesota’s economy has slowly recovered since the Great Recession, but too many workers still struggle to meet their basic needs. Our key findings include:

  • Inflation-adjusted wages for low- and middle-wage workers have only just caught up to pre-recession levels, and are closer to inflation-adjusted 2000 wages. This is despite rising productivity, which has increased almost 10 percent since 2007.swm-wage-percentiles-01
  • Many Minnesota workers, and in fact over half of Minnesota workers without a college degree, earn less than what it takes to support a family of three. The lack of enough good jobs means juggling the rising costs of child care, transportation, and housing.
  • Minnesota’s overall economic success is not reaching all communities: people of color are more likely than other Minnesotans to be unemployed or underemployed. In fact the percentage of African-American workers who can’t find the work they need to support their families is almost three times higher than the percentage for all Minnesota workers.

Minnesota needs a strong workforce to continue building a vibrant economy for years to come. Minnesota can’t afford to leave workers on the sidelines through lack of opportunity. Fortunately policymakers can adopt policies so that more Minnesotans can get and keep quality jobs to support themselves and their families. These include:

  • Improving job quality standards, such as expanding paid sick time to more workers;
  • Ensuring Minnesotans can get the education and training they need, and can get to good jobs that make full use of their skills; and
  • Helping low-wage workers make ends meet and move into the middle class by expanding the Working Family Credit and increasing funding for child care assistance.

-Clark Biegler

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Four takeaways from the October Economic Update

Monday’s October Revenue and Economic Update gave us some unwelcome news. The quarterly report from Minnesota Management and Budget (MMB) showed that while revenues for FY 2016 came in above projections, state revenues are starting to come in lower than expected, and forecasters have once again lowered their projections for national economic growth.

1. FY 2016 ends above projections, FY 2017 begins behind projections. FY 2016 ended on June 30, 2016, with revenues $220 million above projections; that’s $10 million less than reported in the July update. State revenues from the first quarter of FY 2017 were $97 million, or 2.1 percent, lower than projected in the February 2016 Economic Forecast adjusted for legislative changes.

2. Lower national economic growth projected for 2016 and onward. Expected U.S. economic growth for 2016 has been lowered to 1.4 percent. Real GDP growth is then expected to be above 2.2 percent each year from 2017 to 2019; these are lower rates of growth than prior projections. These new growth projections are associated with uncertainty around the outcome of the presidential election, whether the Federal Reserve will raise interest rates, and around OPEC’s oil production and pricing decisions. The impact of Hurricane Matthew is another source of uncertainty.


3. Unemployment remains low. Despite the slower economic growth projections, the economy is expected to continue to see low unemployment of 4.9 percent, a level that traditionally has been characterized as “full employment.”

4. This is the last update before the November Economic Forecast. The quarterly economic updates are helpful in giving us an idea of how revenues and the national economy stack up to previous projections. However, for a fuller picture, we look to the more comprehensive November and February economic forecasts, which project both state revenues and expenditures. The November Economic Forecast will give Governor Mark Dayton the baseline information he needs to put together his proposed budget for the FY 2018-19 biennium that he will release in January.

-Clark Biegler

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What matters more for competitiveness: rankings or results?

It’s a good time to visit public finance expert Peter Fisher’s comprehensive work over at Grading the States, which digs deep into the details of business climate rankings and what does – and doesn’t – matter for building prosperity in the states.

That’s because the Tax Foundation has released the latest edition of its State Business Tax Climate Index, which it argues measures elements of a state tax system that impact its business competitiveness. As Dr. Fisher reminds us, there are serious flaws with this index that make it a poor guide for policymakers – and can even cause them to take their eyes off the ball in terms of what really matters for economic prosperity.

The State Business Tax Climate Index is not a measure of the level of taxes paid by businesses. If it were, it would likely put Minnesota in the middle of the pack. That’s where Ernst & Young ranked Minnesota in a report it prepared for the Council on State Taxation that measured what share of each state’s private sector gross state product went to state and local business taxes.

This index also doesn’t measure “competitiveness” by looking at economic performance. There are a myriad of data points that can be used to measure a state’s economic performance, but here are just a few:

  • Minnesota ranks 2nd for the number of Fortune 500 companies per capita.
  • Minnesota ranks 2nd for our labor force participation rate and our 4.0 percent unemployment rate is better than the national figure.
  • Minnesota ranks 10th for median wages and 13th for median household incomes.

Those rankings paint a picture of Minnesota as having a relatively strong economy with room to improve further. That picture doesn’t square with Minnesota being ranked 46th by the Tax Foundation’s index, which only measures to what degree a state has the tax policies that the Tax Foundation prefers and has incorporated into its index.

We shouldn’t be concerned that Minnesota doesn’t do well measured against this particular set of tax policies; Dr. Fisher finds the index and its component parts are a “poor measure of growth potential.” There are a number of concerns about how the index is constructed that raise questions about its utility; Grading the States, and former Federal Reserve Bank of Boston economist Robert Tannenwald are two good resources for readers wanting to dig into those details.

It seems to me that the ultimate result of being “more competitive” should be having a strong economy that translates into economic opportunity and high living standards for the state’s residents. And while Minnesota has some serious work to do to become a state where economic opportunity is truly available to everyone, we’re doing relatively well on broad measures of economic performance.

Policymakers are right to think about what we as a state should be doing to support economic growth and broader prosperity. That means taking a broader view than just taxes. Dr. Fisher notes the important role of public sector research and development, investments in education, and technical assistance for entrepreneurs in promoting economic growth. He also notes that “public policies that reduce risk increase the opportunities for entrepreneurial activity” – that when families have health insurance and affordable health care, and they aren’t saddled with too much college debt, that provides the baseline of economic security that can enable individuals to take the risk of starting a new business. These are the kinds of public investments that too much fixation on “tax competitiveness” can put at risk.

-Nan Madden

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Policymakers’ equity work makes strides, but much more to do

From Governor Mark Dayton’s State of the State address to the final bills put together at the very end of the 2016 Legislative Session, equity was a major theme at the Capitol this year. But even with the progress made, it’s clear that Minnesota should go further.

State policymakers are increasingly aware that Minnesota is a place where many people are not benefiting from the state’s economic performance. For one, despite overall prosperity, economic disparities remain between white Minnesotans and Minnesotans of color. But economic opportunity should be available to Minnesotans regardless of their race, gender, or where they live. Especially in the context of Minnesota’s tightening labor market and an imminent labor shortage, it’s crucial for the state’s economic future that all Minnesotans can reach their fullest potential in the economy.

The governor proposed allocating $100 million in total for equity proposals in his budget. The Senate followed suit, establishing a Subcommittee on Equity and including $91 million in FY 2017 in their budget to expand opportunity to more Minnesotans. Both of these proposals were for one-time funding. The House also advanced proposals intended to promote equity, but they were not part of a specific equity bill. The final budget agreement passed this session included $35 million in FY 2017 and $35 million for the next biennium in equity provisions that are intended to reduce the state’s economic disparities. FY 2017 funding includes:

  • $6.9 million in grants for the Latino, Somali, Southeast Asian and American Indian communities to address educational, employment and workforce disparities, and to support youth;
  • $1.5 million to promote high-wage, high-demand non-traditional jobs for women;
  • $1 million for a Minnesota Youth at Work Competitive Grant Program that will connect youth with employment opportunities, targeted toward youth of color and others who face barriers in the job market;
  • $1 million for Pathways to Prosperity, which helps prepare low-wage workers for high-demand jobs; and
  • $500,000 for the Emerging Entrepreneurs Fund, which helps fund loans to businesses owned by disadvantaged groups, including people of color, women and people living with disabilities.

However, even with this progress, a recent report from Voices for Racial Justice finds that Minnesota has a long way to go to reach racial equity. Even though policymakers passed an important equity package, they also missed many opportunities to address issues such as:

  • Criminal justice, to create a more just and equitable system that “treats people with compassion and dignity, and that allows for second chances.” For example, this could include restoring voting rights for individuals who were formerly incarcerated.
  • Economic equity, to ensure that all Minnesotans have the opportunity to succeed. This includes increasing cash assistance in the Minnesota Family Investment Program (MFIP). MFIP supports some of Minnesota’s poorest families, but the cash grant hasn’t increased in 30 years. It also includes expanding the Working Family Credit, which supports lower-income families trying to make ends meet and makes the state’s tax system more fair.
  • Structural racism, to tackle policies, formal practices and other barriers that continue racial inequities. This could include instituting equity impact notes that assess proposed legislation on their ability to narrow or widen disparities.

Policymakers made some important strides this session to more directly address the state’s economic and racial disparities, but must come back in 2017 ready to continue this work.

-Clark Biegler

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Better jobs, higher education are 2 of 4 reasons to wish DACA a very happy 4th birthday

In 2012, President Barack Obama introduced a landmark executive action that allowed unauthorized immigrants who came to the United States as children to receive temporary deferred action from deportation and work authorization, provided they meet certain requirements. As Deferred Action for Childhood Arrivals (DACA) turned four this year, several studies look at how effective DACA has been at increasing economic opportunity, and the results are worth celebrating.

We take a look specifically at a new report from the Migration Policy Institute. Here are some of the highlights:

  1. DACA has enabled recipients to get jobs and get better jobs. Work authorization is making a difference. One survey showed over three-quarters of respondents getting a new job after enrollment in DACA, and over half getting a better paying one. Another survey showed that 66 percent “went from unemployed to employed after receiving DACA.”
  2. DACA supports advanced educational opportunities. One survey showed that almost one-third of respondents have gone back to school and are also better able to pay for their higher education because of the program’s work authorization component.
  3. Almost all DACA recipients are getting their driver’s licenses. Over 90 percent of respondents have received driver’s licenses, according to a few surveys. We’ve written about the economic benefits of a driver’s license: people with driver’s licenses are better able to access good jobs and are more flexible in the hours they can work, which can lead to higher earnings.
  4. DACA recipients feel more at home in the United States and want to more fully participate. A survey showed that 99 percent of respondents want to become U.S. citizens, though this is not currently an option for DACA recipients.

DACA is a common-sense way to recognize the contributions that immigrants are already making in our communities and reflect the investment that we have made in the young people who have grown up here. The initial evidence shows that recipients are benefiting from DACA, gaining education and job experience that enables them to better contribute to their communities.

In November 2014, Obama expanded the existing DACA program and created Deferred Action for Parents of Americans and Lawful Permanent Residents (DAPA). However, a split ruling this summer by the U.S. Supreme Court left in place a nationwide delay of Obama’s 2014 executive actions. Next steps for the executive action to proceed likely include another argument before the Supreme Court when there is a full court of nine justices again. Judging from the great success of DACA, it would be wise to expand economic opportunity to more unauthorized immigrants through Obama’s 2014 executive action as well.

-Clark Biegler

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