Not so unlike California ...

In the case you missed it, the following is an op-ed by Senior Fellow Jay Kiedrowski, published by the Star Tribune on Sunday, July 5, 2009.

"California budget crisis forces schools to slash programs, fire teachers, expand class sizes," read a recent Star Tribune headline. With Minnesota Gov. Tim Pawlenty's unallotments wrapping-up the highly contentious legislative session, one can see disturbing similarities between our state finances and California's. California was once considered a great state. Jobs were plentiful, budgets were balanced, college tuition was free, social service helped those in need and people flocked to the state.

Similarly, Minnesota once was a model state. In the 1970s, former Gov. Wendell Anderson appeared on Time magazine's cover with discussion of the "Minnesota miracle." Minnesota's economy outgrew the national economy; our education system was the envy of other states; our budgets were balanced; we helped those in need, and we maintained the highest credit rating.

Much has changed for both states. California's controller recently warned that the state is "less than 50 days away from a meltdown of state government." It is unable to pay its bills because the governor and legislature there cannot agree to balance its budget and reduce deficit borrowing.

Minnesota is not yet California financially. We can still pay our bills, and the state Constitution prevents us from using California-style borrowing. But there are significant similar warning signs:
Failure to balance the budget

Even with the governor's unallotments, Minnesota will spend nearly $2 billion dollars more than it really will collect in its 2009-11 budget, because of accounting gimmicks.

One gimmick moves the payment of $1.8 billion of school aid cash payments (27 percent of the total) from one year to the next so that this money doesn't have to "count" toward the fiscal year budget. Another delays capital equipment sales tax refunds for three months across the fiscal year to "save" $63 million. A third is an accelerated payment of $106 million from Wisconsin that has not been agreed to by Wisconsin.

More importantly, the governor's actions leave the state with a projected budget shortfall of $6 billion (including inflation) for the 2011-13 budget. Minnesota has had a built-in budget imbalance -- normal expenditures greater than normal revenue -- since 1999, when the state lowered taxes and increased spending more than it could afford. This latest budget not only doesn't address the underlying long-term imbalance, but it makes the next budget deficit in 2011 significantly greater than ever before.
Overly optimistic projections of the future

The governor's response to questions about future budgets is that you cannot predict the future and Minnesota's economy could bounce back and provide for future obligations. But, the state economic forecast already includes a Minnesota economic recovery for the next budget.

Minnesota, as well as the global economy, will not attain growth levels seen in the 1990s and early 2000s. The reason is that the world economy has to "reset" at a lower level because it will not have easy and cheap loans for businesses and individuals.

Even if the global economy grows more than expected, Minnesota may not grow like it did in the past. Minnesota's economy, as noted in the Minnesota Budget Trends Study Commission report, has underperformed the national economy since 2005.
Inability of the governor and Legislature to work cooperatively

The governor's unallotments may be clever politics for ending the legislative session, but it did nothing to develop a broad consensus among state leaders on a plan to balance and sustain the budget for Minnesota's future. The past success of Minnesota can be traced to bipartisan approaches to solving the state's most difficult problems.

Never before has a governor refused to bargain with the Legislature and simply impose his will through unallotment powers designed for smaller problems. Conservatives have applauded the governor's actions. Will they if a liberal governor abuses the unallotment power in a similar fashion?

The answer is no, and that is because Minnesotans want and need political consensus on difficult issues like the budget for the state to progress. The credit-rating agencies that determine the creditworthiness of states like Minnesota actually assess the functioning of local political systems. With Minnesota's unbalanced budget and poor political consensus, one can expect the state's credit rating to drop the next time the state borrows money.

California used unsound financial policies in the past that created its crisis. Minnesota needs to cut spending, raise taxes or a combination totaling at least $2 billion now. Hopefully, the courts will negate the governor's abuse of unallotments and force him and the Legislature to do the right thing: develop a political consensus to adopt a sustainable budget.

Jay Kiedrowski is a senior fellow at the Humphrey Institute at the University of Minnesota. He cochaired the Minnesota Budget Trends Study Commission and was finance commissioner for Gov. Rudy Perpich.

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