The Economy and Budget: Minnesota and the Nation

Legislative Conference

January 12, 2011

Scott PattisonExecutive Director

National Association of State Budget Officers

444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org

NASBO

Rethinking State Government

“How much a state spends often matters less than how it spends.”

The Economist, January 23, 2010

Should certain parts of government continue to be funded - what’s the role of government?

Peter Drucker, 1995

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NASBO

Rethinking State Government

“Containing growth in our health care costs… is something we absolutely need to do, because it is unsustainable at the rate that it’s been growing,’’ said Jay Gonzalez, Patrick’s budget chief. There are going to be some hard decisions.’’

“We now have to begin messing with Medicaid,’’ said [House Member Harriett] Stanley.

Boston Globe 1/3/11

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Current Fiscal Situation:

Overview

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Recent State Fiscal Situation

The “Great Recession” - Extremely difficult fiscal period for states States experienced significant shortfalls and large

revenue declines

Widespread budget cuts, layoffs/furloughs continue across the nation

ARRA funds ending

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MAJOR CHALLENGES TO STATE BUDGETS: Fiscal 2011 and 2012

Slow Revenue Growth Unlikely to return to 2008 levels until 2013 or 2014

Medicaid Enrollment Increase 8.5 percent growth in 2010, 6.1 percent growth estimate for 2011

Wind Down of Recovery Funds $151 billion in flexible funding ends in June 2011

Growing Long Term Liabilities The unfunded liability is at least $1 trillion

Health Care ReformUncertain costs

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Current Fiscal Situation:

Indicators

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Negative Spending Two Years in a Row, Increase in 2011

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

%

General Fund Expenditure Growth (%)

*33-year historical average rate of growth is 5.7 percent *Fiscal ‘11 numbers are enacted Source: NASBO Fall 2010 Fiscal Survey of States

* Average

The New Normal

Worst Case Scenario

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Balances as a Percentage of Expenditures

* FY 2008, and 2009 are actual. FY 2010 is preliminary actual and FY 2011 is enacted.

(per

cen

tage

s)State Balances Near Historic Lows for Many States

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Balances inMN and Selected States

Source: NASBO Dec. 2010 Fiscal Survey of States

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Tax and Fee Increases Continue

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State Tax Revenue Growth in MN and Selected States

Source: Fiscal Studies Program, Rockefeller Institute of Government

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Minnesota GF Revenue:1997-2010

Source: NASBO State Expenditure Report

(estimated)

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Budget Cuts Made After the Budget Passed

($ millions)

*FY 2011 mid-year budget cuts are ongoing

Mid-Year Budget Cuts Continue

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Current Fiscal Situation:

Economic Overview

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Unemployment Ratein MN and Selected States

Source: U. S. Department of Labor, Bureau of Labor Statistics

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National Unemployment Rate Compared to MN

17

%

Source: U.S. Department of Labor, Bureau of Labor Statistics

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Who gets out first? Historical Boost to State Earnings and Employment due to Oil & Natural Gas

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Source: Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter 2009

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MN Recovery Act Spending through 12/07/10

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

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The Cliff: Temporary Federal Aid to States (FY ’11 totals include both ARRA & Education Jobs Funds)

Source: Recovery Act data come from GAO Report to Congress, September 2010

In Billions

Fiscal Year

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Background on State Spending Trends

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Spending by Funding Source(Percentage)

General Funds38.1%

Federal Funds34.7%

Other State Funds24.5% Bonds

2.7%

Total State Expenditures By Funding Source, Estimated Fiscal 2010

Source: NASBO 2009 State Expenditure Report

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MN Spending by Funding Source (Percentage)

Source: NASBO 2009 State Expenditure Report

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Total Expenditures Percentage Growth in Spending Categories Over 10 Years

18.1

39.853.5 55 60

71.784.6

95.7

0

20

40

60

80

100

120

%

Percentage Growth in Spending CategoriesBetween Fiscal 2000 and Fiscal 2010 (Total Funds)

Public Assist. Corrections Higher Ed Transport. K-12 Total All Other Medicaid

Sources: NASBO 2001 and 2009 State Expenditure Reports

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General Fund: Medicaid & Education Over 63%

Elementary & Secondary Education

35.7%

Higher Education12.1%

Medicaid15.4%

Public Assistance1.9%

Corrections7.2%

Transportation0.8%

All Other27.0%

General Fund Expenditures by Function, Estimated Fiscal 2010

Source: NASBO 2009 State Expenditure Report

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MN General Fund: Medicaid & Education Over 70%

K-1234.4%

Higher Education18.0%

Medicaid18.1%

Public Assistance0.9%

Corrections2.7%

Transportation0.6%

All Other25.2%

General Fund Expenditures by Function, Estimated Fiscal 2010

Source: NASBO 2009 State Expenditure Report

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General Fund Percentage Growth in Spending Categories Over 10 Years

0.5

22.6

28.5

36.1 36.238.7 39.8 40.3

0

5

10

15

20

25

30

35

40

45

%

Percentage Growth in Spending CategoriesBetween Fiscal 2000 and Fiscal 2010 (General Funds)

Public Assist. Transport. Higher Ed Total K-12 Corrections Medicaid All Other

Sources: NASBO 2001 and 2009 State Expenditure Reports

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MN General Fund Spending Growth over 10 years

Sources: NASBO 2001 and 2009 State Expenditure Reports

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Percentage Change in Medicaid Spending and Enrollment

29

%

Source: Kaiser Commission on Medicaid and the Uninsured

Adopted

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State Spending from Federal Funds

Elementary & Secondary Education

13.1%

Higher Education3.3%

Medicaid39.5%

Public Assistance2.7%

Corrections0.4%

Transportation8.0%

All Other32.9%

Federal Funds Spending, Estimated Fiscal 2010

Source: NASBO 2009 State Expenditure Report

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MN State Spending from Federal Funds

K-1217.3%

Higher Education

0.4%

Medicaid37.4%

Public Assistance2.7%

Corrections0.4%

Transportation6.3%

All Other34.5%

Federal Funds Spending, Estimated Fiscal 2010

Source: NASBO 2009 State Expenditure Report

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Promising Practices

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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

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Focus on Outcomes

Focus on results and outcomes

Spend funds for effective programs

Improve management

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Model: The “Drilling Rig”

Cuts and Savings: $97 million GF-S$6 million HSA

Health CareSpending Plan: $4.2 billion GF-S and HSA

New revenue buys:Basic Health Plan coverage for 17,200 peopleDental care for adultsPartial restoration of cuts to community clinics$98 million for new, higher Medicaid payments to

care providers

Examples of what’s not purchased:Reduced Medicaid payments to teaching hospitals25 percent of state grants to community clinicsOptional Medicaid coverage for workers with disabilities

Key purchases with existing revenue:Medicaid health care for 891,000 vulnerable children and adultsAll current children’s health programsStatewide public health programs to protect all citizensPublic health programs to improve testing, surveillance and follow-up for childhood diseasesHealth insurance for 81,600 low-income people, which is 17,200 fewer than currently served

High

er Pr

ioritie

sLo

wer P

riorit

iesHi

gher

Prior

ities

Lowe

r Prio

rities

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What Can Be Done?

Ask performance questions

Ask for outcome data

Use performance information to justify changes to programs.

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Outlook

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Long Term Spending Pressures

Medicaid and Health Care

K-12 and Higher Education

Demographic Changes

Corrections Transportation Infrastructure Pensions

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State Fiscal Outlook

Austere state budgets for at least the next several years Slow revenue growth; ARRA declines

Health care reform will have an impact on state finances

Tough competition for general funds

Opportunity for reform, restructuring

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www.nasbo.org

Scott Pattison

(202) 624-8804

spattison@nasbo.org