Dire Financial Straits
Last week, Governor Tim Pawlenty announced that he was spending the remaining $155 million in that state reserve funds and trimming $271.4 million in state expenditures. This is just to make sure the state balances its budget for the current fiscal year which ends June 30th. Through a process known as "unallotment", the Governor has the authority (and requirement) to reduce the amount of state spending to prevent a deficit.
But this drastic action by Pawlenty, with the agreement of the state legislature, is just the tip of the iceberg. For the next two year budget period, July 1, 2009 to June 30 2011, the state is projected to face a $5.2 billion budget deficit. The Governor and State Legislature will focus on deep, painful budget cuts to balance our budget. I have learned in discussions with state officials and legislators that the picture may even be bleaker. Many believe that the February budget forecasts will predict a nearly $7 billion budget deficit for the next biennium. That would be nearly a 20 percent reduction in our state's $34.6 billion biennial budget.
Why can't the state just do what the federal government does, deficit spend. Some, mostly those seeing their pet state projects cut, would like to see just that. They have been joined by a few economits who subscribe to the theories of British economist John Meynard Keyes. A Keynesian believes that it is the government's role to smooth out the bumps in our economic cycles. In a recession, the quickest way to revive the economy is for government to stimulate the economy when consumers and businesses cannot. They call for massive infusion of funding regardless of budgetary constraints. Judging by the proposed $800 billion plus stimulus package on the agenda for the next Congress, it would seem that the federal government has already adopted Keynesian economics.
So why can't Minnesota do the same and spend our way out of an economic downturn. First off, the state cannot print money as can the federal government so it must borrow in order to deficit spend. Contrary to what many Minnesotan's believe, our state constitution does not specifically call for a balance budget. It does however limit the state's borrowing. The state is authorized to borrow money within a budget period but must repay that loan during that same period, thereby in effect requiring a balanced budget. Our forefathers, did allow some latitude. Our constitution authorizes two reasons for the state to borrow; to repel an invasion or suppress an insurrection which probably seemed less remote in 1857. (Will a $7 million budget cut to our state's schools, human services and prisons constitute an insurrection.......who knows.)
What does all this gloom and doom mean for MIIAB members. All state agencies will face budget cuts including the Department of Commerce. So expect that the Department will have less people to do what they attempt to do now. The state may also look for ways to increase revenues. One item for discussion will likely be sales tax on services. As our state economy changes from a manufacturing/agricultural base to a mostly service industry, it is clear our current sales tax is behind the times. How a sales tax would be levied on insurance producers could be problematic, not so much for fee based services but on commission and other types of remuneration commonly received by agents. Of course, sales taxes are ultimately transferred and paid by the consumer. I would think that all the fees charged by the state such as license fees might be increased. All the legislative leaders both Republican and Democrat appearing around the state have it made it very clear......this is the worst budget deficit the state has ever faced and everything is on the table.