John Gunyou is the City Manager of Minnetonka, a nice little town that borders Eden Prairie on the north. John is the former Finance Commissioner for the State of Minnesota He served in the Governor Arne Carlson administration. John speaks and writes about local and state government finance. Earlier this week, John testified before the Minnesota House of Representatives’ Ways & Means Committee. Today’s post is John’s written testimony before that committee. It looks like a lot of text but it doesn’t take too long to read. Take a look. Thanks John
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Minnesota House of Representatives
Ways & Means Committee
January 22, 2007
John Gunyou
Thank you for the opportunity to offer some input on the 2008-09 budget. The governor releases his budget tomorrow, and with the February forecast update, the legislative debate can begin. As House Speaker Dee Long used to say, the governor proposes, and the legislature disposes.
It is the role of former finance commissioners to dampen expectations, so I’d like to begin with a caution. The surplus is not $2.2 billion dollars of newfound money that can be used to start new programs or make permanent tax cuts. It’s one billion of one time money, and another billion that’s needed to cover inflation.
As you know,
Minnesota is the only state in the nation that counts inflation in its revenue forecast, but ignores it in the spending forecast. My first advice is to pass HF68 so that you clearly know what money you’re really dealing with. It’s accurate to assume inflation will increase prices and incomes to generate more sales and income taxes, but the forecast also needs to recognize that teachers and firefighters will get raises, and that the price of asphalt will go up.
Once you fix the forecasting process, it will be obvious that the first billion dollars of the surplus is money in the bank, but the second billion is only enough to cover the future costs of the programs you already have in place - there’s nothing extra to fund new spending above inflation.
I think it’s useful to look at the surplus as two separate billion dollar pots of money. The first billion is projected to be available in the next five months. That’s real money you can count on, but it’s a one time windfall.
It is a cardinal rule of financial management that one time money should only be used for one time things - that avoids making commitments today that you can not afford tomorrow. And that means the first billion dollars can not be used to permanently restore past program cuts or to permanently reduce taxes. If you do either of those things, you’ll just create another budget gap in the next biennium. Here’s three things you can do with it:
1. First, you can give some of it back in the form of one time rebates. But if you do, you’re talking about one round of Jesse Checks, not permanent tax rate reductions and not permanent property tax relief. Once you use it, it’s gone.
2. Another option is to squirrel some of it away for the next rainy day. Reserves are drawn down to deal with recessions, and have to be restored when the economy recovers. The current reserve is about three and a half percent of the biennial budget, and it would be nice to get closer to five percent.
3. Finally, you could use some of it to buy reform, and get us off the revenue rollercoaster.
Minnesota has one of the nation’s most volatile tax systems, which means we swing between times of plenty during economic upturns, and budget crises when the economy slows.
We can stabilize that volatility by broadening the sales tax base to include more goods and services. If you don’t want to increase taxes, the sales tax rate can be lowered. Tax credits can offset any impacts on lower income citizens.
Here are some suggestions for that second billion dollars projected to be available for the 2008-09 biennium. Remember, it’s not new money that can be used to start new programs or permanently cut taxes - it’s only enough to continue to pay for existing programs.
That doesn’t mean you have to automatically fund the inflationary costs of all those same programs. You always have the option of changing the way you allocate that additional billion dollars you’re going to spend in the next biennium. Here are three possibilities to consider:
1. First, restore some of the past short-sighted cuts that are going to cost us more in the long run. Invest more of that second billion dollars in programs that will generate future cost savings - like early childhood education and healthcare for kids. During the past four years, we’ve been doing it the wrong way around.
2. Next, tackle the real cost drivers in the budget. If we’re going to meet the 2020 challenge — the year we have more seniors than children — we have to contain the burgeoning costs of long-term care. We can start today by using some of that second billion to encourage private investments in new insurance products, services and technologies that will provide affordable care for people in their own homes, and preserve the safety net for those truly in need.
3. Finally, target more funding to those folks who really need it. Property taxes and college tuition have soared as a result of the recent budget cuts. We need to provide relief to moderate income homeowners, renters and students by providing more aid directly to them. Here’s what I mean:
Only about one-fourth of all property tax relief goes into the income-based circuit breaker program that delivers aid directly to those who need it most. The cuts to Local Government Aid need to be restored, but it’s important to recognize that program helps all property taxpayers in cities that receive LGA, including the millionaires on
Summit Avenue . And it does nothing to help the low and moderate income taxpayers in cities that do not receive any state aid.
It might surprise you to learn that one half of the homeowners in my city qualify for the circuit breaker. They receive no tax relief from LGA restoration, because our city receives no LGA, and we shouldn’t. But, if you want to provide property tax relief to the people who really need it, a significant portion of that relief should be allocated to income-based programs like the circuit breaker.
The same is true for college tuition relief. Less than 15 percent of state funding for higher education goes into income-based student aid. Funding for the U of M and MnSCU helps moderate tuition increases for everyone, including those students from families that can afford to attend any college in the country. If you want to help the students who are being priced out of college, one of your priorities for allocating that second billion dollars should be for student aid.
Thanks again for the opportunity to offer some guidance in your budget discussions. The easiest route is to simply restore the funding cuts in existing programs. I encourage you to resist that approach, and instead, decide how to spend smarter. Put the money where it will do the most for our state.
We missed a golden opportunity during the last four years to reform the way we allocate our state’s resources, but it’s not too late. If we use the surplus wisely, we can still position
Minnesota to be stronger in the future.
Thanks for listening.