Tuesday, February 8, 2011

DOA document puts 2011-13 deficit at $3.6 billion (on top of $137 million this year)

Walker Administration documents that were released on Monday provide updated figures on the General Fund deficit for the current fiscal year and the much larger budget hole for the 2011-13 biennium. The new deficit estimates -- $137 million and $3.6 billion, respectively -- are additive and they don’t include the $200 million (plus interest) that the state will have to pay back to the medical malpractice fund.

This blog post examines the evolution of the deficit figures and the magnitude of the state budget hole. In a future post we’ll look more closely at the irony of the way the Doyle Administration figures released in November were revised upward (partly because they assumed very large cuts and lapses), and we’ll consider whether that revision could be a step toward the long-overdue development of an agreed-upon way for measuring budget deficits.

In preparation for the unveiling of a budget adjustment bill at the end of the week, the Governor’s Office released updated figures on the factors contributing to the deficit in fiscal year 2010-11. After taking into account such variables as a $153 million Medicaid deficit (plus a $16 million shortfall for Medicaid administrative services), almost $59 million owed to Minnesota after the termination of tax reciprocity, and a shortfall of about $22 million in the Corrections Department budget, the DOA Budget Office puts the net 2010-11 deficit at $136.7 million.

The latest Department of Administration (DOA) memo estimates the General Fund deficit in the next biennium to be $3.6 billion, which is about 12 percent of the requested GPR spending. The new total is about $117 million higher than it would have be a few weeks ago, before the Legislature and Governor approved several new tax breaks that dug the deficit deeper. To put the $3.6 billion number into perspective, it amounts to 78 percent of the cost of continuing the current base level of GPR funding for the Department of Corrections and UW System combined.

The DOA figure assumes that the hole in the current fiscal year will be resolved this year, and it doesn’t account for the money that will be needed to repay the medical malpractice fund. Including those amounts brings the total deficit for the next 29 months to almost $4 billion GPR.

Back in mid-November, when the first revenue estimates for the next biennium were unveiled, the Doyle Administration put the General Fund deficit at $2.2 billion. That number represented a $1.5 billion gap between agency budget requests and the revenue projections, plus $200 million for the repayment to the medical malpractice fund, and $528 million from a downward revision of projected federal cost-sharing for Medicaid.

Representatives of the Governor-elect complained at the time that the projected deficit should be raised to $3.1 billion because the Doyle administration’s calculations were based on agency funding levels that were too low to reflect a cost-to-continue budget. We explained the source of that difference in a November 19 blog post, which also noted that the incoming administration’s $3.1 billion figure was still too low because it was based on the unrealistic assumption that federal law would allow the state estate tax to resume this year, and it didn’t account for significant costs (like increased costs for debt service, and fuel and utilities) that don’t get inserted into budget requests until later in the process.

In short, although there are a number of different variables, the two primary reasons why the new deficit figure is much higher than the $2.2 billion indicated by the DOA in mid-November are that the revised figures include new costs (like debt service) that always get accounted for later in the process, and because the Walker Administration is mostly using cost-to-continue figures rather than working from some of the budget recommendations that assumed large lapses and Medicaid cuts.

One can make a lot of arguments about the motives for an incoming conservative Governor to use a methodology that increases the estimate of the budget shortfall. Such arguments make for interesting speculation, but I think they are beside the point. The goal should be to paint an accurate picture of the magnitude of the spending cuts and/or new revenue that will be needed to balance the budget. The DOA calculations appear to do a good job of painting that picture.

Jon Peacock

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