Tom Stinson, State Economist
Tom Gillaspy, State Demographer
July 2011

State Revenues Lost to a Recession Are
Never Regained
$ (millions
)
30,000
25,000
20,000
15,000
10,000
2008 2011
5,000
-
2006 2008
Source: MMB estimate
2010 2013 2014 2016 2018 2020

$5.028 Billion Deficit Was Forecast for FY 2012-13
($ in millions)
Beginning Balance
Revenues
Spending
Reserves
Forecast Balance
FY 2010-11 FY 2012-13
$447
30,662
$938
33,330
30,171
275
39,021
275
$663 ($5,028)

One-time Federal Stimulus and Payment
Shifts Distort Spending Comparisons
$ billions
$41.0
$39.0
$37.0
$35.0
$33.0
$31.0
$29.0
$27.0
$25.0
$34.3 billion
9.6%
K-12 Shift Savings
$1.9
Federal Stimulus
$2.3
29%
$30.2
$39.0 billion
$1.4
K-12 Shift Buyback
$1.9
Replace K-12 Shift
Savings
$2.3
Replace Federal
Stimulus
$33.5
FY 2010-11 FY 2012-13 Forecast

Minnesota Has a Significant Structural
Budget Deficit
($ in millions)
Revenues
FY 12 FY 13 FY 14 FY 15
16,198 17,132 17,323 18,007
19,952
*
19,070 19,668 20,061 Spending
Difference ($3,754) ($1,938) ($2,345) ($2,054)
Est. Inflation 339 673 1,122 1,611
*FY 2012 Spending includes $1.382 billion current law school shift buyback

If State Health Care Costs Continue Their Current
Trend, State Spending On Other Services Can’t Grow
4%
3%
2%
1%
0%
9%
8%
7%
6%
5%
3.9%
8.5%
0.2%
Revenue Health Care Education & All
Other
General Fund Spending Outlook, presentation to the Budget Trends Commission,
August 2008, Dybdal, Reitan and Broat

$5 Billion Shortfall is 13% of FY 2012-13
Projected General Fund Spending
Total Spending $38.6 Billion
Property Tax
Aids &
Credits,
$3.5B, 9.1%
Health &
Human
Services,
$11.9B,
30.9%
K-12
Education,
$15.6B,
40.5%
Debt
Service,
$1.1B, 2.9%
All Other,
$3.5B, 9.1%
Higher
Education,
$2.9B, 7.5%

Recent Economic and Demographic
Events Have Changed the Outlook for as Far as We Can See

Percent Change from Quarter
Preceding NBER Recession Call
24%
20%
16%
12%
8%
2007-2009
1990-1991
2001
1980-1982
4%
0%
-4% 1Q 2011
-8%
-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Quarters After NBER Recession Call

U.S. Employment Is Not Expected to
Reach Pre-Recession Levels Until 2013
U.S. Payroll Employment
156
148
140
132
124
116
108
100
2006 2007 2008 2009
Jobs Unemployment
2010 2011 2012
U.S. Unemployment
Rate (Percent)
14
12
10
8
6
4
2
0
2013

Total U.S. Wages Fell in 2009
Quarterly Year-Over-Year
Percent Change
15%
10%
5%
0%
-5%
-10%
1970 1975 1980
History Fcast
1985 1990 1995 2000 2005 2010

Household Wealth Fell by 25 Percent, More
Than $17 Trillion
$ Trillions
80
65.8
60 56.4
55.0
48.8
40
20
0
2006 2007 2008 2009 2010

The Age Distribution Has Changed
10
0
30
20
% of Population
Over Age 20
50 47.0
40 37.8
20-40
7.6
10.0
40-45
1980 2007
7.2
10.4
45-50
21.6
24.5
50-65
16.6
17.3
65+

Population Growth Rates Have Converged
5%
4%
3%
2%
1%
0%
-1%
-2%
Suburban
Exurban
Mn
Ramsey
Hennepin

Minnesota Saw a 30 Percent Jump in Workers
Turning Age 62 in 2008
60,000
50,000
40,000
30,000
20,000
10,000
0
7/05 to
7/06
7/06 to
7/07
7/07 to
7/08
7/08 to
7/09
7/09 to
7/10
Year Turning Age 62
7/10 to
7/11
7/11 to
7/12
2005 ACS

From 2010 to 2020, Minnesota Will
See Large Increases Age 50s and 60s
85+
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
-42,310
-63,650
-30,680
-2,680
-9,980
Source: Minnesota State Demographic Center, rev 2007
Numbers are rounded
16,500
8,440
41,400
54,240
61,920
47,950
5,050
47,330
36,190
20,150
91,370
112,540
102,960

After a Decade of Little Change, Minnesota K-12
Enrollments Will Begin to Grow More Rapidly
Source: Mn Dept of Education, Minnesota State Demographic Center projection

Change In K-12 Enrollments 2000-01 to
2009-10
In 2009-10, 14.55 of Eastern Carver enrollment was minority students. Minority students
Comprised 41% of enrollment growth 2000-01 to 2009-10

Labor Force Growth Is About To Slow Sharply
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
1.52%
1.12%
0.75%
0.43%
0.10%
0.13%
0.27%
1990-
2000
2005-10 2010-15 2015-20 2020-25 2025-30 2030-35

2008 ACS

Minnesota Will Grow More Diverse; Remain
Less Diverse Than The Nation
60
50
40
Minnesota Total
United States Total
Ramsey County
Twin Cities (7 cou)
30
20
10
20
14
23
16
26
19
0
2005 2010 2015
State Demographer & Census Bureau projections
2020
29
20
2025
31
22
2030
33
23
2035
35
25

The Old Normal
+ The Great Recession
+ Long Run Demographic Changes
= The New Normal

• Higher interest rates
• Labor and talent will be the scarce resources
• Slower economic growth
• A single-minded focus on productivity
• Increasing numbers of retirees
• A more diverse population
• More uncertainty about the future

More 65+ Than School Age by 2020
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1950 1960 1970 1980 1990 2000 2010 2020 2030
Census counts & State Demographer projection, revised 2007
18-24
65+
5-17

Health Care Spending Jumps After 55
U.S. Health Care Spending By Age, 2004
$12,000
$10,000
$9,017
$9,914
$8,000
$6,000
$4,000
$2,000
$1,855
$1,074
$1,445
$2,165
$2,747
$3,496
$6,694
$3,571
$0
<5
5-
14
15
-24
25
-34
35
-44
45
-54
55
-64
65
-74
Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey,
75+ ge
Av era data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.

The “New Normal” Probably Means--2
• A shift in the balance between private and public sectors
• Chronic government deficits & cuts in service
• Worries about how to pay for past promises
• Creative destruction/disruptive innovation will change the way we deliver services
• A whole new set of opportunities

Minnesota Faces a Fiscal Trap
1.
The issue is a long run, structural one— short run solutions will not solve the problem
2.
Trend growth alone will not be sufficient.
Fundamental changes are necessary
3.
Revenue growth will slow. Efforts to increase it will be met with resistance
4.
Spending pressures will increase driven largely by issues of aging and health
5.
State spending will shift its focus from education, infrastructure and higher education to care and support of the aging

The Great Recession Has Been Blamed for
Raising the Level of Social Angst
But What Is Really Happening
Is That We Have Entered A
“ N e w N ormal”

Grieving For The “Old Normal”
•
Denial – “This is not happening.” “Just wait, things will return to normal.”
•
Anger -- “Who is to blame?” Rage and gridlock rule and anyone who symbolizes life, energy, progress, success, happiness, etc. is treated with resentment and mistrust.
•
Bargaining – “I’ll change if this just goes away.” Somehow, we can get back to the old normal if we just return to good, ole fashioned
(conservative/liberal) values.
•
Depression (emotional, not economic) – “What’s the point in trying?” “We are all doomed anyway.” The certainty/finality of events is finally recognized.
•
Acceptance – “It’s going to be okay.” Looking for opportunities begins.

But Why Fear The New Normal?
It Plays To Our Strengths!
Future economic growth will depend increasingly on increasing productivity and less on labor force size
Education has been the key to Minnesota’s productivity and prosperity
Future productivity increases will depend on decisions and the investments we make now
Public Sector Productivity Growth Will Be
Essential

Making things better
(improved quality)
Making better things
(innovation, new products)

Focusing Just On Expenditure
Cuts May Be Short Sighted
Long term cost saving may require investments which increase short term expenditures

“Making Things Better” May Offer the Greatest Potential
•
Cost cutting efforts have focused on transactional jobs
•
Largest future productivity gains are likely to come from investments that lead to better outcomes
Lower lifetime health care costs, reduced recidivism rates, improved graduation rates
•
Adapting service delivery plans to meet the needs of the “New Normal”

• Restructure government costs
• Replace retiring government workers wisely
• Re-engage the growing retiree population

• Restructure government revenues
• Research to solve problems—for example improved graduation rates
• Restore entrepreneurship, initiative, invention in the private and public sectors

Education Is The Key To Productivity
Minnesota High School Graduation Ratio
2007-08 Mn Dept of Education 5 year graduation rate. Percent of 9 th graders who graduate within 5 years

The Fiscal Catch-22
If we don’t make the necessary public investments in human capital, research and infrastructure, then we won’t have the productivity gains needed to provide the resources to make those investments.

“If something can't go on forever, it will stop.”
Herbert Stein, Chair President Nixon’s
Council of Economic Advisors

“I skate to where the puck will be, not to where it has been.”
Wayne Gretzky
Famous Canadian Philosopher