Transcript Slide 1

But … What About
Tomorrow?
Presentation to
September 8 Leadership Summit
Tom Stinson
Tom Gillaspy
September, 2009
Minnesota Has Been Very
Successful
(Especially For A Cold Weather State at the
End of the Road)
• Our economic growth rate has exceeded the
national average
• Our population growth rate leads the frost
belt
• We rank with the leaders on many social and
economic indicators
• Education has been a key contributor to the
state’s success
Past Performance
Does Not Ensure
Future Results
Minnesota Is Facing Significant
Long-Term Budget Problems
This Recession Is Much More Severe
Than Those of 1990-91 and 2001
Real GDP Index
Quarter Preceding NBER
Recession Call = 100
112
110
2007-2009
2001
1990-1991
1980-1982
108
106
104
102
100
98
96
1Q 2009
94
-1
0
1
2
3
4
5
6
7
8
9 10 11
Quarters After NBER Recession Call
12
13
14
15
16
Minnesota’s Recovery Will Be
Slower than After Recent Downturns
MN Employment
Month Preceding NBER
Recession Call = 100
115
2007-2010*
1990-1991
110
2001
1980
105
100
95
August 2009
90
-1
3
7
11
15
19 23 27 31 35 39 43
Months from NBER Recession Call
47
51
55
59
The 2007-09 Recession Permanently
Reduced the Base for Future Revenues
Nominal GDP
$ Billions
25,000
20,000
15,000
10,000
5,000
Feb 07
Jul 09
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
The Economic/Demographic
Environment Has Changed for as
Far as We Can Forecast
Short run economic cycle has merged with
long run demographic cycle
We have entered the Age of Entitlement—
economic growth in the next 25 years will be
about half what it was in the past 25.
State revenue growth will slow while
spending pressures will accelerate
This is a national/global issue
Minnesota Saw a 30 Percent Jump in
Workers Turning Age 62 in 2008
Worked Within Past 5 years
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
2005 ACS
7/10 to
7/11
7/11 to
7/12
Budget Pressures Will Change
More 65+ Than School Age by 2020
1,400,000
1,200,000
1,000,000
18-24
65+
5-17
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
In 1995, we said,
“If there is a time to solve the state’s
fiscal problems, it is now.”
“After 2010, solutions will be more
difficult, as the percentage of
Minnesotans of working age begins
to decline.”
Within Our Means, January 1995, page 9
Labor Force Growth Is About To
Slow Sharply
Ave Annual Change
1.6%
1.52%
1.4%
1.12%
1.2%
1.0%
0.75%
0.8%
0.6%
0.43%
0.4%
0.27%
0.2%
0.10%
0.13%
0.0%
19902000
2005-10 2010-15 2015-20 2020-25 2025-30 2030-35
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
Revenue Growth Will Slow
5 Year Compound Growth Rates
for Total State Revenues
Percent
10
TOTAL TAX
8
CPI
PGSL
6
4
2
0
1986
1991
1996
2001
2006
2011
2016
2021
2026
2031
Next 25 Years--State Revenue Growth
Rate Projected To Slow
5 Year Compund Growth Rate
8%
7%
6%
Total
Per Capita
Real Per Capita
6.8%
5.5%
5%
3.9%
4%
3.4%
2.8%
3%
2%
1.2%
1%
0%
2001
Budget Trends Commission, 2009
2033
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
16,500
8,440
41,400
91,370
112,540
102,960
54,240
-42,310
-63,650
-2,680
61,920
47,950
-9,980
-30,680
Source: Minnesota State Demographic Center, rev 2007
Numbers are rounded
5,050
47,330
36,190
20,150
Health Care Spending Jumps After 55
U.S. Health Care Spending By Age, 2004
$12,000
$9,914
$10,000
$9,017
$8,000
$6,694
$6,000
$2,000
$3,571
$3,496
$4,000
$1,855
$2,165
$2,747
$1,074 $1,445
ra
ge
A
ve
75
+
4
65
-7
4
55
-6
4
45
-5
4
35
-4
4
25
-3
4
15
-2
14
5-
<5
$0
Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey,
data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.
If State Health Care Costs Continue Their Current
Trend, State Spending On Other Services Can’t
Grow
8.5%
Annual Ave Growth 2008-2033
9%
8%
7%
6%
5%
4%
3.9%
3%
2%
1%
0.2%
0%
Revenue
Health Care
Education & All
Other
General Fund Spending Outlook, presentation to the Budget Trends Commission,
August 2008, Dybdal, Reitan and Broat
The Political Economy Has
Changed In Fundamental Ways
Minnesota had strong per capita
economic growth since WWII
The global economic environment has
changed.
The political economy is also changing
Aging means slower economic growth and
rising government expenditures
Aging means more tax resistance
Phases in the Household Life Cycle
State/Local Government’s Share of
Personal Income Has Declined
Price of Government
20%
17.9%
17.4%
16.5%
15.9%
15.5%
15.4%
15%
10%
1990
1992
1994
1996
1998
2000
Calendar Year
Mn Dept of Finance
2002
2004
2006
2008
How Do We Get Out Of This
Fiscal Trap?
Revenue growth will depend increasingly
on per capita economic growth
Future economic growth will depend
increasingly on increasing productivity
and less on labor force size
This plays to Minnesota’s historic
strength
Productivity Remains The Key
To Quality of Life In Minnesota
Economic Growth = Labor Force Growth +
Productivity Growth
Productivity growth comes from
Private investment -- machines & processes
Skills & abilities of workers
Public investment -- roads, bridges, etc
Technology from research, public & private
Productivity Is Not Just
Producing at a Lower Cost
Increasing the Value of Products
Produced Also Increases
Productivity
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.
We must avoid the California spiral
The Tale of Two Economies
Per Capita Personal Income, 1960-2008
% of US Average
130
CA, 125
CA, 118
120
CA, 118
CA, 111
110
US Avg.
CA, 109 MN, 108
MN, 107 CA, 107
100
MN, 99
90
MN, 101 MN, 102
MN, 94
80
1960
1970
1980
1990
2000
2008
Education Is The Key To Productivity
Minnesota High School Graduation Ratio
100%
89%
85%
90%
85%
2 Yr Ave Rate
80%
70%
60%
57%
60%
62%
Hispanic
Black
50%
40%
30%
20%
10%
0%
American
Indian
Asian
White
2004-05 through 2005-06 graduates. Based on 10th grade enrollment three years earlier.
Total
Tough Decisions Must Be Made
• What is state government well
positioned to do?
Some issues are national in scope
Some are local
Some are inherently private
• What activities are central to state
government’s role?
Big Opportunities
• The challenge--building the foundation
for future success
 Economic prosperity
 Environmental quality
 Social justice
 Quality of life
• The current situation is not sustainable
“If something can't go on forever,
it will stop.”
Herbert Stein, chair President Nixon’s
Council of Economic Advisors