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Following Thursday's disclosure that Minnesota was facing a larger-than-expected $6.2 billion budget deficit for the next biennium, state economist Tom Stinson said that while things appear grim from a fiscal standpoint, the state's economy has been steadily if modestly improving, a trend he expects to continue.

Stinson: Economic picture improving – slowly

Lousy U.S. jobs report quells hopes of revenue rebound in February forecast

“The good news, from the Minnesota point of view, is that we seem to be coming out of it faster than the national economy.” —Minnesota state economist  Tom Stinson

“The good news, from the Minnesota point of view, is that we seem to be coming out of it faster than the national economy.” —Minnesota state economist Tom Stinson

Following Thursday’s disclosure that Minnesota was facing a larger-than-expected $6.2 billion budget deficit for the next biennium, state economist Tom Stinson said that while things appear grim from a fiscal standpoint, the state’s economy has been steadily if modestly improving, a trend he expects to continue.

But Stinson pointed out there are a host of factors in the coming weeks and months that will affect the budget outlook, from the potential expiration of the Bush tax cuts to December and January employment figures.

After the forecast was released, Capitol Report sat down with Stinson to talk about the state’s economy and the outlook for the coming budget battle in the Legislature. What follows is a condensed transcript.

Capitol Report: From a broad standpoint, what’s the state of Minnesota’s economy?

Tom Stinson: This was the worst recession since World War II. We’re coming out of it, and everybody would like us to come out of it as quickly as possible, and we are coming out of it, but it’s going to take some time.

The good news, from the Minnesota point of view, is that we seem to be coming out of it faster than the national economy. But, to put it in perspective before we pat ourselves on the back too much, you’ve got to remember that California is part of the U.S. economy and the situation there is much worse than it is in Minnesota, so we better be doing better than the U.S. average.

Capitol Report: One point made concerning this forecast was that we can’t grow our way out of this deficit. How much can growth help out, and can we achieve a level of growth that will have a significant impact on the budget situation facing us?

Stinson: We have a $6.2 billion structural shortfall. The revenue forecast for 2012-2013 went down by about $900 million [in November] because of some economic changes….

But I think the important thing to know is even if it went up twice – if we gained back that $900 million and then the economy improved enough so that we actually added another $900 million – we’d still have $4.4 billion worth of problem to deal with.

Capitol Report: What do you look at when it comes to making these revenue projections, and based on those factors, what can you glean from the state of the state’s economy?

Stinson: We start out by looking at the national economy, and we have a national economic consultant, Global Insight, that provides us with the forecast for the national economy. We then adjust that forecast for the characteristics of the Minnesota economy. If all the growth in the U.S. economy is coming from increased activity in oil production, then we know we aren’t going to get it. If printing and publishing is flourishing, because we have a bigger share of that than most states, that’s going to be good for our economy.

We look at all that stuff, we come up with a Minnesota economic forecast. The key parts of it are: What’s going to happen with employment in the state? What’s going to happen to wages paid in this state? What’s going to happen to personal income paid in the state?

We try to hit things right down middle as much as possible. … Now, that said, this forecast is a little bit different in that there are some policy concerns that affect the level of the forecast and that could leave us with more money in February, other things being equal.

Here’s what I’m talking about: Our forecast assumes that current state and federal tax law remains in place. One of the big issues now is what’s going to happen with the expiration of the Bush tax cuts. If the Bush tax cuts are allowed to expire, the capital gains rate goes from 15 percent to 20 percent. That is what’s in the forecast, because that’s what current law is.

If the Bush tax cuts for capital gains are reinstated for a year or two, that would add money to the forecast. The reason why is because when the tax on some activity goes up, or in this case doesn’t go up, you participate in that activity, you spend on that activity more. So we would expect that there would be more capital gains realizations in Minnesota and nationally under a 15 percent rate than under a 20 percent rate. If there’s an extra 20 percent in capital gains growth in there, then we would get more money. That’s one of the things that we know right now, is if the tax law changes [through an extension of capital gains rate cuts], that we would get more money in February.

Capitol Report: We heard about 5 percent income growth for the next biennium in this forecast. How is that figure reached, and what does it mean for the state’s fiscal health and budget in the next biennium?

Stinson: There are some differences that raise a question about how appropriate it is to make a biennium-to-biennium comparison.

As part of the governor’s and the Legislature’s budget-balancing activity, $236 million in sales tax and corporate tax refunds are being held across the end of the 2010-2011 biennium and will be paid in the 2012-2013 biennium. So what does that do? That lowers revenues in the 2012-2013 biennium by $236 million and it keeps the 2010-2011 biennium from being reduced [by the same amount]. So, you don’t drop off as much as you should in 2010-2011, and in 2012-2013, you drop off more than you should. So the 5 percent growth rate isn’t necessarily accurate.

Another example is, as part of the budget-balancing program, money was transferred from the Health Care Access Fund to the general fund. Well, you transfer that money in. That adds to revenue. You transfer it in 10-11, that artificially bumps up the revenue compared to 12-13, when you don’t have any money to transfer in because you made that one-time change.

So, when we talk about the distortions to the expenditures – the 28 percent expenditure growth rate in the forecast – they’re more dramatic this time than the distortion to the revenue growth rate. But there’s still significant distortion to that 5 percent revenue growth rate too.

Capitol Report: When the forecast was released, there was some talk that strong job numbers in the Friday Bureau of Labor Statistics release could point the way to gaining back in the February forecast much of the ground that was lost in the November forecast. How do you read those numbers, and what do they portend for the next set of revenue projections?

Stinson: These were very, very disappointing numbers. [According to the BLS release, just 39,000 new jobs were created nationally in November – far fewer than expected.] While there might be technical reasons dealing with seasonal adjustment that could explain the weaker-than-expected job growth, even taking that into account, these are very disappointing numbers.

It means we’re not on a path toward stronger economic growth than was in the forecast. That said, in another month we’ll get the December numbers, and then we’ll get the January numbers, so there’s still more information to come. But this would indicate that the revenue forecast is more or less on track.

We’d need about 150,000 new jobs to stay even with the national economy. If there had been many more than that, it would have shown us that the revenue forecast was pessimistic – that we were growing a little faster than was assumed in the revenue forecast. For that to be true, we would have had to have more than 150,000 jobs added – what this is saying is we’re still on the same old path.

Capitol Report: Which revenue indicators typically have the most predictive value, and what did you see in those areas in the November forecast?

Stinson: The two sources of revenue that we pay the most attention to on a monthly basis are withholding and sales tax receipts. Withholding is weekly. We don’t see sales tax gross receipts in quite as contemporaneous a manner. The sales tax receipts that we report on the 10th of Dec. are for sales during the month of November, so there’s a one-month lag.

We will know the November part of the Christmas shopping season in December. That gives us a good measure of what’s going on in the economy, although it’s a bit delayed.

The key variable for the revenue forecast is the wage variable, and that comes in part from the forecast in jobs. It’s not the average wage, it’s the total wages.

We’re seeing better news – we estimate in Minnesota we’ll see 3.5 percent growth next year, compared to 1.5 percent for the U.S.

Capitol Report: How would you characterize that growth?

Stinson: Good question. Here’s why I’m having trouble characterizing it in some way: In 2009, the prior year’s total wages in Minnesota fell by 4.8 percent. Now, that’s the first time since World War II that we’ve seen a decline in wages. So compared to last year, this is terrific. Compared to what we see going on out [into the future], it’s a little bit weaker than we have in the forecast. In 2012 and 2013, we have more than 4.5 percent. But this 3.5 percent growth is a sign that the economy has turned a corner and is starting to recover. It’s a good start.

Capitol Report: Is there a case to be made for a bonding bill this coming session, and could that contribute to growing the state’s economy and strengthening the overall budget outlook?

Stinson: Let me start out by saying that the construction industry has suffered enormously in this recession. They’ve taken the hardest hit out of everybody in this recession. And, your heart has to go out to people that are in that industry, because they have really had hard times.

That said, there isn’t any easy solution for putting those people back to work. The reason that there isn’t any easy solution is that the things that we bond for don’t necessarily provide for jobs consistent with the skill set that these people have.

If we decide to buy land and build a park, we spend $20 million. That doesn’t really create any jobs. If we decide to spend money on building bridges and roads and things like that, that provides construction jobs, but that’s not the part of the construction sector that is suffering. Those people have been supported by the federal stimulus bill, and we actually have seen employment in the heavy construction area get back about to where it was.

The place where the construction employment is down is the construction of buildings and the skilled trades. We need to see jobs created for carpenters and sheet-rockers and painters and electricians and plumbers. Those are harder jobs to create than replacing bridges.

The second thing, it takes a while for the projects to start up. We know from past history that only about 15 percent of the money that’s authorized in a bonding bill gets spent in the first year, only about 25 percent gets spent in the second year, so it’s really the second, third and fourth years where the big lump of spending is. So it’s not a quick fix.

What I’ve argued is that if you’re trying to create jobs, what you need to be doing is things that are labor-intensive as opposed to equipment-intensive and land-intensive so the money goes primarily to wages and can be done quickly. Shovel-ready projects isn’t the right term, I don’t think. I think what you need to have is projects that are asset-preservation projects, repair and renovation projects – things that I would call paint brush-ready.

To the governor and the Legislature’s credit, they did more of that in the last bonding bill, and I don’t know how many of those kinds of projects are left.

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