Capitol Report - Minnesota policymakers ready for fiscal hurdles

>> "CAPITOL REPORT" IS A PRODUCTION OF SENATE MEDIA SERVICES. >> THE FINANCIAL PICTURE FOR THE STATE IS CLEARER, SORT OF, AND NEW LAWMAKERS WEIGH IN ON THEIR PRIORITIES IN THIS WEEK'S "CAPITOL REPORT." ♪ >> HELLO, EVERYBODY, AND THANK YOU FOR TUNING IN. I'M JULIE BARTKEY WITH THIS WEEK'S "CAPITOL REPORT." THE 2013 LEGISLATIVE SESSION IS TYPICALLY CONSIDERED A BUDGET YEAR. ON WEDNESDAY, STATE LAWMAKERS GOT A CLEARER PICTURE OF THE KIND OF BUDGET DEFICIT THEY WILL WORK TO RESOLVE. IN ESSENCE, A $1.3 BILLION SURPLUS THIS FISCAL YEAR WILL GO DIRECTLY TO SCHOOLS. AND IN 2014-'15, THAT FISCAL CYCLE HAS A PROJECTED $1.1 BILLION DEFICIT. >> THE ONE-TIME BUDGET ACTIONS REALLY UNDERLIE THE BUDGET SHORTFALL THAT WE HAVE LOOKING AT US IN 2014-'15. YOU REMEMBER, THE '12 AND '13 BUDGET SOLUTION, WE HAD SIGNIFICANT REVENUE INCREASES THAT WERE ONE TIME IN NATURE, LIKE OVER $460 MILLION OF TRANSFERS FROM THE HEALTH CARE ACCESS FUND OVER TO THE GENERAL FUND. ON THE OTHER HAND, THE SPENDING NUMBERS WERE DIFFERENT AND HARD TO TRACK BECAUSE OF AID PAYMENT SHIFTS, ALONG WITH THE SECURITIZATION OF TOBACCO REVENUES. AND, SO, THE BIENNIAL PICTURE IS EXTRAORDINARILY CONFUSING THIS TIME. BUT ONE THING PERSISTS, AND THAT IS, THAT ONE-TIME ACTIONS ONLY HAPPEN ONE TIME. AND WHEN YOU'RE TRYING TO GET A STRUCTURAL BALANCE TOGETHER, WE STILL HAVE SOME WORK TO DO. >> BECAUSE OF STATUTORY LAW, WE WILL BE TAKING THAT $1.3 BILLION AND USING IT TO REDUCE THE AID PAYMENT SHIFT FROM PREVIOUS LEGISLATIVE SESSIONS. AS A RESULT, THE PAYMENTS GOING TO SCHOOLS WILL MOVE FROM 64.3% AND 35.7% AS A SETTLE-UP TO 82.5%/17.5% AS A SETTLE-UP. >> THE FISCAL CLIFF IS CHARACTERIZED AS A CLIFF, SOME PEOPLE SAY IT'S MORE LIKE A SLOPE. I THINK THE BOTTOM LINE IS, THERE'S GOING TO BE IMPACT AS WE GET TO JANUARY 1 AND BEYOND THAT. THERE ARE SOME THINGS THAT THE FEDERAL GOVERNMENT CAN DO TO MITIGATE THE IMMEDIATE ECONOMIC IMPACT. I THINK THERE'S STILL BEHAVIORAL AND PSYCHOLOGICAL IMPACTS AND ECONOMIC RISKS THAT ARE THERE. >> I CANNOT REMEMBER A FORECAST WITH SO MUCH UNCERTAINTY BUILT INTO IT. I MINE, IF -- I MEAN, IF YOU START TO DIG DOWN INTO THE REVENUE NUMBERS, THE AMOUNT OF CAPITAL GAINS WE MAY RECEIVE BEFORE THE END OF THE YEAR, WHICH TAKES MONEY AWAY FROM NEXT YEAR, OR WE MAY NOT RECEIVE IF THERE'S A RESOLUTION IN WASHINGTON, D.C., JUST AT AN -- ADD AN INCREDIBLE AMOUNT OF UNCERTAINTY TO THESE BUDGET PROJECTIONS. SO, I'M GENERALLY PLEASED THAT WE'RE MAKING SOME HEADWAY IN PAYING BACK THE SCHOOL SHIFT. WHAT CONTINUES TO NAG ME SOME IS, WE STILL HAVE A FISCAL CRISIS AHEAD OF US IN THE NEXT BIENNIUM WITH INFLATION, SOMETHING JUST NORTH OF $2 BILLION. >> WE THINK THAT THE BUDGET FORECAST THAT WE'RE LOOKING AT TODAY IS GOOD NEWS. IT'S GOOD NEWS FOR THE PEOPLE OF MINNESOTA. IT'S GOOD NEWS FOR MINNESOTA FAMILIES. I JUST WAS LOOKING AT THE DOCUMENT ITSELF, FIRST SENTENCE, MINNESOTA'S BUDGET OUTLOOK FOR THE CURRENT BIENNIUM HAS IMPROVED MATERIALLY SINCE LAST FEBRUARY'S FORECAST. AND I THINK IN MANY WAYS, THIS REPRESENTS A CONFIRMATION OF THE WISDOM OF THE REPUBLICAN MAJORITY'S APPROACH TO MANAGING THE STATE FISCAL SITUATION THAT WE INHERITED TWO YEARS AGO. >> Dr. TOM STINSON JOINS ME NOW TO TALK A LITTLE BIT ABOUT THE FORECAST. Dr. STINSON, THANKS FOR JOINING US ON "CAPITOL REPORT." >> IT'S GOOD TO BE HERE. >> LET'S BEGIN WITH, THE GOVERNOR -- THE GOVERNOR ESSENTIALLY ENCAPSULATED THIS FORECAST BY SAYING, THERE ARE SOME GOOD, SOME BAD, AND A LOT OF UNCERTAINTY. SO, LET'S KIND OF GO THROUGH THE GOOD FIRST. >> WELL, THE GOOD IS THAT WE HAVE MORE MONEY IN 2012-2013, THE CURRENT BIENNIUM, AND WHILE THAT MONEY ISN'T AVAILABLE TO BE SPENT IN 2014, IT'S REQUIRED TO BE USED TO BUY BACK THE SCHOOL AID SHIFT, IT DOES BUY BACK THE SCHOOL AID SHIFT AND THAT'S IMPORTANT BECAUSE, AMONG OTHER THINGS, IT BEGINS TO BUILD THE HIDDEN RESERVES BACK THAT THE STATE HAS IN CASE WE GO INTO A SERIOUS ECONOMIC PROBLEM AGAIN. >> AND THE BAD? >> WELL, THE BAD IS A MATTER OF DEGREE, BUT I THINK EVERYBODY WOULD LIKE TO HAVE SOME MONEY TO SPEND IN 2014-2015, AND, INSTEAD, WE'RE STILL ABOUT $1.1 BILLION IN THE HOLE. AND, SO, THAT LEAVES A PRETTY DIFFICULT TASK FOR THE GOVERNOR AND THE LEGISLATURE. >> WE'LL GET TO THE UNCERTAINTY, ALSO KNOWN AS THE SO-CALLED FISCAL CLIFF, IN JUST A FEW MOMENTS. BUT, FIRST, I DID WANT TO GET YOUR REACTION TO SPEAKER DESIGNATE PAUL THISSEN, HE SAID, EVERY TIME WE HAVE A DEFICIT, WE FAIL TO FACE REALITY. SO, IN YOUR OPINION, WHAT IS THE REALITY WITH THIS BUDGET FORECAST? >> WELL, THE REALITY THAT ECONOMISTS AND BUDGETEERS THINK, IS THAT WE'VE GOT TO GET INTO A SITUATION WHERE CURRENT EXPENDITURES AND CURRENT REVENUES ARE EQUAL. AND IN THE PAST, WHAT WE'VE DONE IS FIGURED OUT SOME WAY TO SHIFT SOME MONEY FROM THE FUTURE INTO THE CURRENT BIENNIUM OR TO DO SOME MAGICAL SMOKE IN MIRRORS LIKE THE TOBACCO BONDS, WHICH DOESN'T SOLVE THE PROBLEM IN A FUNDAMENTAL WAY. ALL IT DOES IS JUST PUSH THE PROBLEM INTO THE NEXT YEAR OR THE NEXT BIENNIUM. >> LET'S -- AND I WANT TO GET BACK TO THAT IN JUST A FEW MOMENTS, BUT WE REALLY DO NEED TO ADDRESS THE IDEA OF THE FISCAL CLIFF AND WHAT'S GOING ON IN WASHINGTON. YOU DID, ESSENTIALLY, A SECOND FORECAST BASED ON THIS FISCAL CLIFF. AND JUST KIND OF EXPLAIN TO US WHAT THE WORST-CASE SCENARIO COULD BE IF THERE ISN'T SOME AGREEMENT IN WASHINGTON, D.C.? >> WELL, THE WORST-CASE SCENARIO, THIS ISN'T JUST ME, THIS IS MOST ECONOMISTS AND MOST FORECASTERS, SAY THAT IF THERE ISN'T SOME FUNDAMENTAL AGREEMENT ON WHAT TO DO ABOUT THE COMBINATION OF TAX INCREASES AND SPENDING CUTS THAT ARE ALL SCHEDULED TO TAKE EFFECT JANUARY 1, 2013, WE'RE IN A RECESSION. WE'RE IN A RECESSION IN THE FIRST QUARTER OF 2013. THAT MEANS THAT THE ECONOMY IN JANUARY, FEBRUARY, AND MARCH OF NEXT YEAR, IN OTHER WORDS, A MONTH FROM NOW, TWO MONTHS FROM NOW, THREE MONTHS FROM NOW, DOESN'T GROW, THAT IT ACTUALLY SHRINKS. SO THAT'S THE WORST-CASE SCENARIO. THAT'S THE RISK THAT WE HAVE. FOR THE COUNTRY AS A WHOLE, WHAT WE'RE TALKING ABOUT IS GOING FROM THE CURRENT UNEMPLOYMENT RATE TO A 9% UNEMPLOYMENT RATE. WE'RE TALKING ABOUT LOSING, COMPARED TO WHERE WE WOULD BE, ABOUT THREE AND A HALF MILLION JOBS. AND WE'RE NOT -- WE'RE NOT KIDDING AROUND HERE. THIS IS BIG-TIME STUFF. THE FISCAL CLIFF DESCRIPTIONS AND DISCUSSIONS THAT YOU HEAR, THEY'RE REALLY REAL. >> UNDERSTANDING THAT YOU'RE A NUMBERS GUY AND NOT NECESSARILY SOMEBODY WHO STUDIES CONSUMER BEHAVIOR CONSTANTLY, IS JUST THE IDEA THAT THERE COULD BE ANOTHER RECESSION ENOUGH TO GET CONSUMERS TO MAYBE QUIT SPENDING NOW IN FEAR OF WHAT COULD HAPPEN AND, IF SO, COULD THAT IMPACT THE BUDGET EVEN IF CONGRESS COMES TO AN AGREEMENT? >> OH, I THINK THAT'S EXACTLY RIGHT. YOU SOUND LIKE AN ECONOMIST NOW. >> THAT'S SCARY. >> WHAT THE CONCERN IS THAT A LOT OF PEOPLE SAY, WELL, IT DOESN'T MATTER, THIS ISN'T REALLY A CLIFF, IT'S JUST A SLOPE THAT WE'RE ON AND WE CAN PUT OFF SOLVING THE PROBLEM FOR TWO WEEKS OR A MONTH OR TWO MONTHS OR THREE MONTHS AND NOT GO IN THE FISCAL CLIFF. BUT ECONOMETRIC MODELS AREN'T VERY GOOD AT INCORPORATING CHANGES IN CONSUMER ATTITUDES INTO WHAT'S GOING ON IN THE ECONOMY. AND IF YOU GO A WEEK OR TWO WEEKS, PEOPLE'S AT LOSE ARE GOING TO CHANGE -- AT LOSE ARE GOING TO CHANGE. THEY'RE GOING TO SAY, THINGS ARE A LITTLE MORE RISKY THAN THEY THOUGHT THEY WERE. THEY CUT BACK ON THEIR SPENDING. THEY CUT BACK ON THEIR SPENDING, THEN PRETTY SOON IT AFFECTS THE NUMBER OF HOURS SOMEBODY WORKS IN A WEEK AND THEN PRETTY SOON IT AFFECTS JOBS. AND IT SPIRALS OUT OF CONTROL. ATTITUDES ARE GOING TO CHANGE. >> OKAY. SO I WANT TO ASK YOU, UNDERSTANDING, AGAIN, THAT YOU DON'T NECESSARILY WORK WITH THE LEGISLATURE, YOU ARE THE NUMBERS GUY, BUT WOULD YOU AGREE THAT THERE NEEDS TO BE SOME REFORM IN THE TAX STRUCTURE? >> I THINK BOTH AT THE FEDERAL LEVEL AND AT THE STATE LEVEL, MOST PUBLIC FINANCE ECONOMISTS WOULD SAY THAT THE TAX STRUCTURE NEEDS TO BE REFORMED. I'LL GIVE YOU JUST A SIMPLE EXAMPLE. AND THAT IS THAT IN MINNESOTA, WE HAVE GROWN INCREASINGLY RELIANT UPON THE CAPITAL GAINS. AND CAPITAL GAINS ARE VERY VOLATILE. YOU MAY -- YOU PROBABLY DON'T KNOW THIS, BUT WE'RE PREDICTING CAPITAL GAINS TO GO UP BY MORE THAN 50% IN 2012 AND THEN FALL BY ABOUT 50% IN 2013. WE HAVE THAT KIND OF VOLTILITY, IT MAKES STATE FINANCES MUCH MORE UNSTABLE. SO, ONE OF THE THINGS THAT WE NEED TO BE THINKING ABOUT IS HOW DO WE INCREASE THE STABILITY OF STATE FINANCES, STATE FINANCES, STATE REVENUES HAVE GOTTEN TO BE MUCH MORE VOLATILE THAN THEY WERE 20 YEARS AGO. WE HAD THE LATIMER COMMISSION IN THE 1980s, WHERE WE LOOKED COMPREHENSIVELY AT TAXES, IT'S ABOUT TIME THAT WE HAVE SOME COMPREHENSIVE LOOK AT TAX SYSTEMS AGAIN. 20 YEARS, 25 YEARS, THAT'S NOT A RUSH TO CHANGE THINGS. >> AND MEMBERS OF BOTH PARTIES WOULD AGREE WITH YOU THAT THERE NEEDS TO BE SOME REFORM IN THE STRUCTURE. HOWEVER, HOW THAT IS HANDLED, OBVIOUSLY, DEPENDS ON WHICH SIDE OF THE AISLE YOU'RE ON. SO, WITH THE GOVERNOR SAYING THAT HE'S DONE WITH GIMMICKS, HE'S DONE WITH THESE GAMES AND THE SMOKE IN MIRRORS, AND THE COMMISSIONER SAYING THERE ARE NOW SOME TOUGH DECISIONS TO MAKE, SOME HEAVY LIFTING TO DO FISCALLY, YOU KNOW, IT'S UP TO THE LEGISLATURE TO SET THE PROCESS. AND I KNOW YOU DON'T LIKE TO DO THIS, BUT I'M GOING TO ASK YOU ANYWAY, IF THEY WERE TO COME TO YOU FOR ADVICE, WHAT ADVICE WOULD YOU GIVE THEM ON HOW TO CREATE A STRUCTURALLY SOUND TAX SYSTEM OR REVENUE SYSTEM, REVENUE STREAM? >> YOU KNOW, I THINK THAT WE HAVE TO BE CONCERNED ABOUT HAVING A BROADER BASE AND NOT CARVING OUT NARROW PIECES FOR INDIVIDUAL SELF-INTEREST. WE NEED A BROADER BASE ON THE INDIVIDUAL INCOME TAX, BUT, OF COURSE, WE CAN'T DO THAT UNLESS THE FEDERAL INCOME TAX IS CHANGED BECAUSE IT'S IMPORTANT THAT IT HAVE CONFORMITY WITH THE FEDERAL TAX. SO, IF THERE IS TAX REFORM ACTIVITY AT THE FEDERAL LEVEL, WE KIND OF GET AUTOMATIC REFORM AT THE STATE LEVEL, JUST BY OUR CONFORMITY AND WE PROBABLY NEED TO HAVE A BROADER SALES TAX BASE AS WELL THAT USED TO BE THAT WE WERE -- WELL, YOUNGER PEOPLE -- WE WERE YOUNGER AND WE BOUGHT A LOT MORE CONSUMER DURABLES, BIG-TICKET ITEMS. NOW THAT PART OF OUR TAX BASE ISN'T GROWING AS FAST AS IT USED TO BECAUSE I ALREADY HAVE A REFRIGERATOR, I ALREADY HAVE A STOVE, I ALREADY HAVE A TV SET. ACTUALLY, TWO TV SETS. AND, SO, WE NEED TO GET RELIANT ON SOMETHING OTHER THAN THOSE PURCHASES OF BIG-TICKET ITEMS FOR THE SALES TAX BASE. >> OKAY. Dr. TOM STINSON, THANK YOU SO MUCH FOR JOINING US TODAY. WE ALWAYS APPRECIATE YOUR TIME. >> GOOD TO TALK TO YOU. >> THE GOVERNOR SAYS THE TIME FOR GIMMICKS IS OVER. IT'S NOW TIME FOR THE LEGISLATURE TO WORK WITH HIM ON LONG-TERM SOLUTIONS. >> JUST A LOT OF AVOIDANCE AND A LOT OF GIMMICKS AND A LOT OF UNWILLINGNESS TO TAKE RESPONSIBILITY FOR THE SITUATION THAT FACES THEM AT THAT MOMENT IN TIME AND WE'RE NOT GOING TO PERPETUATE THAT. WE'RE GOING TO MAKE TOUGH DECISIONS, THERE WILL BE