The $5.2 billion dollar budget deficit that the state of Minnesota faces for the remainder of FY 2008-09 and FY 2010-11 poses an immediate challenge, I’ve laid out a painful but necessary solution here.
But in any crises it is important to not only take bold steps to fix the immediate problem but also to take steps to prevent us from getting in this situation again. That’s what FDR did with the New Deal and imagine what this current economic crises would be like without the FDIC. So I propose in addition to passing fixes for our current shortfall we also look at steps we need to take to help avoid situations like this in the future.
One of the most obvious ways to avoid this situation in the future is by building up a strong budget reserve fund which could make similar situations in the future much less painful to deal with. There are a number of steps I would propose to build a strong reserve fund.
Increase the Cap:
Currently Minnesota caps it’s budget fund at $653 million, we are the only state in the nation to have a fixed cap and have one of the lowest caps in the nation. We’ve only got $155 million in the budget fund right now. Clearly that is not enough to deal with a serious budget crises and that will not be able to be a major factor into solving the deficit.
I would propose increasing the cap to 15 percent of projected FY revenues, for the 2010-11 year that would be $5,141,896. If we had that kind of reserve fund built up we simply would not have to make dramatic changes in services depending on the economic conditions which is not something that is healthy for our state.
Set a floor:
In addition I think we should set a floor for the minimum we should aim to have in our reserve fund. I would propose setting that at 2.5 percent of FY revenues ($856,982 for FY 2010-11). We would not be required to keep it above that but if it fell below that and we had a projected surplus of more then 2.5 of FY revenues then half of that surplus must go into the reserve fund until the floor is reached. It should also be a non-binding policy goal to keep it at the minimum but not legally required.
Constitutional Rainy-day Fund Amendment:
Also beyond that I think we need a stable source for the reserve fund (sometimes called the rainy day fund). In 2007 the voters of Washington State voted overwhelmingly to mandate that 1 percent of the states general-fund revenue would be automatically set aside for the reserve fund. I think this is something we should also do in Minnesota.
In Washington they cap the reserve fund at 10 percent of revenues and let the excess be spent, with a simple-majority vote, on school and college construction. To gain broader support among all different kinds of people I’d propose that all overflow funds are given directly back to the people via a tax rebate.
In Washington the constitutional amendment got broad support from both parties.
During the past few years, the biggest champion was Sen. Joe Zarelli of Richfield, the ranking Republican on the Senate budget committee. But with Democrats in control in Olympia, his bill got little traction.
Last December, however, Gregoire announced she was going to start pushing her own rainy-day bill.
Gregoire’s proposal was largely the same as Zarelli’s, and within weeks the two had agreed on final version to push through the Legislature.
I believe the same can happen here, other things like revenue reform (which I’ll talk more about in part 2) will probably be harder to push through but building a solid reserve fund will prevent us from facing large tax increases and budget cuts in the future and is something I think everyone can get behind. At the very least put this all on the ballot and let the voters decide, I think they would be overwhelmingly in favor of smart budgetary practices.