In last Friday’s MinnPost, Eric Black did an excellent fact check of Governor Pawlenty’s assertion that state funding has slowed dramatically under his watch relative to the previous 42 years.  As summarized by Black, Pawlenty claims that:

From 1960 to 2002, under 10 previous Minnesota governors of three different parties including his own, general fund spending in Minnesota had grown by an average of 21 percent per biennium. Under Pawlenty, state general fund spending has grown by just 2 percent a year.

Black dissected the claim and found it to be misleading.  He’s right, but what is more surprising is the fact that Pawlenty’s numbers actually understate the decline in state general fund spending that occurred during his tenure as governor.  What’s not at all surprising is Pawlenty’s failure to note the deterioration in Minnesota’s relative economic performance that has coincided with the decline in public investment.

As noted by Black, the most obvious distortion is the fact that Pawlenty compares the two-year (i.e., biennial) growth rate for the period prior to 2002 to a single year growth rate for the period since 2002; this has the effect of making the pre-2002 growth rate appear to be twice as great as it was during his tenure.  The only apparent reason for this statistical slight-of-hand is to mislead.

The biennial general fund growth rate from fiscal year (FY) 1960-61 to the FY 2002-03 (the last biennium under a budget set by Pawlenty’s predecessor, Gov. Ventura) was 21%, while the projected growth from FY 2002-03 to FY 2010-11 is 4%.*

However, in order to get a meaningful comparison of spending growth over time, several factors need to be taken into account:

• As Black observes, a comparison of spending levels over time should consider the impact of inflation and population growth.  Biennial growth in inflation (as measured by the implicit price deflator for state and local government purchases) and statewide population are each approximately 30% greater during the period from FY 1960-61 to FY 2002-03 than during the period from FY 2002-03 to FY 2010-11.
• Spending also needs to be adjusted for artificial swings resulting from funding shifts.  As noted by Black, state general fund spending was reduced in FY 2010-11 by shifting school aid payments into FY 2012-13.  This creates the illusion of a spending reduction, when in fact the spending was simply delayed to the next biennium.
• Finally, spending needs to be adjusted for the supplanting of general fund spending with dollars from other sources.  In FY 2010-11, a portion of general fund spending on health and human services and K-12 education were replaced with federal dollars from the American Recovery and Reinvestment Act (ARRA).  This spending was still occurring, but it did not show up in the state general fund in FY 2010-11 because it was being paid for with non-general fund dollars, thereby producing another artificial dip in state spending.  It is ironic that Pawlenty goes around the nation bashing Pres. Obama and the ARRA while at the same time taking credit for the general fund spending decline produced by the ARRA.

After adjusting for all of the above, state general fund spending is projected to decline at an average biennial rate of 3.3% from FY 2002-03 to FY 2010-11.  The comparable growth rate from FY 1960-61 to FY 2002-03 is 7.7%.  So—as it turns out—Pawlenty was understating the decline in state general fund spending during his tenure.  After adjusting for inflation, population growth, funding shifts, and the supplanting of state funding with federal dollars, general fund spending has declined by an aggregate 12.7% from FY 2002-03 to FY 2010-11.  (Further analysis of this trend can be found in a May 10 Minnesota 2020 article.)

Pawlenty has not just shrunk the rate of growth in general fund spending, but has made deep and significant cuts.  However, most of the pain resulting from state budget cuts was not borne by state government, but by local governments and property taxpayers.  From FY 2003 to FY 2011, real (i.e., inflation-adjusted) per pupil state aid to school districts has fallen by 14%, while real per capita state aid to counties and cities has fallen by 46% and 31% respectively.  These cuts have forced both large property tax increases and significant local government budget reductions.  This is a legacy of the “no new tax” policy that Pawlenty rarely touts.

Black further notes that Pawlenty’s pre-2002 and post-2002 spending analysis ignores the fact that we are asking state government to do a lot more today than in 1960.  Environmental protection and education of special need students are two examples that come immediately to mind.  It contributes nothing to a meaningful policy discussion to complain about growth in government spending over the last half century without acknowledging changes in society and the increased demands that we have placed on government on a bi-partisan basis.

Another area in which the state role has evolved since 1960 is in the area of property tax relief.  For example, a major cause of state general fund spending growth prior to 2003 was the effort to reduce school property taxes by increasing the share of school costs borne by the state general fund.  In fact, Majority Leader Pawlenty was a proponent of these changes during the 2001 session.  It is again ironic that the Governor supported a policy that caused the pre-2003 spending growth that he now criticizes.

Just as the expansion of state-paid property tax relief was a significant contributor to general fund growth prior to 2003, the contraction of property tax relief since 2003 has resulted in both a reduction in state general fund spending and an increase in local property taxes.

While Pawlenty is quick to take credit for shrinking state government, he is less eager to accept responsibility for Minnesota’s deteriorating economic performance.  Since he took office, Minnesota has performed well below the national average in terms of the percentage growth in jobs, income, and GDP.  Minnesota’s rank in terms of road conditions has fallen from 8^th best in the nation in 2002 to 27^th in 2007.  Other areas in which Minnesota has declined relative to the national average are documented in a recent Minnesota 2020 report, “On Our Way to Average: Ranking Minnesota’s Economic Performance” and subsequent articles.  Pawlenty’s attempts to defend himself from this dismal track record are feeble and easily rebutted.

If anything, Pawlenty’s claims regarding government growth since 2002 are understated.  He has not just reduced the rate of growth in government, but has orchestrated a double-digit decline in real per capita state general fund spending.  He deserves significant credit for the shrinkage in public investment and the coinciding deterioration in Minnesota’s economic performance relative to other states.

*It should be noted that the state general fund comprises only 52% of total state spending in the current biennium.  (In addition to the general fund, the state budget includes over 30 other funds, including the trunk highway, special revenue, and debt service funds.)  Based on a more comprehensive measure of state spending which includes all funds—not just the general fund—the biennial growth rate from FY 1960-61 to FY 2002-03 was 19%, compared to a projected growth rate of 9% from FY 2002-03 to FY 2010-11.  Thus, based on the more inclusive measure of state spending, the differential between the spending growth during the pre-Pawlenty and post-Pawlenty eras is not nearly as great as the Governor claims.

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Earlier this week, the Senate Tax Committee met to discuss the Governor’s proposal to amend the constitution to cap state spending.  The state already has a constitutional requirement to balance the state budget; all Pawlenty’s amendment would do is require that general fund spending in the current biennium equal the revenues generated in the last biennium.  Thus, if there’s a deficit, the problem could only be solved by cutting spending, not increasing revenue, thereby reducing the options open to state policymakers, restricting the ability of government to respond to the demands of the public, and ensuring that the “no new tax” tribe win every dispute on deficits.

At one point during the Senate Tax Committee discussion of the amendment, Senator Tom Bakk (Cook) said that income taxes and the overall “price of government” (i.e., total state and local own-source revenue as a percent of statewide personal income) has declined over the last decade.  To this point, Senator Warren Limmer (Maple Grove), an amendment supporter, argued that sales taxes and property taxes have increased in recent years.

Both senators were correct.  While specific taxes have increased, others have declined and the overall size of government relative to statewide personal income has declined.  Sadly for low and moderate income families, regressive taxes (sales and property taxes) have increased as a share of total public revenue, while progressive taxes (the income tax) have shrunk.  These trends have shifted a larger share of state taxes on to those families with the least ability to pay.

While Senator Limmer is certainly correct that property taxes have increased, Pawlenty’s constitutional spending amendment will only accelerate this trend.  During the “no new tax” era, state government has solved its recurring budget problems largely by cutting state dollars shared with counties, cities, and schools, thereby compelling local governments to simultaneously cut budgets while increasing property taxes.  The fiscal straightjacket imposed by the amendment will constitutionally guarantee similar outcomes in the future; the state will not be able to solve any portion of its deficit problem through an increase in state taxes, so it will of necessity continue to chop away at the property tax relief dollars that the state shares with local governments.  This will cause even more public costs to be shifted on to low and moderate income families.

Pawlenty’s constitutional spending cap falls under the broad category of proposals known collectively as “taxpayers’ bill of rights.”  Dane Smith, President of Growth & Justice, hit the nail on the head when he told the Senate Tax Committee that the proposed constitutional amendment could be more aptly called a  “taxpayers’ bill of goods.”

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