Friday, December 4, 2009

Study Commission Report Calls Upon us to Take Courageous Action

I've been writing on and off about the need for courageous action by leaders in Minnesota at all levels. These days courage is hard to find among political leaders. Perhaps one of the reasons is that our political system is increasingly structured around the perception of elected leaders that in order to survive politically, they must maintain the active financial support of their base, and especially their highly motivated campaign funding base. It is not courageous for Republicans to champion the cause of reduced taxation. It is not courageous for Democrats to champion the cause of more funding for governmental services and governmental workers. Courage involves reaching beyond one's base, and doing what needs to be done. Nixon, for all his many faults, had the courage to go to China, despite the anger of his political base. Truman had the courage to fire MacArthur to preserve the principle of civilian control of the military. Clinton, for all his many faults, had the courage to reach across the aisle and balance the budget with a package of spending controls and tax increases, an act that led to balanced budgets and years of sustained growth.

One act of courage from our political leadership would be to reach across the aisle and develop a solution to the structural financial problems facing Minnesota in the next decades. Report after report warns us that Minnesota faces a long-term fiscal crisis that can only be solved by a combination of actions on the revenue and expenditure sides. One of the more recent such reports is the 2009 Minnesota State Budget Trends Study Commission. The Commission, authorized by the legislature, was comprised of fifteen members including five members appointed by the governor; five by the senate and five by the house. The Commission Report explains that "Minnesota has a long-term structural budget problem, with long term expenditure growth likely to outpace revenue growth." The first finding of that report is that Minnesota is currently experiencing a major, long range demographic shift which has grave economic consequences for the state, unless we act courageously.

Today, as the first of Minnesota’s 1.4 million baby-boomers begin to reach retirement age, the state has reached an inflection point - a moment of profound change that produces an immediate shift from recent trend. This milestone requires a complete reassessment of the way the state’s economy is perceived. No longer can Minnesota sit by and watch as the crest of this giant aging wave grows larger. As Minnesota’s population begins to transform, new, long ranging factors will begin to weigh more and more heavily on the state’s tax base, spending needs, and overall economic progress. The wave is beginning to break and policymakers have not adequately prepared for the overwhelming implications this will have on state government finances.

The report continues:

A rising dependency ratio will have profound implications on virtually all aspects of state and local government. For instance, a larger dependent population will put upward pressure on government expenditures. Dependent populations rely more heavily on health care, education, economic assistance,and social service programs. .....Current trends signify that by 2020 the number of seniors in the state of Minnesota will exceed the number of school age children for the first time. However, this change is due to the unprecedented number of individuals reaching age 65, not to a drop in the school age population. Over the next twenty years, the number of school age children in Minnesota will actually be increasing.

In 1999, the State of Minnesota, flush with cash from the growth during the Clinton Presidency, adopted a series of fiscal measures that threw state government into permanent financial chaos. The government rebated a significant share of the accumulated surplus with one-time payments. At the same time, the State adopted permanent reductions in the tax rates, combined with permanent increases in spending. The result was not merely a reduction in our surplus, it was the creation of a permanent long term structural deficit. Hence the Commission's finding number 6, that:

Finding #6: Minnesota has a long-term structural budget problem, with long-term expenditure growth likely to outpace revenue growth.

What happened following these structural changes? The answer is that during this period, Minnesota experienced one of its most significant economic declines relative to the rest of the nation. We have experienced a decline in our infrastructure, a drop in the national rankings of our K-12 and post secondary education system, and a decline in our relative economic performance as compared to the rest of the nation.

What is causing this structural deficit. The answer is primarily ballooning health care costs, the largest component of which is health care for the elderly.

Growing at an average annual rate of 8.5 percent, state payments for direct health care services are the fastest growing segment of the state’s budget and consume a greater share of available resources each year. State health care programs face many of the same cost pressures that exist in the private health care market, including medical inflation and increased utilization of services spurred in large part by the development of new medical technologies, services, and pharmaceuticals to treat illnesses.

In the absence of structural reform, on both the revenue side and the cost control side, health care costs alone will drive the state into bankruptcy. This problem will not be solved as long as Democrats campaign only for the revenue part of the solution to this problem and Republicans campaign only for the cost control part of the problem. Each of our structural problems require each party to "go to China" as it were and to shape a grand compromise that solves our structural problems with courageous action.

To read the report click on this link:
Commission Report

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