Governor’s Chief of Staff outlines Minnesota’s budget situation

Dan McElroy is one of the most articulate political staffers I have ever met. The chief of staff to Minnesota Governor Tim Pawlenty addressed a business group in Bloomington on May 3. He talked about the Governor’s priorities for the state budget, which is currently being debated in the legislature.

McElroy said the Governor wants a budget that enhances the state’s competitiveness with other states for attracting and retaining good jobs, which make a high quality of living possible.

“This is not our grandfather’s economy,” McElroy said. “Fifty years ago, most of the jobs were anchored here; there were ties to here that were difficult to break. They were anchored to the soil in agriculture; they were anchored to the timber industry, or to minerals extraction, or to huge investments in manufacturing. Those anchors are no longer in place…

“Every job we compete for in Minnesota is a job that is essentially portable. The fast-growing industries are not anchored to soil or timber or minerals. They are anchored to a highly-trained workforce, to good communications and transportation, and to a competitive business environment.”

McElroy summarized the administration’s budget proposal. It increases government spending in the next two years by 6 percent so the budget goes from $28.3 billion in the last biennium, to $29.6 billion in the next biennium.

McElroy noted that in 1970, Gov. Harold LeVander proposed a biennial budget that for the first time hit $1 billion. It had doubled in 14 years, since 1955, when Gov. Orville Freeman presented a $500 million budget.

“We had 3.5 million people in 1970,” McElroy said. “That was spending of $123 per capita. If the budget had grown from 1970 to 2000 by inflation, it would have been $8.8 billion, and it was, in fact, $26 billion, or at that point, about $2,500 per capita. It is now about $3,000 per capita…

“If government were to grow as fast between now and 2030 as it did between 1970 and today, the budget in 2030 would be $1.3 trillion or $54,000 per capita. In order for it to be the same percentage of personal income that it is today -- about 10 percent -- every man, woman and child in Minnesota would have to make $540,000 per year from cradle to grave. That might happen, but I think it would be a mistake to bet the ranch on that.”

McElroy gave the following reasons for Gov. Pawlenty’s reluctance to raise taxes.

First, he said: “It is illogical in this competitive environment for government to grow faster than the economy. The debate is that some elements of our spending, such as education and health care, are growing faster than the balance of the economy. Can we make the tough decisions to hold the total growth in state government to about 6 percent? Can government grow faster than the economy, responsibly in the long term? We do not believe that it can.”

Second, he explained that surrounding states are not raising taxes. He said Wisconsin, Iowa, Illinois and Michigan are unlikely to raise taxes this year. North and South Dakota already have adjourned their 2005 legislative sessions and did not raise their taxes.

Third, McElroy said the state’s demographics are working against us. He described something called the “dependency ratio,” which is the number of people under 16 and over 65 compared to the number of people between 16 and 65. Most government services, he said, are consumed by the young and the old, and funded by working people between 16 and 65.

“Today there are 55 people under 16 or over 65 for every 100 people between those ages,” he said. “By 2030, that number will be 65, and by 2040 it will be 80. Can we continue to grow services as fast in a condition where we have about 55 dependents for every 100 wage earners as we can in a circumstance where we have 80 dependent people for every 100 people who are in their prime working years? We argue that is not very smart.”

Fourth, McElroy said Minnesota already is a very high tax state. “The latest data from the Minnesota Taxpayers Association, based on 2002 numbers, shows Minnesota spends 20 percent more than the national average on state and local spending combined,” McElroy said. “We spend 11 percent more than Wisconsin, 18 percent more than Iowa, 47 percent more than South Dakota. 113 percent more than Mississippi. That spending drives taxes.

“Minnesota ranks fifth in the nation for taxes on a per capita basis, and eighth in the nation on taxes as a percentage of personal income. We rank first by far in the Upper Midwest on those measures.

"Do we get enough competitive advantage from the education investment we make, the transportation investment that we make, the environmental investment we make, to justify those high prices? Over the last 30 years, we have. Can we sustain that competitive advantage with health care growing at 18 percent per biennium? That challenge in this whole equation is not education, transportation or the environment; it’s the rapid growth in the cost of health care.

“We are proposing health care spending to grow by 15 percent in the next biennium, compared to 18 percent under current law,” he said. “We are proposing to go from first in the nation for the generosity of our state-subsidized health care programs to first in the nation. And we will go from the lowest number of uninsured persons in a state, to the lowest number of uninsured people in a state, in the country. We are proposing to slow the growth in Minnesota Care by 23,000 people over the next two years…

“One problem we are having is dumping, where employers who used to offer health care no longer do. Another is the changing demographics of the health care market. Is it an easy decision to slow the growth of Minnesota Care? It is not. None of our surrounding states have programs like Minnesota Care, except Wisconsin. But Wisconsin does not provide coverage at all -– it never has –- for single adults without children. And they stop family coverage at 185 percent of the federal poverty level. Minnesota has been at 275 percent of that level and is proposing to go to 190. If we do not get health care expenditures under some level of control, it will literally eat the budget for all other things that are important to our ability to be competitive.”

Fifth, he said, “The people of Minnesota would like us to not raise taxes. Gov. Pawlenty and staff have traveled to more than 500 cities, listening to people about this issue. The number of people who think government should live within its means ranges from 60 to 70 percent.”

McElroy addressed two other issues: education and casino gambling.

He noted that the administration in proposing an 8 percent increase in education funding over the next two years. The administration advocates a pay-for-performance system, while critics oppose that system.

“We ignored the fact that in some schools 70 percent of the students don’t finish high school in four years, or 40 percent of the students can’t read at an eighth grade level in time to graduate in four years. On average, we graduate about 90 percent of our students in four years, compared to a national average of 74 percent, but we can’t be content with educating averages,” he said. “We have to educate every child. And so we have to be willing to change some things, like paying teachers based on their performance rather than their seniority, re-inventing the junior and senior year in high school so it is more effective. And we have to look more at school principals as CEOs, rather than bureaucrats and thoughtless disciplinarians. That is, someone who is running a business whose product is satisfied parents and educated children. We cannot have a competitive economy in the 21st century without effective schools.”

On gambling, he said the debate is about who should benefit from its expansion.

“It is a fact that Minnesotans love to gamble,” he said. “We are among the top states in the country in terms of gambling per capita. We have 18 successful casinos in Minnesota. We have the third-largest casino gaming industry in the country after Connecticut and California. Our competitors get revenue from casino gaming. Connecticut, California, New York and others states get about 25 percent of the revenue from their tribal casinos in exchange for exclusivity. States around us get revenue from gaming. In Wisconsin’s case, they have an agreement with their tribes. In Iowa, South Dakota, Illinois and Michigan, they have private gaming.

“The governor’s preference would be not to expand gambling. But it would be delusional to say that gambling isn’t expanding of its own initiative. We’ve gone from 15,000 slot machines in Minnesota five years ago to 21,000 machines today. There are more sales of lottery tickets, pull tabs, and online gaming than ever before. It’s a $1.4 billion industry. The question is not should gambling expand, but who should benefit?

“In a presentation before the Minnesota Senate the executive director of the Minnesota Indian Gaming Association testified that fewer than 1,000 Minnesota Indians have benefited significantly from casino gaming. Fifty-four thousand people are still waiting.

“The governor has partnered with the White Earth tribe, which has 24,000 members, about 44 percent of Minnesota’s Indians, to propose working with Canterbury Park, to have two facilities which we are calling the Casinos at Canterbury. It would not provide a geographic expansion of gaming. It would provide revenue to the state, revenue to some of the poorest Indians of Minnesota.

“Would you rather get revenue from Minnesota gaming, or raise taxes on Minnesota families? We think it makes more sense to get revenue from gaming.”

The constitutional deadline for the legislature to adjourn in 2005 is Monday, May 23. The lawmakers will have to make a lot of progress to meet that deadline.