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But … What About Tomorrow? Presentation to September 8 Leadership Summit Tom Stinson Tom Gillaspy September, 2009 Minnesota Has Been Very Successful (Especially For A Cold Weather State at the End of the Road) • Our economic growth rate has exceeded the national average • Our population growth rate leads the frost belt • We rank with the leaders on many social and economic indicators • Education has been a key contributor to the state’s success Past Performance Does Not Ensure Future Results Minnesota Is Facing Significant Long-Term Budget Problems This Recession Is Much More Severe Than Those of 1990-91 and 2001 Real GDP Index Quarter Preceding NBER Recession Call = 100 112 110 2007-2009 2001 1990-1991 1980-1982 108 106 104 102 100 98 96 1Q 2009 94 -1 0 1 2 3 4 5 6 7 8 9 10 11 Quarters After NBER Recession Call 12 13 14 15 16 Minnesota’s Recovery Will Be Slower than After Recent Downturns MN Employment Month Preceding NBER Recession Call = 100 115 2007-2010* 1990-1991 110 2001 1980 105 100 95 August 2009 90 -1 3 7 11 15 19 23 27 31 35 39 43 Months from NBER Recession Call 47 51 55 59 The 2007-09 Recession Permanently Reduced the Base for Future Revenues Nominal GDP $ Billions 25,000 20,000 15,000 10,000 5,000 Feb 07 Jul 09 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 The Economic/Demographic Environment Has Changed for as Far as We Can Forecast Short run economic cycle has merged with long run demographic cycle We have entered the Age of Entitlement— economic growth in the next 25 years will be about half what it was in the past 25. State revenue growth will slow while spending pressures will accelerate This is a national/global issue Minnesota Saw a 30 Percent Jump in Workers Turning Age 62 in 2008 Worked Within Past 5 years 60,000 50,000 40,000 30,000 20,000 10,000 0 7/05 to 7/06 7/06 to 7/07 7/07 to 7/08 7/08 to 7/09 7/09 to 7/10 Year Turning Age 62 2005 ACS 7/10 to 7/11 7/11 to 7/12 Budget Pressures Will Change More 65+ Than School Age by 2020 1,400,000 1,200,000 1,000,000 18-24 65+ 5-17 800,000 600,000 400,000 200,000 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 Census counts & State Demographer projection, revised 2007 In 1995, we said, “If there is a time to solve the state’s fiscal problems, it is now.” “After 2010, solutions will be more difficult, as the percentage of Minnesotans of working age begins to decline.” Within Our Means, January 1995, page 9 Labor Force Growth Is About To Slow Sharply Ave Annual Change 1.6% 1.52% 1.4% 1.12% 1.2% 1.0% 0.75% 0.8% 0.6% 0.43% 0.4% 0.27% 0.2% 0.10% 0.13% 0.0% 19902000 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 Minnesota Faces a Fiscal Trap 1. The issue is a long run, structural one— short run solutions will not solve the problem 2. Trend growth alone will not be sufficient. Fundamental changes are necessary 3. Revenue growth will slow. Efforts to increase it will be met with resistance 4. Spending pressures will increase driven largely by issues of aging and health 5. State spending will shift its focus from education, infrastructure and higher education to care and support of the aging Revenue Growth Will Slow 5 Year Compound Growth Rates for Total State Revenues Percent 10 TOTAL TAX 8 CPI PGSL 6 4 2 0 1986 1991 1996 2001 2006 2011 2016 2021 2026 2031 Next 25 Years--State Revenue Growth Rate Projected To Slow 5 Year Compund Growth Rate 8% 7% 6% Total Per Capita Real Per Capita 6.8% 5.5% 5% 3.9% 4% 3.4% 2.8% 3% 2% 1.2% 1% 0% 2001 Budget Trends Commission, 2009 2033 From 2010 to 2020, Minnesota Will See Large Increases Age 50s and 60s 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 16,500 8,440 41,400 91,370 112,540 102,960 54,240 -42,310 -63,650 -2,680 61,920 47,950 -9,980 -30,680 Source: Minnesota State Demographic Center, rev 2007 Numbers are rounded 5,050 47,330 36,190 20,150 Health Care Spending Jumps After 55 U.S. Health Care Spending By Age, 2004 $12,000 $9,914 $10,000 $9,017 $8,000 $6,694 $6,000 $2,000 $3,571 $3,496 $4,000 $1,855 $2,165 $2,747 $1,074 $1,445 ra ge A ve 75 + 4 65 -7 4 55 -6 4 45 -5 4 35 -4 4 25 -3 4 15 -2 14 5- <5 $0 Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey, data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions. If State Health Care Costs Continue Their Current Trend, State Spending On Other Services Can’t Grow 8.5% Annual Ave Growth 2008-2033 9% 8% 7% 6% 5% 4% 3.9% 3% 2% 1% 0.2% 0% Revenue Health Care Education & All Other General Fund Spending Outlook, presentation to the Budget Trends Commission, August 2008, Dybdal, Reitan and Broat The Political Economy Has Changed In Fundamental Ways Minnesota had strong per capita economic growth since WWII The global economic environment has changed. The political economy is also changing Aging means slower economic growth and rising government expenditures Aging means more tax resistance Phases in the Household Life Cycle State/Local Government’s Share of Personal Income Has Declined Price of Government 20% 17.9% 17.4% 16.5% 15.9% 15.5% 15.4% 15% 10% 1990 1992 1994 1996 1998 2000 Calendar Year Mn Dept of Finance 2002 2004 2006 2008 How Do We Get Out Of This Fiscal Trap? Revenue growth will depend increasingly on per capita economic growth Future economic growth will depend increasingly on increasing productivity and less on labor force size This plays to Minnesota’s historic strength Productivity Remains The Key To Quality of Life In Minnesota Economic Growth = Labor Force Growth + Productivity Growth Productivity growth comes from Private investment -- machines & processes Skills & abilities of workers Public investment -- roads, bridges, etc Technology from research, public & private Productivity Is Not Just Producing at a Lower Cost Increasing the Value of Products Produced Also Increases Productivity The Fiscal Catch-22 If we don’t make the necessary public investments in human capital, research and infrastructure, then we won’t have the productivity gains needed to provide the resources to make those investments. We must avoid the California spiral The Tale of Two Economies Per Capita Personal Income, 1960-2008 % of US Average 130 CA, 125 CA, 118 120 CA, 118 CA, 111 110 US Avg. CA, 109 MN, 108 MN, 107 CA, 107 100 MN, 99 90 MN, 101 MN, 102 MN, 94 80 1960 1970 1980 1990 2000 2008 Education Is The Key To Productivity Minnesota High School Graduation Ratio 100% 89% 85% 90% 85% 2 Yr Ave Rate 80% 70% 60% 57% 60% 62% Hispanic Black 50% 40% 30% 20% 10% 0% American Indian Asian White 2004-05 through 2005-06 graduates. Based on 10th grade enrollment three years earlier. Total Tough Decisions Must Be Made • What is state government well positioned to do? Some issues are national in scope Some are local Some are inherently private • What activities are central to state government’s role? Big Opportunities • The challenge--building the foundation for future success Economic prosperity Environmental quality Social justice Quality of life • The current situation is not sustainable “If something can't go on forever, it will stop.” Herbert Stein, chair President Nixon’s Council of Economic Advisors