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Minnesota Dec. 2012 economic forecast

Minnesota Dec. 2012 economic forecast

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Minnesota's latest economic forecast shows a $1.1 billion deficit in the upcoming two-year budget cycle.
Minnesota's latest economic forecast shows a $1.1 billion deficit in the upcoming two-year budget cycle.

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Published by: Minnesota Public Radio on Dec 05, 2012
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 400 CENTENNIAL BUILDING
658 CEDAR STREET
ST. PAUL, MINNESOTA 55155
(651) 201-8000
November 2008
HIGHLIGHTS
$1.095 Billion Budget Shortfall Forecast for 2014-15 Biennium
Minnesota’s FY 2014-15 budget outlook has changed little since August’s special legislativesession when a $1.079 billion shortfall was projected. Revenues now are forecast to be $35.793billion, $68 million less than earlier estimates. This small decline in revenues is partially offsetby a $43 million reduction in projected spending and a net $9 million increase in reserves.Spending in FY 2014-15 is now estimated to be $36.866 billion. The projected FY 2014-15budget shortfall has grown by $16 million.
Current Biennium’s Budget Balance of $1.330 Billion Goes to Repay School Aid Shift
State general fund revenues for the 2012-13 biennium are forecast to exceed end-of-sessionestimates by $1.076 billion (3.2 percent), while general fund spending is projected to be $262million below earlier estimates. State law requires that any forecast balance for the currentbiennium be used to reduce the $2.4 billion school aid shift outstanding. After the buyback,$1.1 billion in school shifts will remain.
Revenue Growth in FY 2012-13 Does Not Carry Forward into FY 2014-15 Biennium
Global Insight’s November baseline calls for U.S. economic growth to average 2.8 percent inthe 2014-15 biennium. In February, 3.1 percent growth was expected. That slight decline in theeconomic outlook, coupled with several one-time items that increased FY 2012-13 revenues butdid not add to future revenues, left FY 2014-15 revenues almost unchanged from earlierplanning estimates. Income tax revenues are now forecast to be $548 million less than end-of-session estimates. Almost half of that decline came from a weaker wage forecast. A projectedshift of capital gains realizations and other portfolio income from the 2013 and 2014 tax yearsinto tax year 2012 produced much of the remainder of the reduction.
 Federal Tax and Spending Policy Concerns Add to Forecast Uncertainty
 Minnesota’s budget outlook for FY 2014-15 depends on more than the national economy’sstrength. Changes in federal law also will affect state revenues by inducing changes inindividual behavior. For example, permanent tax rate increases are generally expected toencourage acceleration of taxable income and reduce it in later years. Global Insight’s baselineassumes that federal policymakers resolve current fiscal cliff concerns on a timely basis andthat significant tax and spending changes will be phased in beginning in 2014. Failure to reachagreement before January 1, 2013 tax year or a more aggressive fiscal policy stance in 2013would materially reduce economic growth and state revenues in the 2014-15 biennium.
 ov em b  e 0  o e c a s t  
 
 
November 2012 Minnesota Financial Report
2
SUMMARY
$1.330 Billion Projected FY 2012-13 Balance Triggers School Shift Buyback
Minnesota's budget outlook for the current biennium has improved materially since lastFebruary’s forecast. After August’s special legislative session, the budget was balancedand a zero general fund balance was projected.Forecast revenues are now expected to be $34.944 billion, up $1.076 billion from theend-of-the special session. Forecast spending is now expected to be $33.898 billion, a$262 million decline from previous projections. These forecast changes, coupled with a$8 million net increase in reserves, produce a forecast balance of $1.330 billion. But, thisbalance does not carry forward to the next budget period. Instead it is statutorily allocatedto buying back some of the outstanding school aid payment shifts. Leaving the availablebalance at zero.
FY 2012-13 Forecast
($ in millions)
NovemberForecast Change
Beginning Balance $1,289 $0Revenues 34,944 1,076Spending 33,898 (262)Reserves 988 26Stadium Reserve 17 (18)
Forecast Balance $1,330 $1,330
School Shift Buyback 1,324 Residual to Reserve
Available Balance $0
Over 40 percent of the forecast improvement reflects gain from closing the books for FY2012. For the 2012-13 biennium, forecast revenues are up $1.076 billion. The forecast taxrevenues, primarily the income, corporate and sales tax forecasts increased by $810million. Non-tax revenue, transfers and other revenues increased $266 million. Of the$262 million decline in spending, human services spending accounted for $196 million.The remainder came from small savings in K-12 education, debt service and property taxaid and credit spending.
 
Minnesota Financial Report November 2012
3
Available Balance Drops to Zero after School Shift Buyback
As in last February’s forecast, current law allocates all of the projected balance to buyingback K-12 education shifts enacted in the 2009, 2010 and 2011 legislative sessions.Minnesota Statutes 16A.152 requires that if a forecast during the biennium indicates apositive balance for the close of the biennium, the forecast balance must be used to repayschool aid payment shifts and reverse the school property tax recognition shift
.
Statutory Allocation of Forecast Balances
($ in millions)
Feb 2012ForecastNov 2012ForecastTotalAllocatedForecast Balance
$323 $1,330 $1,653
Statutory Allocations
Restore Reserves 5K-12 Shift Buyback 313 1,324 1,642Residual to Reserve $5 $6 $11
Total Allocated $323 $1,330 $1,653
November’s forecast balance of $1.330 billion provides an additional $1.324 billion thatis automatically allocated to reversing school aid payment shifts. It will be added to K-12education aids spending in FY 2013, changing payment percentages from 64.3 percent inthe current year followed by a 35.7 percent settle-up payment in the following year to an82.5 percent, 17.5 percent payment basis.The $1.324 billion pays back over one-half of the $2.4 billion in school shifts thatremained following the February 2012 forecast. The additional funds will be paid toschools in the December 15 school aid payment. After this buyback, $1.1 billion inschool aid shifts will remain. The estimated amount needed to return paymentpercentages to the original 90-10 payment schedule is $546 million; the amount requiredto fully reverse the existing 50 percent property tax recognition shift is estimated to be$555 million.Under current law, the school payment percentage is to be adjusted to the nearest one-tenth of one percent. The remaining balance, $6 million, is directed to the budget reserve.

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