Minnesota and the New Normal Tom Stinson Tom Gillaspy April 2012

Minnesota’s Finances Have Improved FY budget improved by $1.2 billion since end of session Forecast balances used to restore reserves and buy back $313 million f school aid shift FY budget outlook shows $1.1 billion gap between expenditures and revenues Remaining school shift -- $2.4 billion Estimated inflation $1.0 billion

Recent Economic and Demographic Events Have Changed the Outlook for as Far as We Can See

This Recovery Has Been Slower Than Those in the Past

U.S. Unemployment Rate 8.2 Percent Employment Down 5.2 Million Jobs

Total U.S. Wages Fell in 2009 Quarterly Year-Over-Year Percent Change

Household Wealth Fell More than $16 Trillion; Real Estate, Nearly $10 Trillion

Convergence of Population Growth Rates Census Bureau estimates, aligned with 2010 Census

The Number Of Minnesotans Turning Age 65 Is Increasing Sharply This Year Census ACS and counts and Mn State Demographer forecasts, the 2012 increase is 36%

From 2010 to 2020, Minnesota Will See Large Increases Age 50s and 60s Source: Minnesota State Demographic Center, rev 2007 Numbers are rounded

Annual Percent Change Minnesota Total Labor Force Minnesota State Demographer forecast, revised January 2012 Gillaspy Demographics

World Labor Force Growth Slowing Projected Change In Working Age Population (15-64) U.S. Census Bureau

Percent Of Employers Having Difficulty Filling Jobs Due To Lack Of Available Talent Manpower Group, 2011 Talent Shortage Survey Gillaspy Demographics

Minnesota Will Grow More Diverse; Remain Less Diverse Than The Nation State Demographer & Census Bureau projections

In 2006, Minnesota’s Foreign Born Workforce Was 240,000 or 8% Of The Total Workforce 2006 ACS

The Old Normal + The Great Recession + Long Run Demographic Changes = The New Normal

The “New Normal” Probably Means Higher interest rates Labor and talent will be the scarce resources Slower economic growth A single-minded focus on productivity Increasing numbers of retirees A more diverse population More uncertainty about the future

For Many Occupations, Replacements Will Outnumber New Job Growth Projected Openings In Minnesota Occupations DEED projections. Percent of 2006 level

Budget Pressures Will Change More 65+ Than School Age by 2020 Census counts & State Demographer projection, revised Jan 2012

Health Care Spending Jumps After 55 U.S. Health Care Spending By Age, 2004 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.

The “New Normal” Probably Means--2 Creative destruction/disruptive innovation will change the way we deliver services A shift in balance between private and public sectors A change in the land rent gradient Benefits depend on employment not employer Chronic government deficits & cuts in service Worries about how to pay for past promises A whole new set of opportunities

State Taxes Paid by a Married Couple Before and After Retirement Income Income Tax Sales Tax TotalChangePct Working $35,000$1,236$782$2,018 $65,000$3,387$1,295$4, % $25,000$0$559 -$1,459-72% $45,000$1,091$896$1,987-$2,695-58%

If State Health Care Costs Continue Their Current Trend, State Spending On Other Services Can’t Grow General Fund Spending Outlook, presentation to the Budget Trends Commission, August 2008, Dybdal, Reitan and Broat

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

The Great Recession Has Been Blamed for Raising the Level of Social Angst But What Is Really Happening Is That We Have Entered A “ N e w N ormal”

But Why Fear The New Normal? It Plays To Our Strengths! Future economic growth will depend increasingly on increasing productivity and less on labor force size Education has been the key to Minnesota’s productivity and prosperity Future productivity increases will depend on decisions and the investments we make now Public Sector Productivity Growth Will Be Essential

Productivity Is Not Just Producing at a Lower Cost

Increasing Productivity Also Means Making things better (improved quality) Making better things (innovation, new products)

Long term cost saving may require investments which increase short term expenditures Focusing Just On Expenditure Cuts May Be Short Sighted

“Making Things Better” May Offer the Greatest Potential Cost cutting efforts have focused on transactional jobs Largest future productivity gains are likely to come from investments that lead to better outcomes Lower lifetime health care costs, reduced recidivism rates, improved graduation rates Adapting service delivery plans to meet the needs of the “New Normal”

60% Of Minnesota K-12 Teachers Are Over Age ACS

3 R’s of Opportunity Restructure government costs Replace retiring government workers wisely Re-engage the growing retiree population

3 More R’s Of Opportunity Restructure government revenues Research to solve problems—for example improved graduation rates Restore entrepreneurship, initiative, invention in the private and public sectors

Education Achievement Gaps Are Large Minnesota High School Graduation Ratio Mn Dept of Education 5 year graduation rate. Percent of 9 th graders who graduate within 5 years. ACS 2009

High School Graduation Is No Longer Enough 70% of Minnesota job openings will require at least some college--63% nationally In 1973, 28% of job openings required some college Minnesota is the 3 rd most education intensive job market in the nation Nationally, college degrees conferred will need to increase by 10% a year by 2018 to meet the demand for skilled workers and avoid slower economic growth Georgetown Univ Center for Education and The Workforce

Minnesota 2010 Earnings By Education 2010 ACS

Unemployment Rates Are highly Correlated With Education Unemployment Rates For Minnesotans Age ACS PUMS

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.

“If something can't go on forever, it will stop.” Herbert Stein, Chair President Nixon’s Council of Economic Advisors

“I skate to where the puck will be, not to where it has been.” Wayne Gretzky Famous Canadian Philosopher