Next Generation EconomyThe Minnesota Perspective

Tom Stinson, State Economist

Tom Gillaspy, State Demographer

January 2009

November’s Forecast Highlights Minnesota’s Major Budget Challenge

• FY 2008-09 -- $426 million deficit• FY 2010-11 -- $4.8 billion shortfall

– Revenues decline 1.8 percent– Expenditures increase 6.1 percent

• Planning Estimates for 2012-13 show gap of $4.6 billion between revenues and expenditures– Including inflation would increase the

2012-13 shortfall by $1.5 billion

The Economic Outlook Has Deteriorated Since November

This Recession Is Expected to Be One of the Deepest and Longest Since WWII

January 2008: “Last Year’s Issues Have Not Gone Away”

January 2009: This is still true!

Next 25 Years--State Revenue Growth Rate Projected To Slow

6.8%

3.9%

5.5%

3.4%2.8%

1.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2001 2033

5 Y

ea

r C

om

pu

nd

Gro

wth

Ra

te

TotalPer CapitaReal Per Capita

Budget Trends Commission, 2009

If State Health Care Costs Continue Their Current Trend, State Spending On Other

Services Can’t Grow

3.9%

8.5%

0.2%0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Revenue Health Care Education & AllOther

An

nu

al

Av

e G

row

th 2

00

8-2

03

3

General Fund Spending Outlook, presentation to the Budget Trends Commission,August 2008, Dybdal, Reitan and Broat

In 1995, we said,“If there is a time to solve the state’s If there is a time to solve the state’s fiscal problems, it is now.”fiscal problems, it is now.”

““After 2010, solutions will be more After 2010, solutions will be more difficult, as the percentage of difficult, as the percentage of Minnesotans of working age begins Minnesotans of working age begins to decline.”to decline.”

Within Our Means, January 1995, page 9

The Next Generation Economy-- Long term issues are quickly becoming Long term issues are quickly becoming

short term challengesshort term challengesThe next four years will be a period of

great social and economic changeStructural imbalances have turned into projected budget deficits

Rapid aging and the related surge in entitlements are upon us

Economic growth will depend increasingly on productivity growth

Once again, wise decisions are neededOnce again, wise decisions are needed

Minnesota Will See a 30 Percent Jump in Workers Turning Age 62 Beginning 2008

0

10,000

20,000

30,000

40,000

50,000

60,000

7/05 to7/06

7/06 to7/07

7/07 to7/08

7/08 to7/09

7/09 to7/10

7/10 to7/11

7/11 to7/12

Year Turning Age 62

Wo

rke

d W

ith

in P

as

t 5

ye

ars

2005 ACS

From 2010 to 2020, Minnesota Will See Large Increases Age 50s and 60s

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Source: Minnesota State Demographic CenterNumbers are rounded

Budget Pressures Will Change More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection, revised 2007

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

$1,855$1,074 $1,445

$2,165$2,747

$3,496

$6,694

$9,017$9,914

$3,571

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

<55-

14

15-2

4

25-3

4

35-4

4

45-5

4

55-6

4

65-7

475

+

Avera

ge

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 Most Rapidly Growing Segments Of Minnesota Are People In The Highest

Health Care Cost Ages

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Change 2010-20

Source: Minnesota State Demographic CenterNumbers are rounded

Use Of Health Care Professionals Is Increasing

Association of American Medical Colleges, November 2008

Association of American Medical Colleges, November 2008

Shortages of Doctors and NursesProjected For The United States

Productivity Has Been Minnesota’s Competitive Advantage

It will be even more important inThe Next Generation EconomyThe Next Generation Economy

Productivity Remains The Key To Quality of Life In Minnesota

Economic Growth=Labor Force Growth + Productivity Growth

Productivity growth comes fromPrivate investment—machines & processesPublic investment—roads, bridges, etcTechnology from research, public & privateSkills & abilities of workers—education &

training

Labor Force Growth Is About To Slow Sharply

1.52%

1.12%

0.75%

0.43%

0.10% 0.13%

0.27%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1990-2000

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35

Ave

An

nu

al C

han

ge

Competition For Future College Students Will Increase

6.8%

4.5%

-1.6%-2.2%

13.0%

-1.2%

-3.5% -3.0%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2000-05 2005-10 2010-15 2015-20

Per

cen

t C

han

ge

18-2

4 US

Mn

Census Bureau US Proj, Mn State Demographer revised 2007. The 18 year oldpopulation, both Minnesota & nationally are projected to decline starting 2009.

The New 3 R’s for Economic Success

• Retention

• Recruitment

• Retraining

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 current situation is not sustainable

• The challenge--building the foundation for future success– Economic prosperity

– Environmental quality

– Social justice

– Quality of life

“If something can't go on forever, it will stop.”

Herbert Stein, chair President Nixon’sCouncil of Economic Advisors