on our way to average: ranking minnesota's economic performance

8/14/2019 On Our Way to Average: Ranking Minnesota's Economic Performance

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ON OUR WAY TOAVERAGERANKING MINNESOTAS

ECONOMIC PERFORMANCE

Jef Van WychenMinnesota 2020 Fellow

January 2010


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Table of Contents___ Executive Summary 1

Introduction 6

Revenue and Expenditures Per $1,000 ofPersonal Income 11

Revenue and Expenditures Per Capita 16

Summarizing Revenue &Expenditure Trends 21

State Performance 25

Conclusion 45

Endnotes 48

Appendix A - Revenue & Expenditures 51

Appendix B - State Performance 63


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On Our Way to Average 1

Executive Summary___________________ Since 2002, Minnesotas state and local government revenues and expenditures have declined signi cantly incomparison to other states. The corresponding decline in public investment has coincided with a decline inMinnesotas economic performance and quality of life. Once a na onal leader in areas such as educa on andemployment, Minnesota is now lagging.

Minnesota leads the na on in terms of the decline in non-federal general revenue from 2002 to 2007 ,both on a real per capita basis and per $1,000 of personal income. In fact, on all categories of revenue andexpenditures on both a per capita basis and per $1,000 of personal income, Minnesota ranks among the topten states in terms of the decline (or least growth) from 2002 to 2007. This is true for no other state.

This report updates a 50 state analysis of revenue, expenditure, and performance trends published in June2008. 1 It looks at where Minnesota ranks na onally on 13 key wellness indicators ranging from job andincome growth to road condi ons. The report nds that to date, the economic experiment undertaken by theadvocates of less government and no new taxes has been a failure.

The baseline year for this study is 2002. In that year, Minnesota implemented a series of changes in the state-local scal rela onship, including a restructuring of the property tax system and a complete state takeover of general educa on funding; 2002 was also the last year prior to the implementa on of a no new tax agendain Minnesota.


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2 On Our Way to Average

Minnesota Leads the Na on in Revenue DeclineNo state has cut government revenue and spending more than Minnesota since 2002. The following analysisfocuses on state and local government revenue and expenditures per $1,000 of personal income.

On taxes and state and local general revenue (non-federal), also known as own-source revenue, Minnesotahas dropped from approximately nine percent above the na onal average in 2002 to less than two percentabove in 2007. The four broadest categories of government nancesgeneral revenue, total revenue, generalexpenditures, and total expendituresare be er measures of the total size of government in Minnesotarela ve to other states. On each of these measures, Minnesota dropped below the na onal average, indica ngthat we are no longer an above average state.

Minnesotas rank among the 50 states in the various categories of state and local government nances per$1,000 of personal income has also fallen signi cantly from 2002 to 2007. Minnesotas rank on taxes per$1,000 of personal income fell from 6 th in 2002 to 16 th in 2007, while total general revenue (non-federal) fellfrom 12 th to 22 nd . On each of the four broadest categories of government nances, Minnesotas rank hasdropped from eight to 15 places from 2002 to 2007; Minnesotas rank on each of the four broadest measuresis 29 th or below in 2007.

The Minnesota Department of Revenue concludes that taxes per capita are not par cularly helpful iniden fying high tax and low tax states because they do not account for the higher cost of labor and cost of living and the lower level of federal assistance in high personal income states. 2 Nonetheless, because percapita rankings are frequently called for, they are included in this report. Even on a per capita basis, Minnesotais only modestly above the U.S. average based on 2007 data. For example, 2007 total revenue and spendingper capita in Minnesota are just 2.3 and 2.5 percent respec vely above the na onal average.


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The decline in Minnesota revenue and spending versus the na onal average since 2002 is striking, both on aper capita basis and per $1,000 of personal income. In all instances, the decline is much larger (or the growthis much smaller) in Minnesota than in the na on as a whole.

A 2008 Revenue Department analysis concluded that Minnesota is just about average in terms of itscombined state and local tax burden. 3 The above analysis shows that this is true for other categories of revenues and expenditures as well. It is clear that no new tax leadership has reduced public investment inMinnesota to the point where we are not a high tax, big government state. The more important ques on,however, is how the shrinkage in government and decline in public investment has impacted Minnesotaseconomic performance and quality of life.

Minnesota Falls Behind on Key Economic IndicatorsIn the past, Minnesotans have demonstrated an ability to iden fy cri cal public investments and fund themin a way that promotes long-term prosperity. State Economist Tom S nson observed that 50 years ago, far-sighted leaders invested in educa on and infrastructure and by doing so paved the way for a half century of prosperity during which Minnesota surged ahead the na on.

The principal objec ve of the no new tax policy is to freeze or shrink the level of public revenue. If this had

been the agenda of state leaders a half-century ago, the progress cited by S nson would not have occurred.The primary goal of state policymakers should not be to xate upon a par cular level of public revenue, but toiden fy which public investments are in the long-term interest of the state and nd a way to pay for them. Anyideology that interferes with this objec ve must be abandoned.

The analysis of the 13 performance factors begins in 2002 and terminates in 2007, 2008, or 2009, dependingon the most recent data available for that speci c indicator. The period since 2002 corresponds with the meframe of the revenue and expenditure data examined in this report; it also corresponds with the ascendance of the no new tax agenda in Minnesota.

In general, Minnesotas performance rela ve to other states deteriorated since 2002. Some key ndings:

Minnesotas performance rela ve to the na onal average in terms of unemployment rates andemployment growth (since 2001) has deteriorated.

Somewhat smallerbut s ll signi cantdeteriora on was observed on the three income and paymeasures.

On all three educa on indicatorspupil-teacher ra o, students at or above basic level in math andreading, and per capita state and local spending on educa onMinnesotas performance declined rela veto other states.

Minnesotas posi on in terms of road miles in poor or mediocre condi on fell sharply rela ve to the restof the na on; the miles of roads in poor or mediocre condi on in Minnesota more than doubled from2002 to 2007.

On the other four factors examined in this report (homeownership rates, health insurance coverage,bridge de ciency percentage, and poverty rates) there was no evidence of a sta s cally signi cant declinein Minnesotas performance rela ve to other states. Nor was there evidence of improvement.

The following graph shows Minnesotas ranking on each performance indicator in 2002 and the most recentyear data were available. A ranking of 1 denotes the best performance among the 50 states.


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On 12 of the 13 measures, Minnesotas ranking declined from 2002 to 2007, although in some instances thedrop in ranking was slight. For the remaining factor, Minnesotas rank remained the same. In no instance didMinnesotas rank improve.

Minnesota is by no means an economic basket case; however, Minnesotas performance rela ve to otherstates is headed in the wrong direc on. The decline in Minnesotas performance has coincided with a declinein public investment.

Of course, correla on does not equal causa on. However, compe ng explana ons do not explain the fullextent to which Minnesotas economic performance has deteriorated since 2002. The trends highlighted inthis report leave no new tax proponents with a di cult ques on to answer: why did the reduc on in the sizeof government in Minnesota not produce the rela ve improvement in Minnesotas economic performance thatwas predicted? To this point, the economic experiment undertaken by the advocates of less governmentand no new taxes has been a failure.

Proponents of sustained public investment have long argued that the failure to maintain cri cal publicinvestments would lead to deteriora on in Minnesotas economic performance rela ve to the na onalaverage. This is precisely what has occurred.

Nothing in this report should be construed as an endorsement of untargeted and undisciplined publicspending. The states general fund budget de cit is projected to be $1.2 billion in the current biennium and$7.4 billion in the next. 4 In addi on, a recent district court ruling threatens to cancel Governor Pawlentys July


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2009 unallotment, poten ally adding $2.7 billion to the de cit. Spending reduc ons and reforms will haveto be part of the solu on to the states ongoing budget morass. However, in light of the substan al reduc onin Minnesota public revenue since 2002, it is wrongheaded to insist that the budget solu ons be restricteden rely to the expenditure side of the ledger.

The Consequences of Public DisinvestmentThe shrinkage in government that has occurred in Minnesota since 2002 has jeopardized cri cal publicinvestments. The states roads have deteriorated and pupil-teacher ra os in public schools have increased.In addi on, per pupil current spending in Minnesota elementary and secondary public schools has droppedbelow the na onal average. 5

Minnesotas con nued strong economic performance rela ve to the rest of the na on is not predes ned;Minnesotas posi on in comparison to other states can and has deteriorated. This deteriora on correspondswith shrinkage in Minnesotas public investment. Minnesotas ability to restore a bright economic future liesnot in a slavish devo on to cu ng public revenue, but upon our ability to iden fy the states long-term needsand fund them appropriately.


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Debate over the size of government in Minnesota is strewn with bombas c claims about spending run amokand governments insa able appe te for increased spending. Rankings of the rela ve size of government inthe 50 states have become a focal point in this debate.

The rst edi on of this report 6 compared the size of state and local government in Minnesota to otherstates based on commonly used measures. This edi on will extend the analysis to include scal year 2007informa on that was released in the fall of 2009. All state and local government tax, revenue, and expendituredata in this report are from annual U.S. Census Bureau reports. 7

Not all rankings of the rela ve size of government are equally valid. The claim that Minnesota is a biggovernment state is o en based on rankings that focus exclusively on state taxes. However, a House FiscalAnalysis O ce issue brief noted that rankings based on state taxes alone are a awed measure of the rela vesize of government because some statessuch as Minnesotacollect a large share of revenue at the statelevel and redistribute it to local governments. 8 These states tend to have above average state governmentrevenue but below average local government revenue.

In order to get a true measure of the rela ve size of government in the 50 states, it is important to look atcombined state and local government nances. In addi on, focusing on taxes alone provides an incompletemeasure of the size of government in the 50 states. Based on FY 2007 data from the U.S. Census Bureau, taxescomprise only 54.8 percent of state and local government general revenue in the United States (57.2 percentin Minnesota). Apart from taxes, ci zens pay charges, license fees, and special assessments.

A more complete measure of the cost of paying for public services borne by the residents of each state is non-federal general revenue, commonly referred to as own-source revenue. Own-source revenue includes alltaxes, fees, charges, special assessments, and other miscellaneous payments made within a state to supportstate and local governments.

Even total own-source revenue does not fully measure the total amount of revenue u lized by state andlocal governments. State and local governments in all 50 states receive revenue from the federal governmentfor transporta on, health and human services, and other public costs. On a na onwide level, transfers fromthe federal government comprised 20 percent of all state and local government general revenue in 2007 (17.6percent in Minnesota). In order to adequately gauge the rela ve size of government in the 50 states, it isimportant to focus on general revenue, which includes both own-source revenue and federal transfers.

In addi on to general revenue, the Census Bureau also reports an even broader category of revenue thatincludes u lity, liquor store, and insurance trust revenue. The following diagram shows the classi ca on of revenue used in Census Bureau reports.

Introduction__________________________


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Based on recommenda ons from research sta with the Minnesota Department of Revenue, this analysiswill exclude insurance trust revenue from total revenue. The largest category of insurance trust revenueis employee re rement funds, which can uctuate greatly from year to year due to the performance of

nancial markets. The uctua on in insurance trust revenue is o en so large that it can cause a largevaria on in total government revenue. 9 Inclusion of insurance trust revenue in the revenue total wouldbe measuring changes in state and local government resources that are not driven by ordinary growth ingovernment, but by uctua on in nancial markets.

The most inclusive category of revenue examined in this report consists of the sum of general revenue plusu lity and liquor store revenue. For shorthand purposes, this category of revenue will be referred to as totalrevenue, even though it does not include insurance trust revenue. This represents a change from the rstedi on of this report, which included insurance trust revenue in total revenue.

In summary, this report will examine Minnesotas rank among the 50 states based on each of the following

categories of revenue from the U.S. Census Bureau, listed from least to most inclusive:

Taxes

Own-source revenue (i.e., non-federal general revenue)

General revenue

Total revenue (excluding insurance trust revenue)


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The rela ve size of government in the 50 states can also be gauged by examining state and local governmentexpenditures, as opposed to revenue. This report ranks Minnesota rela ve to other states based on two broadcategories of government spending.

The rst of these categories is general expenditures. The general expenditure category parallels generalrevenue insofar as it excludes u lity, liquor store, and insurance trust expenditures. The second categoryis referred to herein as total expenditures. In order to parallel the total revenue category, the totalexpenditure category will exclude insurance trust expenditures.

Government revenues and expenditures among the 50 states can be compared on a per capita basis or per$1,000 dollars of personal income. While this report shows Minnesotas posi on based on both types of rankings, rankings based on revenue and expenditures per $1,000 of personal income generally provide a moremeaningful comparison. According to the Center for Budget and Policy Priori es (CBPP):

Revenue as a percentage of personal income is a standard form of measurement in public nanceanalyses, and for several reasons it is usually a be er measure for comparisons across states than aremeasures of spending and revenue per capita.

Measuring revenue and spending rela ve to personal income shows the rela ve burden of state and local taxes on state taxpayers and the rela ve e ort states are making to fund public programs.

By contrast, measuring revenue and spending on a per capita basis does not take into account thedi ering abili es of states to raise revenues and fund programs. Two states with large di erencesin average income levels could raise the same amount of revenue per resident, but the poorer statewould be placing a greater tax burden on its ci zens.

Both the overall cost-of-living and wage levels may be higher in states with above-average incomes.Thus, wealthier states may be required to spend more per resident than poorer states to provide thesame level of services. 10

A sta s cal analysis con rms that both cost-of-living and wage levels are higher in high personal income states,as posited by the CBPP. 11 Examining government revenues and expenditures as a percentage of personalincome is therefore a sensible way of adjus ng for the higher labor costs for governments in high personalincome states.

In addi on, high per capita personal income states tend to receive less federal assistance than low per capitapersonal income states and thus must rely more heavily on taxes and other own-source revenue, therebycontribu ng to higher per capita taxes in these states. 12

Research conducted by Dr. Paul Wilson, Director of the Research Division at the Minnesota Department of Revenue, has demonstrated that high per capita income states generally have higher per capita taxes than lowper capita income states; Wilson a ributes this rela onship to the factors cited above: higher wage levels andcost of living and lower levels of federal assistance in high per capita income states. 13 Based on this nding,Wilson concludes that per capita tax levels are not par cularly helpful in iden fying high tax and low tax states.A Revenue Department publica on further notes that, Rankings of total state and local tax burden measuredas a percent of income are be er able to iden fy the states commonly perceived to be low-tax or high-taxstates. 14


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State rankings of revenues and expenditures per $1,000 of personal income in this report are based on scalyear (i.e., July 1-June 30) personal income data that match the scal year revenue and expenditure data fromthe Census Bureau. Other reports that examine revenues and spending rela ve to personal income typicallyuse calendar year (January 1-December 31) personal income data, which does not precisely match the meframe of the revenue and expenditure data. Personal income data used in this report is from the U.S. Bureauof Economic Analysis.

The rst edi on of this report examined state revenue and expenditure data going back to scal year (FY) 1995.In order to avoid going over ground already covered, this report will focus on data beginning with FY 2002. FY2002 is last year before the commencement of the no new tax era in Minnesota (as marked by the ascensionof the Pawlenty administra on) for which Census revenue and expenditure data is available. Thus, FY 2002 isthe appropriate baseline year for examining state and local revenue and spending trends during the no newtax period.

This report will rank the 50 states based on revenues and expenditures for each year from FY 2002 to FY 2007,with the excep on FY 2003 for which Census Bureau state and local data is not available. FY 2007 is the mostcurrent year for which Census Bureau state and local revenue and expenditure informa on is available; theprevious edi on of this report extended through FY 2006.

The next sec on of this report examines Minnesotas ranking based on the four categories of revenue and twocategories of expenditures per $1,000 of personal income. The subsequent sec on examines Minnesotasranking based on the same categories of revenues and expenditures on a per capita basis.

Two limita ons of state rankings should be noted.1. A small change in revenue or expenditures can cause a large change in rankings, depending on howclosely the values of a par cular factor for each state are clustered together. Thus, a large change in rankis not necessarily indica ve of a large change rela ve to other states or rela ve to the na onal average.Conversely, if the values among states are widely distributed, a rela vely large change in the value of afactor for a state might result in li le or no change in a state ranking.

2. State rankings expressed as a single number tell us nothing about where Minnesota compares tospeci c states. For example, it was one thing to rank ahead of large states like California, New York, andTexas. It is quite another to rank ahead of small states like Wyoming, Alaska, and Hawaii.

To address these shortcomings, this report not only presents Minnesotas rank among the 50 states, but alsoMinnesotas posi on rela ve to the na onal average. In addi on, the report will examine the Minnesota andna onwide percentage change in each category of revenue and expenditures from 2002 to 2007.

Appendix A shows each states value and ranking for each of the revenue and spending categories so thatreaders can determine how Minnesota compares to speci c states. Unlike the rst edi on of this report, theper capita tables in appendix A (tables A-7 to A-12) are adjusted for in a on to account for changes in thepurchasing power of the dollar over me. The in a on adjustment is based on the implicit price de atorfor state and local government purchases, which is the appropriate measure of in a on for state and localgovernments. 15

A de ciency of all studies that look strictly at government revenues and expenditures is that they overlook thequality of public services being provided and the economic outcomes being produced. For example, a highlevel of government spending rela ve to other states may be a wise investment if it is producing higher quality


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roads, schools, and other public services that contribute to superior economic vitality and quality of life. Inshort, an examina on of government revenue and spending that does not take into account the outcomesresul ng from public expenditures is incomplete.

This report will examine thirteen factors that measure the level of economic performance and the quality of public services and infrastructure in each of the 50 states. These factors are:

Per capita personal income

Median household income

Average annual pay

Unemployment rate

Employment growth since 2001

Poverty rate

Homeownership rate

Percent of popula on covered by health insurance

Pupil-teacher ra o in public schools

Per capita state and local spending for educa on

Students performing at or above basic level in math and reading (4 th and 8 th grades)

Percent of bridges that are de cient

Miles in poor or mediocre condi on per 1,000 road miles

Data on each of these performance factors will be examined for each year from 2002 through the mostcurrent year available. These factors include the same 12 factors examined in the previous edi on of thisreport, except that (1) all informa on has been updated to the most current year available and (2) the sourceof informa on for some factors has been changed when more accurate or reliable sources were discovered.Changes in data rela ve to the previous version of the report are described in the report. In addi on, one newfactor is added to this version of the report: miles in poor or mediocre condi on per 1,000 road miles.

As with the revenue and expenditure categories, the report will examine Minnesotas rank and posi on rela veto the na onal average for all 13 performance measures. When survey data is used, a considera on of thereported margin of error is included in the analysis.

Appendix B consists of tables showing the value of each factor for each state in each of the years examined.Dollar amounts in appendix B are expressed in in a on-adjusted dollars. 16

The report will conclude with an examina on of the possible linkage between increases or decreases inpublic investment on the one hand and the level of economic performance and quality of public services andinfrastructure on the other. Speci cally, the report will address the ques on of whether the no new taxpolicy that Minnesota has pursued since 2002 has produced the bene ts that were promised.


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Revenue and Expenditures Per $1,000 of Personal IncomeTaxes (see table A-1 in appendix for detail)Taxes are o en the focus of state ranking reports, since they are the largest and most visible source of stateand local government revenue. However, taxes should not be overemphasized to the exclusion of otherrevenue sources. Na onally, state and local governments collect 45 percent of general revenue from non-taxsources, so taxes are an incomplete measure of public revenue.

Minnesotas rank among the 50 states on state and local government taxes per $1,000 of personal income was6th in 2002. From 2002 to 2004, Minnesotas tax rank fell sharply to 17 th , with li le change since then.In 2002, Minnesotas state and local government taxes per $1,000 of personal income were 8.6 percent abovethe U.S. average. Minnesota taxes declined drama cally over the next two years, dropping to just 1.2 percentabove the U.S. average in 2004. Minnesota taxes per $1,000 of personal income changed rela vely li le from2004 to 2007.

In aggregate, na onwide state and local taxes per $1,000 of personal income increased from $101 in 2002to $110 in 2007, a growth of 8.8 percent. Over the same period, taxes per $1,000 of personal income inMinnesota grew from $110 to $112, a growth of 1.9 percent.

Own-Source Revenue (see table A-2 in appendix for detail)Own-source revenuealso referred to as non-federal general revenueincludes taxes, fees, specialassessments, interest earnings, and all other general revenue except for dollars from the federal government.Na onally, own-source revenue comprises 80.0 percent of all state and local government general revenue.Own-source revenue is a be er measure of the total price of government paid by residents of a state than istaxes.

Minnesotas rank among the 50 states on state and local government own-source revenue per $1,000 of personal income has fallen from 12 th in 2002 to 24 th in 2004. Since 2004, Minnesotas rank has changedrela vely li le.

Minnesota own-source revenue per $1,000 of personal income has fallen from 9 percent above the na onalaverage in 2002 to just 0.5 percent above the na onal average in 2007. Once again, the bulk of this declineoccurred from 2002 to 2004.


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In 2002, state and local own-source revenue per $1,000 of personal income was $148 na onally and $161in Minnesota. From 2002 to 2007, U.S. state and local own-source revenue grew by 8.5 percent, while inMinnesota it was virtually unchanged. By 2007, own-source revenue per $1,000 of personal income in

Minnesota was approximately equal to the U.S. average. From 2002 to 2007, Minnesota led the na on interms of the decline in own-source revenue per $1,000 of personal income.

General Revenue (see table A-3 in appendix for detail)General revenue is a more complete measure of the overall size of government becauseunlike taxes andown-source revenueit includes intergovernmental transfers from the federal government.

Minnesotas rank on general revenue per $1,000 of personal income has fallen from 22 nd in 2002 to 31 st in2004. Since 2004, Minnesotas rank has changed li le.

Minnesotas general revenue per $1,000 of personal income fell from 4.9 percent above the na onal averagein 2002 to 1.9 percent below average in 2004. Since 2004, own-source revenue has declined slightly rela ve tothe rest of the na on, dipping to 2.4 percent below the U.S. average in 2007.

During the en re period from 2002 to 2007, total U.S. state and local general revenue per $1,000 of personal


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income increased by 6.6 percent from $188 to $201, while in Minnesota it dipped slightly from $198 to $196.From 2002 to 2007, Minnesota went from signi cantly above the na onal average in state and local own-source revenue to modestly below.

Total Revenue (see table A-4 in appendix for detail)Total revenue is the most comprehensive measure of state and local government revenue used in this report.Total revenue includes all general revenue plus u lity and liquor store revenue; with the addi on of thesetwo sources, total revenue exceeds general revenue by 6.1 percent na onally and 4.8 percent in Minnesotabased on 2007 data. For reasons noted in the introduc on, total revenue as de ned here excludes insurancetrust revenue.

Minnesotas rank among the 50 states in total state and local government revenue per $1,000 of personalincome fell from 25 th in 2002 to 34 th in 2004. Since 2004, Minnesotas rank has uctuated only slightly, se lingat 33 rd in 2007.

Minnesota state and local government total revenue per $1,000 of personal income fell from 3.3 percentabove the na onal average in 2002 to 3.2 percent below average in 2004. Over the next three years,Minnesota total revenue dipped further to 3.6 percent below the na onal average.

From 2002 to 2007, U.S. state and local government total revenue per $1,000 of personal income increasedfrom $200 to $213, a growth of 6.3 percent; in Minnesota, it declined from $207 to $205, a drop of 0.8percent. Both na onally and within Minnesota, the change in total revenue from 2002 to 2007 resembles thechange in general revenue.

General Expenditures (see table A-5 in appendix for detail)In examining the rela ve size of government in the 50 states, it is important to examine not just revenue, butexpenditures as well. An analysis of general expenditures is arguably the best way to gauge the rela ve changein the size of state and local government over me because:

1. It includes spending on all of the most widely recognized state and local government func ons, includingthose funded with federal dollars,

2. it does not include spending on u li es, insurance trusts, and liquor stores, which are broadly disparateamong states in the extent to which they are funded, if they are performed at all, and


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3. Unlike general revenues or any of the other revenue categories, it is not subject to erra c swings fromyear to year due to changes in vola le revenue sources. Changes in general expenditures are more likely tobe the result of the conscious decisions of policymakers to increase or decrease the scope of governmentservices, as opposed to uctua ons in unstable revenues.

Minnesotas rank on general expenditures per $1,000 of personal income has fallen from 17 th in 2002 to 29 th in2007. Most of the drop in Minnesotas ranking occurred from 2002 to 2004.

Minnesota has gone from 7.4 percent above the na onal average in general expenditures per $1,000 of personal income in 2002 to 0.8 percent below the na onal average in 2009. Once again, most of the declineoccurred from 2002 to 2004.

U.S. state and local general expenditures per $1,000 of personal income in 2007 was $194the same as it wasin 2002. Meanwhile, in Minnesota it declined from $208 in 2002 to $192 in 2007, a drop of 7.6 percent. Fromthis informa on, it is clear that Minnesotas public spending rela ve to statewide ability-to-pay declined inboth absolute terms and rela ve to the na onal average.

Total Expenditures (see table A-6 in appendix for detail)As used here, total expenditures includes all general expenditures plus u lity and liquor store expenditures.To be consistent with the total revenue measure, total expenditures excludes insurance trust spending.With the addi on of u lity and liquor store spending, total expenditures exceed general expenditures by 8.4percent na onally and by 5.8 percent in Minnesota based on 2007 data.

Minnesotas rank in state and local government total expenditures per $1,000 of personal income fell from 19 th

to 34th

from 2002 to 2007. Most of the decline in Minnesotas rank occurred between 2002 and 2004.

In terms of total expenditures per $1,000 of personal income, Minnesota has gone from 4.6 percent above thena onal average in 2002 to 3.4 percent below the na onal average in 2007. As has been consistently the caseacross other categories of revenues and expenditures, most of this decline occurred between 2002 and 2004.

On a na onwide basis, state and local government total expenditures per $1,000 of personal income increasedvery slightly from $210 in 2002 to $211 in 2007. Over the same period, state and local government totalexpenditures per $1,000 of personal income in Minnesota fell from $220 to $204, a drop of 7.3 percent.


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Note on Personal Income GrowthOn the six measures of revenues and expenditures per $1,000 of personal income examined above,Minnesotas ranking and posi on rela ve to the na onal average declined signi cantly from 2002 to 2007.This decline could be due to either (1) a decline in Minnesota revenue and expenditures rela ve to the rest of the na on or (2) a growth in Minnesota personal income rela ve to the rest of the na on.

From FY 2002 to 2007, Minnesotas nominal personal income growth was nearly four percent less than thena onal average. Thus, the decline in Minnesota revenues and expenditures rela ve to the U.S. average wasnot due to above average growth in personal income. Rather, the change in Minnesotas posi on rela ve tothe na onal average was due to below average growth in nominal public revenue and expenditures. Across allsix categories of revenues and expenditures, the nominal growth in Minnesota was below the U.S. average.


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Revenue and Expenditures Per Capita_


All dollar amounts in the following sec ons dealing with per capita revenues and expenditures are expressed inconstant FY 2007 dollars. As noted in the introduc on, the in a on adjustment is based on the implicit pricede ator for state and local government purchases, which is the appropriate measure of in a on for state andlocal governments. 17

Taxes (see table A-7 in appendix for detail)In a presenta on at the 2008 Minnesota Policy Analysis Conference, Dr. Paul Wilson, Director of the ResearchDivision at the Minnesota Department of Revenue, noted that high per capita income states almost alwayshave higher per capita state and local taxes than low per capita income states. 18 Wilson concluded that taxesper capita are not par cularly helpful in iden fying high tax and low tax states due to the fact that high percapita income states nearly always have higher per capita taxes due to higher labor costs, higher costs of living,and lower levels of federal assistance.

Nonetheless, state and local taxes per capita is commonly used in making interstate comparisons. Thus,despite its limita ons, this report includes data on taxes per capita. While taxes per capita are not par cularlyuseful as a basis for comparison to the na onal average, the examina on of changes in per capita tax, revenue,and expenditure levels within a single state over me can be useful.

Minnesotas rank on state and local government taxes per capita was 5 th in 2002. Over the next four years,Minnesotas rank declined steadily, hi ng 13 th in 2006, before rebounding to 11 th in 2007.

Rela ve to the na onal average, per capita taxes in Minnesota showed an unabated decline over the last ve

years, dropping from 17 percent above the na onal average in 2002 to 7.9 percent above in 2007. Most of thisdecline occurred between 2002 and 2004.

Per capita state and local taxes in the U.S. grew from $3,962 in 2002 to $4,234 in 2007, a growth of 6.9 percentover the ve years. Over the same period, per capita taxes in Minnesota fell by 1.4 percent, from $4,633 in2002 to $4,566 in 2007.


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Own-Source Revenue (see table A-8 in appendix for detail)Rankings of state and local government own-source revenue (also referred to as non-federal general revenue)per capita have the same limita ons as rankings of per capita taxes; these limita ons were described in theprevious sec on. However, an examina on of changes in own-source revenue per capita over me within asingle state can be useful.

From 2002 to 2005, Minnesotas rank on own-source revenue per capita declined from 7 th to 10 th . Minnesotasrank remained 10 th in 2006 and 2007.

Minnesota per capita state and local own-source revenue rela ve to the na onal average has fallensigni cantly during the period under examina on, going from 17.4 percent above the na onal average in 2002to 6.6 percent above average in 2007.

U.S. state and local government own-source revenue per capita grew from $5,797 in 2002 to $6,176 in 2007,for total growth over the ve year period of 6.5 percent. Meanwhile, in Minnesota it declined from $6,805 to$6,585, a drop of 3.2 percent. From 2002 to 2007, no state in the na on has had a greater decline in per capitaown-source revenue than Minnesota.

General Revenue (see table A-9 in appendix for detail)General revenue includes own-source revenue plus dollars transferred from the federal government. Becauseit includes federal dollars, general revenue per capita is not as awed as taxes and own-source revenue percapita as a basis for interstate comparisons. However, interstate comparisons based on general revenue percapita are nonetheless of limited u lity due to the fact that they do not adjust for the higher labor costs andhigher cost of living in high per capita income states.

Minnesotas rank on total state and local government general revenue per capita fell from 5 th in 2002 to 16 th in2006, where it remained in 2007. The largest drop in rank occurred between 2002 and 2004.

Minnesotas posi on rela ve to the na onal average in per capita state and local general revenue also fellsteadily over this ve year period, going from 13.0 percent above the na onal average in 2002 to just 3.5percent above in 2007.

U.S. per capita state and local government general revenue grew from $7,375 in 2002 to $7,721 in 2007, agrowth of 4.7 percent. Meanwhile, in Minnesota it fell from $8,333 to $7,990, a decline of 4.1 percent.


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Total Revenue (see table A-10 in appendix for detail)Per capita rankings based on total revenue have the same limita ons as per capita rankings based on generalrevenue. These limita ons were described at the beginning of the previous sec on. For reasons explained in

the introduc on, total revenue as de ned in this report excludes insurance trust revenue.

Minnesotas rank in state and local government total revenue per capita fell steadily from 7 th in 2002 to 18 th in2007.

Minnesotas total revenue per capita has fallen 11.3 percent above the na onal average in 2002 to 2.3 percentabove in 2007. Most of Minnesotas decline rela ve to the na onal average occurred between 2002 and 2004.

U.S. state and local government total revenue per capita grew from $7,845 to $8,190 during the period from2002 to 2007, a growth of 4.4 percent. Over the same period, total revenue per capita in Minnesota declinedfrom $8,730 to $8,377, a drop of 4 percent.


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General Expenditures (see table A-11 in appendix for detail)In examining the rela ve size of government in the 50 states, it is important to examine not just revenue, butexpenditures as well. Expenditures have an advantage over revenue as a basis for interstate comparisonsbecause expenditures are less subject to erra c swings from year to year due to changes in vola le revenuesources. Changes in general expenditures are more likely to be the result of the conscious decisions of policymakers to increase or decrease the scope of government services, as opposed to uctua ons in unstablerevenue sources.

However, general expenditures per capita have some of the same limita ons as general revenue per capita ,insofar as it does not adjust for the higher labor cost and higher cost of living in high per capita income states.

Minnesota ranked 5 th among the 50 states in per capita state and local government general expenditures in2002. Over the next four years, this rank fell to 14 th in 2006 before moving to 13 th in 2007.

Minnesotas state and local government general expenditures per capita fell steadily from 15.6 percent above

the na onal average in 2002 to 5.2 percent above average in 2007.

Real state and local government general expenditures per capita fell both na onally and in Minnesota from2002 to 2007, although the decline in Minnesota was much greater. Na onally, general expenditures percapita declined from $7,583 to $7,444, a drop of 1.8 percent. In Minnesota, general expenditures per capitadeclined from $8,770 to $7,832, a decline of 10.7 percent.

Total Expenditures (see table A-12 in appendix for detail)As a basis for interstate comparisons, total expenditures per capita have some of the same limita ons asgeneral expenditures per capita. For reasons described in the introduc on, total expenditures as used hereexclude insurance trust revenue.

Minnesotas rank among the 50 states in state and local government total expenditures per capita fell from 6 th in 2002 to 15 th in 2007.

Minnesotas total expenditures per capita were 12.7 percent above the na onal average in 2002. Over thenext ve years, total expenditures per capita in Minnesota declined steadily rela ve to the na onal average.By 2007, Minnesota per capita state and local government expenditures were 2.5 percent above the na onalaverage.


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As with per capita general expenditures, per capita state and local government total expenditures fell bothna onally and in Minnesota from 2002 to 2007. U.S. state and local general expenditures per capita fell from

$8,232 to $8,109, a drop of 1.5 percent. In Minnesota, general expenditures per capita went from $9,274 to$8,311, a decline of 10.4 percent.


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Summarizing Revenue and Expenditure TrendsFrom 2002 to 2007, Minnesotas rank and posi on rela ve to the na onal average declined on all six measuresof state and local government revenues and expenditures examined above; this decline occurred regardless of whether the measurement was on a per $1,000 of personal income basis or a per capita basis.

The tables below summarize the change in Minnesotas rank and posi on rela ve to the na onal average foreach of the six revenue and expenditure categories from scal year 2002 to 2007. The rst table shows thechange per $1,000 of personal income, while second table shows the per capita change; the percent changesin the second table are expressed in in a on-adjusted dollars.


As noted above, measuring revenues and expenditures per $1,000 of personal income provides a simple andsensible way of adjus ng for the higher labor costs and lower level of federal assistance in high income states.On all six categories of revenue and expenditures per $1,000 of personal income, Minnesotas rank declined by


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at least eight places and on one categorytotal expendituresby 15 places. Rela ve to the na onal average,Minnesota declined from 6.9 percent to 8.5 percent on the various measures.

For reasons explained in a preceding sec on, the single most meaningful measure of the rela ve size of government is arguably general expenditures per $1,000 of personal income. On this measure, Minnesotasrank declined from 17 th in 2002 to 29 th in 2007. Over this period, Minnesota declined from 7.4 percent abovethe na onal average in 2002 to 0.8 percent below the na onal average in 2007.

Minnesotas per capita rankings are much higher than the per $1,000 of personal income rankings becauseper capita rankings do not take into account the higher labor costs and lower level of federal assistance in highincome states such as Minnesota. Even so, Minnesotas rank and posi on rela ve to the na onal average fellsigni cantly from 2002 to 2007 on all six categories of revenue and expenditures per capita. Rela ve to thena onal average, Minnesota declined by nine percent to 10.8 percent on all per capita measures.

For most measures, the fastest rate of decline rela ve to the na onal average occurred from 2002 to 2004;from 2004 to 2007, the decline generally con nued, but at a slower pace.

Minnesota is a na onal leader in terms of the magnitude of state and local government revenue and

expenditure reduc ons from 2002 to 2007. The table below compares the change in all six categories of U.S.and Minnesota revenues and expenditures both on a per capita and per $1,000 of personal income basis.Minnesotas rank among the 50 states in terms of revenue and spending reduc ons is also shown.

Per $1,000 of personal income, Minnesota has declined or increased very slightly on all six categories of revenues and expenditures; this is in contrast to the U.S. total, which has increased on all six categories withthe excep on of general expenditures. The graph below illustrates the magnitude of the change from 2002 to2007 in revenues and expenditures per $1,000 of personal income in Minnesota versus the U.S. total.


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The contrast between Minnesota and the rest of the na on in per capita revenues and expenditures is equallystark. Minnesota revenues and expenditures fell across all six categories, while the U.S. total either grew orfell only modestly. For example, in terms of total and general revenue, Minnesota declined by about $343and $353 per capita respec vely, while the U.S. average increased by $346 and $345 per capita respec vely;meanwhile, the decline in total and general expenditures per capita was about $800 greater in Minnesota thanin the rest of the U.S. The graph below illustrates the magnitude of the di erence between Minnesota and therest of the na on in terms of the change in per capita revenues and expenditures from 2002 to 2007.


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Minnesota leads the na on in terms of the decline in own-source revenue from 2002 to 2007 , both on a percapita basis and per $1,000 of personal income. In fact, on all six categories of revenue and expenditures andon both a per capita basis and per $1,000 of personal income, Minnesota ranks among the top 10 states interms of the decline (or least growth) from 2002 to 2007. This is true for no other state in the na on.

In terms of the total size of state and local government, Minnesota is a mid-size state based on the mostcurrent data available for all 50 states. Per $1,000 of personal income, Minnesota is approximately 3.5 percentbelow the na onal average on the broadest nance categories used in this report: total revenues and totalexpenditures. Even on a per capita basis, Minnesota total revenue and total expenditures are only about 2.5percent above the na onal average. Furthermore, Minnesota leads the na on in terms of the rate of declinein the size of government from 2002 to 2007.

Not surprisingly, 2002 marks Governor Pawlentys elec on, so it is the appropriate baseline year to use whenexamining the impact of the no new tax policies pursued by the Pawlenty administra on. (Actually, the lastbudget year under Governor Pawlentys predecessorGovernor Venturais FY 2003; however, since state-by-state Census Bureau data is not available for FY 2003, FY 2002 becomes the default baseline year.) It is clearthat Pawlentys no new tax policies have succeeded in shrinking the size of government in Minnesota both inan absolute sense and rela ve to other states.


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State Performance____________________


The next important ques on is whether the decline in the size of government in Minnesota rela ve to otherstates has been a bene t or a detriment to the state as a whole. Has the decline in the rela ve size of thepublic sector in Minnesota led to increased private sector investment, with improvements in job growth,personal income, and other indicators rela ve to other states? Or has the rela ve reduc on in governmentrevenues and spending lead to cuts in educa on, public safety, and infrastructure that reduces Minnesotasquality of life and that ul mately makes Minnesota a less a rac ve place to work and do business?

In an a empt to address this ques on, this report examines various indicators of Minnesotas economicperformance and quality of life rela ve to other states. The thirteen factors examined in this report are listedbelow.

Per capita personal income

Median household income

Average annual pay

Unemployment rate Employment growth since 2001

Poverty rate

Homeownership rate

Percent of popula on covered by health insurance

Pupil-teacher ra o in public schools

Per capita state and local spending for educa on

Students performing at or above basic level in math and reading (4 th and 8 th grades)

Percent of bridges that are de cient

Miles in poor or mediocre condi on per 1,000 road miles

Minnesotas rank and posi on rela ve to the na onal average on each of these 13 factors will be examinedfor every year from 2002 to the most current year for which data is available. The period from 2002 to 2007corresponds with the ascendance of the no new tax agenda, which commenced a signi cant decline inMinnesotas revenue and expenditure rankings and posi on rela ve to the U.S. average. The value and rankfor each state on each of the 13 performance measures are shown in appendix B.

In all rankings based on the performance measures, a rank of 1 will denote the state with the bestperformance and 50 will denote the state with the worst performance.

Per Capita Personal Income (see table B-1 in appendix for detail)The U.S. Bureau of Economic Analysis (BEA) de nes personal income as income received by persons fromall sources. 19 Personal income includes compensa on of employees, supplements to wages and salaries,proprietors income with inventory valua on adjustment and capital consump on adjustment (CCAdj), rental


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income of persons with CCAdj, personal income receipts on assets, and personal current transfer receipts, lesscontribu ons for government social insurance. Per capita personal income is equal to total personal incomedivided by the number of people. The per capita personal income amounts 20 in this sec on and in table B-1are converted to constant 2008 dollars using the consumer price index (CPI).

capita personal income was 8.3 percentabove the na onal average in 2002 andimproved to approximately 9.3 percent in2003 and 2004. Minnesotas per capitapersonal income declined rela ve to thena onal average over the next three years,dropping to 5.9 percent above in 2007,before rebounding to seven percent abovein 2008.

U.S. per capita personal income increasedfrom $37,656 in 2002 to $40,208 in 2008,a growth of 6.8 percent. Over the sameperiod, Minnesota per capita personalincome grew from $40,774 to $43,037,a growth of 5.5 percent. Growth inMinnesota per capita personal incomelagged 1.3 percent behind the na onalgrowth rate from 2002 to 2008.

Minnesotas rank among the 50 states on per capita personal income was 8 th in 2002, increased to 7 th in 2003and 2004, before falling to 12 th in 2005; from 2005 to 2008, Minnesotas rank changed li le. Minnesota per


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Median Household Income (see table B-2 in appendix for detail)The U.S. Census Bureau de nes household income as the sum of money income received in the calendaryear by all household members 15 years old and over. 21 Included in this de ni on of income are amountsreported separately for wage or salary income; net self-employment income; interest, dividends, or netrental or royalty income or income from estates and trusts; Social Security or Railroad Re rement income;Supplemental Security Income (SSI); public assistance or welfare payments; re rement, survivor, or disabilitypensions; and all other income. According to the U.S. BEA, the measure of income used by the Census Bureauto determine household income is generally less comprehensive than personal income from the BEA. 22

Last years report relied on median household income data from the Census Bureaus Current Popula onSurvey. The median household income data in this years report is from the Census Bureaus AmericanCommunity Survey (ACS). 23 The ACS is based on a larger sample than the Current Popula on Survey and thushas a smaller margin of error. In some instances, data from the ACS is signi cantly di erent than data from theCurrent Popula on Survey.

Per capita income amounts can be distorted by a rela vely small number of high income earners, which tendsto pull the per capita amount upward. Median income, on the other hand, is more representa ve of thetypical household, since it represents the income level which divides the popula on into two equal halves and

is less in uenced by the presence of extremely high incomes within the popula on.

As with the per capita personal income amounts in the previous sec on, the median household incomeamounts in this sec on and in table B-2 are converted to constant 2008 dollars using the consumer price index(CPI).

Minnesotas median household income was 10 th highest for four years during the period from 2002 to 2008,only dipping below tenth in 2003, 2005, and 2008. Minnesotas median household income was 14.6 percent


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above the na onal average in 2002 and dropped to 10.1 percent above by 2008.U.S. median household income grewby one percent from $51,521 in 2002to $52,029 in 2008. Meanwhile,Minnesota median householdincome declined by three percentfrom $59,053 to $57,288. Thesees mates do contain a marginof error; however, based on themargins error reported in the ACS,we can conclude with sta s calcon dence that the U.S. medianhousehold income increased from2002 to 2008, while the Minnesotamedian household income declined.

As with per capita personal income,median household income in

Minnesota is s ll high rela ve tothe rest of the na on. However,Minnesotas median householdincome has slipped rela ve to theU.S. average since 2002.

Average Annual Pay (see table B-3 in appendix for detail)Personal income and median household income both include income earned from a variety of sources,including investments. Average annual pay, on the other hand, focuses only on wages, including bonuses,

cash value of meals and lodging, and employer contribu ons to certain deferred compensa on plans. Averageannual pay was computed by adding total annualwages of employees covered by unemploymentinsurance programs by the average monthlynumber of these employees. The data used hereare taken from annual State Rankings reportsfrom CQ Press and are based on data from U.S.Bureau of Labor Sta s cs.

Average annual pay amounts in this sec on and intable B-3 are converted to constant 2007 dollars

using the consumer price index (CPI).

Minnesotas rank among the 50 states in averageannual pay did not change drama cally from2002 to 2007, hovering at about 12 th in each year.However, Minnesotas average annual pay fell from

1.9 percent above the na onal average in 2002 to 0.2 percent below the na onal average in 2007; modestgrowth in real Minnesota annual pay rela ve to the na onal average from 2002 to 2004 and from 2006 to2007 was more than o set by a large decline from 2004 to 2006.


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It is interes ng to note thatdespite Minnesotas rela ve high ranking in 2007 (13 th)average annual payin Minnesota is slightly below the na onal average. Several of the 12 states that are ahead of Minnesota inaverage pay ranking are large states (e.g., California, New York, and Illinois) which have a greater e ect on thena onal average than small states. Despite the fact that Minnesota is ahead of most states in terms of averageannual pay, it has dipped below the na onal average because it trails behind some of the largest and mostcri cal states. This illustrates how rankings can be somewhat decep ve is an indicator of a states posi onrela ve to the na on as a whole.

From 2002 to 2007, Minnesota average annual pay increased from $43,181 to $44,375. This 2.8 percentincrease was a full two percent less than the na onal growth rate of 4.9 percent. As with median householdincome, Minnesotas posi on rela ve to the rest of the na on in average annual pay has deteriorated since2002.

Unemployment Rate (see table B-4 in appendix for detail)The unemployment rate represents the number of unemployed as a percent of the labor force. Theunemployment rates used here were calculated from seasonally adjusted U.S. Bureau of Labor Sta s cs data.The annual rate was calculated by averaging the unemployment rate for all 12 months of the year except for2009, which is based on the rst 11 months. (December 2009 data was not available at the me of publica onof this report.)

Minnesota had the 14 th lowest unemployment rate in the na on in 2002 and 2003; that rank droppedmodestly over the next three years before hi ng 18 th in 2006. Minnesotas unemployment rate rank fellprecipitously in 2007, hi ng 33 rd, before rebounding to 30 th in 2008 and 21 st in 2009.

The Minnesota and na onal unemployment rates both increased by approximately the same amount from2002 to 2008. However, as a percentage of the na onal rate, Minnesotas rate deteriorated somewhatover this period. Minnesotas unemployment rate was 21.4 percent below the na onal average in 2002;


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Minnesotas annual unemployment rate deteriorated rela ve to the na onal average over the next ve yearsand then improved in the subsequent two years. By 2009, Minnesotas annual unemployment rate was 15percent below the na onal averagebe er than in 2006 but not as favorable as in 2002.

Employment Growth Since 2001 (see table B-5 in appendix for detail)A reduc on in the unemployment rate does not necessarily mean that more people are working. A fall in theunemployment rate could be due to the fact that unemployed people have stopped looking for work and havedropped out of the labor force. For this reason, it is important to supplement unemployment rate informa on

with informa on on the growth or decline in total employment. The annual change inemployment in this sec on ismeasured rela ve to a baselineyear of 2001. This di ers fromthe previous version of thisreport, which measured thechange in each year rela veto the previous year. With theexcep on of 2009, averageemployment for all 12 monthsof the year was compared toaverage employment for all12 months of 2001; averageemployment for 2009 is based onthe rst 11 months of that year.(December 2009 data were not

available at the me of publica on of this report.) Data used in these calcula ons are from the U.S. Bureau of Labor Sta s cs (seasonally adjusted).


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Based on this measure, Minnesotas rank among the 50 states declined from 26 th in 2002 to 46 th in 2007. Overthe next two years, Minnesotas rank recovered somewhat, climbing to 39 th .

Minnesotas employment growthfrom 2001 to 2002 was slightlyabove average. However,Minnesota employment growthlagged behind the na onalaverage in each of the next

ve years, before reboundingsomewhat in 2008 and 2009.However, even a er thisrebound, employment growthfrom 2001 to 2009 lagged behindthe na onal average by overthree percent.

From 2002 to 2009, total U.S.employment increased by 2.5

percent. Over the same period,employment in Minnesota fell byone percent, despite popula ongrowth of over ve percent.Only ten other states have hada higher rate of employmentloss than Minnesota over thelast seven years. In aggregate,Minnesotas track record of jobgrowth since 2002 is well belowthe U.S. average.

Poverty Rate (see table B-6 in appendix for detail)The poverty rate represents the por on of the popula on living below the poverty level based on datafrom the U.S. Census Bureau. Last years report relied on poverty rates from the Census Bureaus CurrentPopula on Survey. The poverty rate data in this years report is from the Census Bureaus AmericanCommunity Survey (ACS). 24 As noted above, the ACS is based on a larger sample than the Current Popula onSurvey and thus has a smaller margin of error. In some instances, data from the ACS is signi cantly di erentthan data from the Current Popula on Survey.

Minnesota had the 8 th lowest poverty rate in the na on in 2002, before improving to 2 nd lowest in 2003; since2003, Minnesotas rank has slipped, falling to 9 th in 2008. Minnesotas poverty rate was 31.3 percent belowthe na onal average in 2002 and improved to 38.6 percent below in 2003. From 2003 to 2006, Minnesotasposi on rela ve to the rest of the na on deteriorated modestly, falling to approximately 27 percent below theU.S. average in 2006, 2007, and 2008.

From 2002 to 2008, Minnesotas poverty rate increased by 1.1 percent from 8.5 percent to 9.6 percent; overthe same period, the U.S. poverty rate increased by 0.8 percent from 12.4 percent to 13.2 percent. Whilethe growth in Minnesotas poverty rate over this period was slightly greater than the growth in the total U.S.poverty rate, the di erence between the two was within the margin of error.


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The growth in Minnesotas poverty rate rela ve to the U.S. average since 2002 is modest. The rate of povertyin Minnesota is s ll very low rela ve to the rest of the na on.

Homeownership Rate (see table B-7 in appendix for detail)As de ned by the U.S. Census Bureau, the homeownership rate equals the number of owner-occupied housingunits divided by the total number of occupied housing units. 25 The importance of homeownership as a means

of improving the welfare of individual households and society as a whole has long been recognized. An UrbanCoali on report concluded that Homeownership provides important nancial security and also contributes tofamily independence, security and self-dignity. 26 The report further notes homeownership is associated withreduced crime rates, higher educa on levels, and increased wealth.

The Census Bureaus Current Popula on Survey (CPS) indicates a signi cant decline in Minnesotashomeownership rate rela ve to the na onal average from 2002 to 2008; based on CPS data, 27 Minnesotasrank among the 50 states has fallen from 2 nd in 2002 to 14 th in 2008. 28 Data from the CPS is cited in the annualState Rankings reports from CQ Press and was the source of homeownership data in the previous version of this report.

The current version of this report relies on data from the American Community Survey (ACS) instead of theCPS because the ACS is based on a larger sample size and thus has a smaller margin of error. 29 As it pertainsto Minnesota versus the rest of the na on, homeownership rates from the ACS are signi cantly di erent thanrates from the CPS.

Based on data from the ACS, Minnesota has had the highest rate of homeownership in the na on each yearfrom 2002 to 2008. In each year from 2002 to 2008, Minnesotas homeownership rate has been approximately12 percent to 14 percent above the na onal average.


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From 2002 to 2008, the na onal homeownership rate has increased by 0.2 percent, while the Minnesotahomeownership rate has fallen by 0.2 percent based on data from the ACS. This is a rela vely small di erenceand well within the margin of error of these es mates. Based on ACS data, there is no sta s cally signi cantevidence of a decline in Minnesotas homeownership rate rela ve to the U.S. average.

Percent of Popula on Covered by Health Insurance (see table B-8 for detail)Informa on on the percent of the popula on covered by health insurance is from the U.S. Census BureausCurrent Popula on Survey. 30 Health insurance coverage data in the previous version of this report were basedon a rolling three year average (e.g., the 2002 amount was based on the average from 2000 to 2002, the 2003amount was based on the average from 2001 to 2003, etc.). Single year data are used in this report in order tomore accurately track current health insurance coverage.

From 2002 to 2005, Minnesota ranked 1 st or 2 nd in thena on in terms of the percent of the popula on coveredby health insurance. In 2006 and 2007, Minnesotas rankfell to 4 th , before rebounding to 3 rd in 2008. In 2002, thepercentage of the popula on covered by health insurancein Minnesota was 8.6 percent above the na onal average.Over the next seven years, the health insurance coveragepercentage uctuated within a rela vely small range. By2008, Minnesotas health insurance coverage percentagewas 7.9 percent above the na onal average.

From 2002 to 2008, the percentage of Minnesotanscovered by health insurance fell by 1.3 percent, from92.6 percent to 91.3 percent. Over the same period, the


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percentage of the U.S. popula on covered by health insurance fell by about 0.7 percent, from 85.3 percent to84.6 percent.

Based on this informa on, it appears as if the percentage of popula on covered by health insurance fell0.6 percent more rapidly in Minnesota than in the na on as a whole during the period from 2002 to 2008.However, a er considera on of the margins of error of the insurance coverage es mates, these ndingsbecome more ambiguous. While there is a 50 percent chance that the decline in Minnesotas health insurancecoverage rate rela ve to the na onal average was more than 0.6 percent, there is about a 25 percent chancethat there was no decline rela ve to the na onal average.

The me frame of this analysis does not include the 2009 line-item veto of funding for General AssistanceMedical Care e ec ve for FY 2011, which will cut health insurance coverage for an es mated 35,000 low-income Minnesotans. 31

Pupil-Teacher Ra os in Public Schools (see table B-9 in appendix for detail)Research has shown a link between low pupil-teacher ra os (i.e., the number of pupils per teacher) inelementary schools and be er performance on standardized tests (although the bene t of low ra os to

secondary school students has been disputed). The public school elementary and secondary school pupil-teacher ra o informa on cited here is from CQ Press annual State Rankings reports and is based on datafrom Na onal Educa on Associa on. (CQ Press did not report data for 2007.) Data corresponds to the Fall of the school year (e.g., 2002 data is for the school year that began in the Fall of 2002).

Minnesota ranked 25 th among the 50 states in pupil-teacher ra os in 2002 and then fell to 36 th the followingyear. Minnesotas rank fell as low as 40 th in 2006 before recovering to 37 th in 2008. From 2002 to 2006,Minnesotas pupil-teacher ra o went from 3.2 percent below the na onal average to 7.1 percent above thena onal average, before falling to two percent above the na onal average in 2008.


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From 2002 to 2007, Minnesotas pupil-teacher ra o increased from 15.2 to 15.6 (2.6 percent growth), whilena onally the pupil-teacher ra o declined from 15.7 to 15.3 (2.5 percent decline).

Over this period, the low-point in Minnesotaspupil-teacher ra o and the high point in Minnesotasrank on this indicator was 2002, which correspondsto Minnesotas school scal year 2003. This yearwas also a peak year for Minnesota public schoolsin total real per pupil funding. Since then, realper pupil public school revenue in Minnesota hasdeclined and Minnesotas pupil-teacher ra o hasincreased.

Educa on spending per capita (see table B-10 inappendix for detail)Per capita spending for elementary, secondary,higher, and other educa on was calculated using

data from the U.S. Census Bureau and includes bothstate and local government expenditures. 32 Totalstate and local educa on expenditure data for 2003is not available. The amounts in this sec on and intable B-10 are converted to constant 2007 dollarsusing the implicit price de ator for state and local government purchases, which is the appropriate measure of in a on for state and local governments. 33


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Minnesotas rank on per capita educa on spending has fallen from 12 th in 2002 to 19 th in 2005, then bouncedback to 15 th by 2007. Minnesotas per capita educa on spending was 8.7 percent above the na onal averagein 2002, but by 2007 had fallen to just 3.9 percent above the na onal average.

From 2002 to 2007, na onwide per capitastate and local government educa on

spending fell from $2,603 to $2,578, a dropof one percent. Over the same period, percapita state and local government educa onexpenditures in Minnesota fell from $2,828 to$2,679, a decline of 5.3 percent.

The measure of educa on expenditures usedhere includes higher and other educa onspending. If we focus only on publicelementary and secondary current spendingper pupil, Minnesota is 1.2 percent below

the na onal average based on data for themost current year available (FY 2007). 34 Withthe decline in state and local governmentrevenue in Minnesota rela ve to the restof the na on since 2002, it should not besurprising that Minnesotas spending oneduca on has also declined rela ve to thena onal average.


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Math and Reading Skill Levels (see table B-11 in appendix for detail)A primary func on of a public educa on system is to impart basic math and reading skills to students. Asimple way of measuring the success of a school system is to measure the extent to which students haveachieved basic pro ciency in these skills. As part of the Na onal Assessment of Educa onal Progress (NAEP),the U.S. Department of Educa on conducts regular assessments of math and reading skills at the 4 th and8th grade levels. To assess the rela ve performance of public schools in each state, this report averages thepercentage of public school students that achieve the basic skill level or higher on the 4 th and 8 th grade readingand math assessments. 35

The previous version of this report contained an error in the calcula on of this measure for 2002 and 2003.This error is corrected in the current version.

In terms of the average percentage of students achievingbasic skill levels or higher in 4 th and 8 th grade math andreading, Minnesota ranked 3 rd in the na on in 2003,but had dropped to 8 th place by 2007. The averagepercentage of students achieving the basic skill levelor higher in Minnesota fell from 12.7 percent abovethe na onal average in 2002 to 9.2 percent above the

na onal average in 2007.

From 2002 to 2007, the average percentage of studentsachieving at or above basic across 4 th and 8 th gradereading and math improved by 3.9 percent na onally(from 69.6 percent to 73.5 percent), but by only 1.8percent in Minnesota (from 78.4 percent to 80.3percent).


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In 2002, Minnesota had the 8 th lowest number of road miles in poor or mediocre condi on per 1,000 roadmiles. In the next year, Minnesotas rank dropped to 13 th . Over the next three years, Minnesotas rankchanged li le, un l dropping to 27 th in 2007. In 2002, the number of miles in poor or mediocre condi onper 1,000 road miles was 61.3 percent below the na onal average. By 2007, Minnesota was only 9.3 percentbelow the na onal average.

From 2002 to 2007, the numberof U.S. road miles in poor ormediocre condi on per 1,000miles fell from 180 to 176, adecline of 2.4 percent; over thesame period, the number inMinnesota more than doubledfrom 70 to 160.

In 2007, the number of roadmiles in poor or mediocrecondi on per 1,000 miles inMinnesota is s ll modestly

below the U.S. average.However, rela ve to thena onal average, the quality of Minnesota road infrastructurebased on this measure hasdeteriorated drama cally since2002. 38


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Summary of Performance TrendsRela ve to other states, Minnesotas economic performance and the quality of its transporta on infrastructureremains above average, if not strong. On ve of the 13 performance indicators examined, Minnesota ranksamong the top ten states in the na on in 2007. However, Minnesotas trend over me on most of theindicators gives cause for concern.

Comparing Minnesota performance rela ve to the na onal average across the thirteen factors used in thisreport is problema c, because the degree of variability about the average varies signi cantly from factor tofactor. For example, the degree of variability about the average is much greater for road miles in poor ormediocre condi on per 1,000 road miles than for the poverty rate, so a simple comparison of the extent towhich Minnesota deviates from the na onal average can be misleading.

In order to provide a more meaningful comparison across factors, the previous graph shows the change inMinnesotas performance rela ve to other states from 2002 to 2007 in terms of the number of standard


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devia ons 39 that Minnesota is above or below the 50 state mean. For example, Minnesotas median householdincome was 0.95 standard devia ons above the 50 state mean in 2002 and 0.62 standard devia ons above themean in 2008; thus, Minnesotas performance rela ve to the 50 state mean fell by 0.33 standard devia onsfrom 2002 to 2008. The graph was constructed so that improvement in Minnesotas rela ve performancewould appear as a posi ve amount and deteriora on would appear as a nega ve amount.

On nine of the 13 measures, Minnesotas performance rela ve to other states deteriorated modestly tosigni cantly since 2002. On two of the remaining four factors, Minnesota showed insigni cant improvementon one measure and insigni cant deteriora on on another. On the nal two factors, further analysis revealedthat the declinethough apparently substan alwas not sta s cally signi cant a er accoun ng for themargin of error in the es mates that were used.

Minnesotas performance rela ve to other states in the unemployment rate and employment growthdeteriorated signi cantly since 2002. On both measures, Minnesotas posi on rela ve to the 50 state meandeclined by over one-half standard devia on from 2002 to 2009. This standard devia on analysis is consistentwith the analysis presented in preceding sec ons. Minnesotas rank and posi on rela ve to the na onalaverage deteriorated for the unemployment rate and employment growth.

On each of the three income and pay measures (per capita personal income, median household income, andaverage annual pay), Minnesotas performance rela ve to the 50 state mean deteriorated by 0.15 to 0.33standard devia ons since 2002not as large as the decline in the two employment factors but s ll notable.

In addi on, on all three educa on indicatorspupil-teacher ra o, students at or above basic level inmath and reading, and per capita state and local spending on educa onMinnesota experienced a modestdeteriora on rela ve to other states ranging from 0.18 to 0.44 standard devia ons.

The two transporta on measures reveal mixed results. There has been no signi cant change in Minnesotasposi on rela ve to the na onal average in the percentage of bridges that are de cient. However, Minnesotasposi on in terms of road miles in poor or mediocre condi on fell sharply rela ve to the rest of the na on;

Minnesotas faltering performance in this area was not due to a decline in the number of poor and mediocreroads na onally, but to a substan al increase in the number of such roads in Minnesota. Minnesotaperformance on this measure declined by 0.82 standard devia onsthe largest decline in the standarddevia on analysis.

The standard devia on analysis indicates modest improvement in Minnesotas homeownership rate andmodest deteriora on in its poverty rate, although neither of these are sta s cally signi cant a er taking intoaccount the margins of error in the survey data that was used.

In terms of the percentage of the popula on with health insurance, Minnesota has declined by 0.31 standarddevia ons from 2002 to 2008. While this is larger than many of the other declines in the standard devia onanalysis, it needs to be evaluated in the context of the margin or error for the insurance coverage data. Thisdata is drawn from the Census Bureaus Current Popula on Survey, which is based on a smaller sample thanthe American Community Survey and thus typically has a larger margin of error. While there is a 50 percentchance that Minnesotas decline on this factor was more than 0.31 standard devia ons, there is about a 25percent chance that there was no decline at all in Minnesota rela ve to the 50 state mean.

In general, the standard devia on analysis reveals a disturbing trend: Minnesota is losing ground rela ve to therest of the na on on most of the 13 factors, while showing signi cant improvement in none.


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Like Minnesotas posi on rela ve to the na onal average, Minnesotas ranking on the 13 performancemeasures generally deteriorated over me. The graph below shows Minnesotas ranking on each factor in2002 versus the most current year for which data is available. A ranking of 1 denotes the best performanceamong the y states, while 50 denotes the worst performance.

On 12 of the 13 measures, Minnesotas rank has declined since 2002, although in some instances the dropin ranking was slight. For the remaining factor, Minnesotas rank remained the same. In no instance didMinnesotas rank improve.

The above analysis compares Minnesotas rank on each factor in 2002 to the rank based on data for the mostcurrent year available. An alterna ve way of ranking states would be on the change in each factor over thisperiod. For example, it is possible to rank each state in terms of the percent change in median householdincome from 2002 to 2008. The state with the highest percentage growth over this period would be rankednumber 1, while the state with the greatest percentage decline or least percentage increase would be ranked

50th

.

The graph on the following page shows Minnesotas rank among the 50 states based on the change in eachfactor from 2002 to the most current year available. Once again, a rank of 1 denotes the most improvementamong the 50 states, while 50 denotes the greatest decline.

In terms of the change since 2002, Minnesota ranks among the bo om ten states in the na on on four of the 13 factors and among the bo om 20 on 11. Minnesota breaks into the top 25 states on only one factor.(Minnesota ranks 23 rd in terms of improvement in the de cient bridge percentage since 2002.)


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Admi edly, it is more di cult for a state with already strong performance in a par cular area to make drama cimprovement in that area. For example, Minnesota already has a low de cient bridge percentage and highhealth insurance coverage and thus the poten al for improvement is more limited in Minnesota than in otherpoorer performing states.

However, in other areassuch as average annual pay and pupil-teacher ra osMinnesotas performancein 2002 was not par culary strong rela ve to the rest of the na on and thus there was certainly room forimprovement. Even in these areas, Minnesotas performance change ranking since 2002 is discouraging.

Minnesotas performance rela ve to other states was never so strong that there was no room forimprovement. The fact the Minnesota failed to break into the top 20 states on even one of the 13 factorsshould give cause for concern, if not embarrassment.

Minnesota is by no means an economic basket case; we s ll compare favorably to other states on most of the13 indicators. However, Minnesotas performance rela ve to other states on most factors has deterioratedsince 2002. This is true regardless of whether we examine Minnesotas rank or its posi on rela ve to thena onal average.


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Conclusion___________________________ Since 2002, the size of government in Minnesota declined signi cantly rela ve to other states. This period alsocorresponded with deteriora on in Minnesotas performance rela ve to the rest of the na on on many keyindicators. These trends are consistent with the expecta ons of pro-investment advocates and run counterto claims from an -tax groups, who argue that lower taxes and lower government spending would improveMinnesotas compe veness rela ve to other states.

However, correla on does not equal causa on. Simply because deteriora on in Minnesotas economicperformance rela ve to other states corresponded with a rela ve decline in public investment does notnecessarily mean that the decline in investment caused the decline in performance.

Proponents of less government could argue that factors other than the decline in public investment haveled to the decline in Minnesotas rela ve performance. For example, Minnesotas deteriora ng economicperformance rela ve to other states has been a ributed to the fact that the na onal defense and energysectors of the economy have done well in recent years. These sectors are not par cularly large components of Minnesotas economy in comparison to other states and thus other states have bene ted more from the boomin these sectors than Minnesota.


While Minnesota is not a big player in sectors that have done well, the states economy is fairly heavilyinto two sectors that have done poorly in recent years: forestry and wood product manufacturing andair transporta on. The forestry and wood product industry has been hurt by the slump in new homeconstruc on, while the air transporta on industry has been hurt by a combina on of factors, including


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rising energy prices. Just as Minnesotas economic performance rela ve to other states is hurt by its lightdependence on industries that have done well, it is also hurt by its rela vely heavy dependence on industriesthat have done poorly.

In an a empt to quan fy the contribu on of trends in na onal defense, energy produc on, forestry and woodproduct manufacturing, and air transporta on industries to Minnesotas lackluster economic performancefrom 2002 to 2007, a recent Minnesota 2020 analysis compared Minnesota and U.S. total GDP growth to therate of GDP growth excluding these four sectors. 40

From 2002 to 2007, Minnesota total real GDP growth lagged 4.1 percent behind the na onal average.A er factoring out na onal defense, energy extrac on and manufacturing, forestry and wood productmanufacturing, and air transporta on, Minnesotas adjusted GDP growth was s ll 2.3 percent below thena onal average. Even a er factoring out the impact of these categories, over half of the gap betweenMinnesota and the rest of the na on in terms of GDP growth remains. In other words, trends in defensespending, energy, and the other categories described above explain somebut not all or even mostof Minnesotas lackluster GDP growth.

Proponents of less government might also argue that Minnesotas rela ve decline in public investment

did not cause a decline in rela ve economic performance, but rather that the rela ve decline in economicperformance caused a rela ve decline in public revenue. This is a varia on of the old conundrum: what camerst, the chicken or the egg?

It is well understood that an economic slump can lead to a reduc on in government revenue. However,this simply begs a di erent ques on: why was Minnesotas economic performance slumping rela ve to thena onal average in the rst place?

Advocates of less government tend to focus on taxes and other own-source revenue, since these representdollars that are being diverted from the states private economy into its public sector. During the period from1995 to 2007and par cularly during the period from 2002 to 2007the level of taxes and other own-source

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on our way to average: ranking minnesota's economic performance

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