Minnesota Shutdown May Cost State Economy $23 Million Weekly

The economy in Minnesota, whose debt was downgraded today by Fitch Ratings, may lose about $23 million a week in spending power from public and private workers idled by the shutdown of its government, according to Tom Stinson, the state’s economist.

The 23,000 state workers laid off in the wake of a partisan budget dispute may get only about half their average $1,000 weekly salary in unemployment benefits, Stinson said in a telephone interview from Minneapolis. That, plus the additional loss from employees of nonprofits and private construction workers, may mean a total $18 million taken from the economy, he said.

Stinson also estimated a secondary loss of as much as $5 million in weekly spending power by private workers, especially in the leisure industry, as furloughed employees cut back on spending if the closure drags on for a month or longer, he said. Although the loss is a fraction of the $2.4 billion in weekly state wages, the impact will become more noticeable the longer the closure lasts, he said.

“This is not going to produce a recession in Minnesota or anything like that, but it’s going to be a drag on the state’s economic growth,” said Stinson, a professor in the department of applied economics at the University of Minnesota.

Essential Services

The state’s government shut down at 12:01 a.m. July 1 after Democrat Mark Dayton, a first-term governor, and lawmakers failed to reach a budget agreement. Dayton has said he doesn’t want cuts alone to address a $5 billion deficit, and Republicans oppose his plan for an income-tax increase.

The state will lose revenue including $52 million per month because compliance officers at the Department of Revenue are laid off and not completing audits, and $1.25 million a day in lost lottery sales, said John Pollard, a spokesman with the Minnesota Management and Budget office.

Tax collections continue, as does funding for critical services including police and prisons, Pollard said in a telephone interview from St. Paul.

Fitch today downgraded about $5.7 billion in Minnesota general-obligation bonds one step to AA+ from AAA, the highest level. Moody’s Investors Service rates the state Aa1, second-highest, and Standard & Poor’s gives it a top AAA grade.

The Debt Abides

Ten-year general-obligation bonds from Minnesota issuers yield 2.96 percent on average, or about 0.17 percentage point more than the average top-rated debt of that maturity, according to Bloomberg Fair Value indexes. The yield difference is about 0.05 percentage point less than the six-month average, a sign the shutdown, in its sixth day today, isn’t hurting the state’s debt prices.

Fitch reassessed the obligations because of the state’s reliance on one-time funding sources during the recession, “the difficulties in reaching consensus on a plan to address the resulting large budget gap for the biennium that began on July 1, the likelihood that the final budget agreement will again include non-recurring solutions, and an increasingly contentious budgeting environment in the state in recent years,” according to a release.

Dayton’s talks with Republican legislative leaders ended yesterday without a deal. Dayton made two new proposals to help bridge what he said is a $1.4 billion gap between the two sides: a temporary 2 percent income-tax surcharge on annual income of more than $1 million, or increasing the 34.6 cent tax on a pack of cigarettes by $1, according to a letter released by his office.

Another Path

A state budget commission convened earlier this week by former senator and Democratic U.S. Vice President Walter Mondale and former Republican Governor Arne Carlson released “third way” recommendations today calling for cutting spending by $3.6 billion from projections and increasing revenue by $1.4 billion. The panel recommended a temporary 4 percent income-tax increase during the biennium.

Dayton noted that most of the committee’s recommendations parallel his own proposals and said the income tax should be increased only for the wealthiest 2 percent of Minnesotans, not all taxpayers, according to a statement issued by his office.

“Unfortunately, Republican legislators remain adamantly opposed to making our state tax system fairer,” the governor said in the statement.

Republicans called Dayton’s proposal “a giant step back” and said the commission recommendations are not a solution to the state’s budget problem.

“It is a retread of failed tax-and-spend policies,” House Speaker Kurt Zellers said in a statement. “Republicans will not raise taxes to pay for unsustainable government growth.”

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