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Executive Summary

Concerns over growth in government have taken a prominent place in Minnesota's political discourse in recent years. Some fear that the rate of growth in Minnesota government is unsustainable, while others are concerned that Minnesota will not be competitive in the global economy unless the state continues to commit to critical public investments.

To better understand trends in government growth in Minnesota and to get a sense of what these trends mean, this report looks at two questions:

• How much has government in Minnesota grown?
• Has a higher level of public investment in Minnesota resulted in a higher quality of life and a stronger economy?

The report concludes with a consideration of how the answers to these questions can help guide future state and local government budget decisions.

Growth in Minnesota Government
In budget debates during the 2002 legislative session, Governor Ventura argued that government in Minnesota had doubled over the past decade. At first glance, this seems like a troubling statistic. However, this assertion is based on growth in the state's general fund from 1990-91 to 2002-03, which is actually a twelve-year period, not a decade. More significantly, the "doubling in a decade" claim is based on an incomplete measure of government revenue (the state's general fund). In fact, total state and local government revenues did not double over the last ten years.

Rather than limiting the analysis to the state's general fund, which includes only about two-thirds of state government revenues, this report focuses on total state and local government expenditures. In addition, this report also accounts for inflation and population growth. Using this approach, this report finds that:

• From 1987 to 1997, over two-thirds of the growth in Minnesota state and local government spending was necessary to keep up with inflation and population growth.
• As a percentage of Minnesota personal income, total state and local government expenditures in Minnesota declined slightly from 22.2 percent in 1987 to 21.9 percent in 1997.
• Government spending in Minnesota has grown less rapidly than the national average. From 1987 to 1997, state and local government spending for all fifty states and the District of Columbia in real dollars per capita grew by an average of 2.4 percent annually, significantly
  higher than Minnesota's annual average of 1.8 percent.

• in simple nominal dollars (i.e., unadjusted for inflation or population growth),
• adjusted for inflation and population growth,
• as a percentage of total statewide personal income, and
• relative to the national average.

Combined, these measures provide a comprehensive picture of changes in the size of Minnesota government over time.

As population grows, public services must be provided to more people. In addition, because inflation erodes the purchasing power of the dollar over time, governments must increase spending in order to provide the same level of services. Examining expenditures in real (inflation-adjusted) dollars per capita allows us to measure the extent to which growth in government is due to inflation and population growth as opposed to other factors, such as the creation of new government programs.

For nearly a decade, lawmakers and business groups have argued in favor of measuring the size of government in relation to statewide personal income. Measuring expenditures as a percentage of statewide personal income helps to gauge growth in government in relation to growth in the state's economy and growth in taxpayers' ability to pay.

In addition, this report measures growth in Minnesota government relative to the national average. This comparison allows us to place Minnesota government growth in perspective by providing a national context.

Examining State and Local Government
As mentioned above, this report includes both state and local government. An examination of growth in state government spending that does not take into account growth in local government spending—or vice versa—can yield misleading conclusions. A comprehensive analysis of government growth needs to take into account both state and local government expenditures. There are two reasons why this provides a more meaningful picture.

First, spending responsibilities can shift from one level of government to another. For example, in the 2001 legislative session, policymakers agreed that the state would take over a significant portion of general education costs that had been funded through local property taxes. An analysis that includes only the state's general fund would conclude that this was growth in spending, when in fact it was merely a shift in funding responsibility from local property taxes to the state's general fund. Measuring the combined total of state and local government expenditures avoids this sort of error.

Second, states vary considerably in terms of which services are funded at the state level and which are funded at the local level. In some states, state government spending may appear high in relation to other states only because the state government is financing public services that are financed at the local level in other states. An examination of the combined expenditures of both state and local governments is necessary in order to make meaningful comparisons among states.

The primary source of expenditure data used in this report is the U.S. Census Bureau's Census of Governments, which contains data from all state and local governments. The disadvantage of the Census of Governments is that data for years after 1997 is not yet available.

In order to determine whether more recent data would yield different results, this report also looks at state and local revenue data up to 2002. The analysis of revenue data from 1990 to 2002 reveals a trend similar to the analysis of expenditure data: state and local government revenues in Minnesota grew less rapidly than the national average and declined as a share of Minnesota personal income.

Impact of Government Spending on Minnesota's Quality of Life
Even though government in Minnesota has grown less rapidly than the national average, total 1997 state and local spending per capita in Minnesota was 10.3 percent above the national average. To what extent has a higher level of public investment in Minnesota resulted in greater economic prosperity and a higher quality of life?

To answer this question, this report examines two policy areas: K-12 education and transportation. Within each policy area, this report examines Minnesota spending relative to the national average. In addition, this report attempts to determine whether a higher (or lower) level of public spending is accompanied by superior (or inferior) public outcomes.

In terms of current K-12 expenditures per pupil, Minnesota ranks 14 th highest in the nation and is 6.6 percent above the national average based on the most current Census of Governments. There are strong indications that Minnesota has received ample return for greater investment in K-12 education. For example, Minnesota is at the top of the nation in terms of basic skills proficiency and other measurements of academic achievement.

In the area of transportation, the situation is mixed, with Minnesota spending above the per capita national average on highways but below average for transit. Minnesota's highway spending per capita was 42.2 percent above the national average in 1997, although Minnesota's high level of per capita spending on highways is to some extent driven by climate. A more meaningful comparison is between Minnesota and a similar northern state. In 1997, Minnesota spent 9.6 percent more per capita on highways than Wisconsin, which in part reflects the fact that Minnesota has more miles of road per capita than Wisconsin. In
addition, roads and bridges in Minnesota are generally in better shape than in Wisconsin and traffic deaths per vehicle mile of travel in Minnesota are significantly lower. Once again, there is evidence that Minnesota is receiving a return on its higher level of government expenditures.

In terms of transit funding, Minnesota's spending per capita in 1997 was 64 percent below the U.S. average. Minnesota™s low rate of public investment in transit has translated into low mass transit carrying capacity. Among the 18 states with metropolitan areas of more than two million people, Minnesota ranks last in terms of mass transit carrying capacity.

In general, Minnesota has a strong economy and a high quality of life as measured in terms of employment, wages, hourly earnings, business closings, child poverty, and a variety of other indicators. Various studies have ranked Minnesota at or near the top of the nation in terms of economic performance, development capacity, and quality of life. An examination of the 2001 Development Report Card for the States indicates that public infrastructure and services have contributed to Minnesota's high rankings.

Planning for the Future
This report addresses growth of government in Minnesota and compares this growth to the national average. This is a relatively easy task. No attempt is made to predict future spending growth or determine which public investments are necessary to ensure Minnesota's future prosperity and quality of life and which are not.

This analysis indicates that state and local government investments in public services and infrastructure have contributed positively to Minnesota's economic health and quality of life. While policymakers need to be attentive to trends in government growth, they should also be mindful of the extent to which Minnesota's current prosperity is the result of wise public investments made in the past. Prudent use of public dollars in the present can reduce the need for government spending in the future. Conversely, the failure to make necessary public investments now will only compound the severity of problems that the state will encounter in the future. Minnesota's experience provides a strong indication that public spending—even spending in excess of the national average —can produce positive public benefits.

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Section on K-12 Education

Total public elementary and secondary current expenditures per pupil in Minnesota grew less rapidly than the national average from 1987 to 1997.¹⁵ In constant 1997 dollars, elementary and secondary public school current spending per pupil in Minnesota grew from $5,649 in 1987 to $6,272 in 1997—a growth of 11.0 percent. The growth nationally was 15.5 percent.

While the rate of growth in public school current spending per pupil in Minnesota is below the national average, it nonetheless exceeds the rate of inflation. What factors explain this growth?

Perhaps the most significant factor contributing to growth in school expenditures is special education. In recent decades, federal and state governments have decided that dramatic changes in public policy regarding special education were necessary to address the needs of disabled students. As a result of these changes in policy, special education spending has increased. In recent years, Minnesota special education expenditures have grown at twice the rate of total K-12 expenditures. Furthermore, on average Minnesota public schools are spending two times more per special education student than per regular education student. According to a 1997 report, special education costs accounted for 21 percent of total school district spending.¹⁶

Special education costs are growing for reasons beyond the control of school districts. In recent years, four trends have accelerated growth in the cost of special education services:

• Many disabled children of school age who were formerly cared for in institutional settings have been deinstitutionalized and returned to public schools due to federal requirements that disabled children be placed in the least restrictive educational environment. From FY 1991 to 1997, the number of special education students enrolled in Minnesota public schools grew by 28.8 percent.¹⁷
• Advances in medical technology have increased the number of medically fragile students who can be cared for in a public school setting.
• Court, state, and federal mandates continue to increase the level of service expected from school districts. For example, Supreme Court decisions have confirmed that school districts are responsible for all medical services for medically fragile students up to (but not including) medical services provided by a doctor.
• An increase in the incidence of high-cost disabilities—such as autism and deafness—and an increase in the number of students with multiple disabilities have resulted in further increases in the cost of providing special education services.

To a large extent, the provision of special educational services is not a discretionary item for school districts. Courts have consistently upheld the right of disabled students to receive services that are required under state and federal law. In short, school districts are not at liberty to refuse to deliver special education services.

These observations pertaining to special education should not be regarded as a criticism of special education spending. Indeed, the changes in special education policy were necessary in order to ensure that all students have equal educational opportunities. The reference to this information regarding special education costs is simply intended to underscore the impact of special education policy on total K-12 spending.

Other factors that contribute to growth in K-12 public education costs include:

• Increases in the number of limited English proficiency (LEP) students. Due largely to immigration, the number of LEP students has grown much more rapidly than total enrollment.
• Increased health care costs. All levels of government are affected by the rising cost of providing health care to employees. School districts are especially hard hit by health care costs because personnel expenses are an especially large percentage of school district budgets.
• Technology. In order to equip students for life in an information-based economy, school districts must provide students with access to computers and other forms of technology. This requires investments in computers and infrastructure that were not part of school budgets in the past.
• Performance standards. In recent years, school districts have been asked to ensure that students are able to meet new performance standards. These new standards contribute to increased costs for testing and additional instruction for students who have not met the standards.

While K-12 spending per student in Minnesota has grown less rapidly than in other states, Minnesota current spending per student in 1997 was still 6.6 percent above the national average.¹⁸ Does Minnesota have anything to show for this higher rate of investment in public education? The answer would seem to be "yes." While Minnesota ranks 14th in the nation in terms of current elementary and secondary spending per pupil, Minnesota ranks first in the nation in math proficiency, sixth in science proficiency, and sixth in reading proficiency.¹⁹ In addition, Minnesota ranks third in the percentage of adults over age 25 with a high school diploma.²⁰ In short, Minnesota appears to be getting a "bang for the buck" from its elementary and secondary public school investment.²¹

However, it remains to be seen whether Minnesota can maintain these superior academic outcomes if per pupil spending continues to decline relative to the national average. [Emphasis Added]

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Notes
¹⁵ As used by the Census of Governments, elementary and secondary education refers to regular, special, and vocational programs, summer school, food services, student activities, pre-kindergarten, transportation services, school health programs, and plant operation and maintenance. For shorthand purposes, elementary and secondary education is referred to herein as "K-12." In general, this report uses total expenditures from the Census of Governments. However, the Census of Governments does not report total K-12 education expenditures on a per pupil basis. Because it is important to show K-12 expenditures on a per pupil basis, the analysis of K-12 education in this report is based on current
spending per pupil. Current spending "comprises current operation expenditures, payments made by the state government on behalf of school systems, and transfers made by school systems into their own retirement funds. This classification is used only in Census Bureau education reports in an effort
to provide statistics for users who wish to make interstate comparisons."
¹⁶ Office of the Legislative Auditor, Special Education: A Program Evaluation Report, 1997.
¹⁷ 2000-2001 State of Minnesota Biennial Budget, p. A-111.
¹⁸ Based on information from the 1997 Census of Governments. Other more recent sources indicate that K-12 public school current expenditures in Minnesota are even closer to the national average. For example, the most recent Digest of Education Statistics from the U.S. Department of Education indicates that elementary and secondary public school current expenditures in Minnesota were only 2.1 percent above the national average in FY 1999. However, please note that "current expenditures" as used in the Digest of Education Statistics is not identical to "current spending" as used in the Census of Governments.
¹⁹ These results are based on an assessment of eighth grade students. The math and science results are based on information reported in the 2002 Congressional Quarterly State Fact Finder. The 2002 CQ State Fact Finder does not report reading scores. The reading score results cited here were compiled from State Profiles from the website of the U.S. Department of Education National Center for Education Statistics. (The most current reading scores for eighth grade students are from 1998.) For each category of scores, data is not available for some states. The math score ranking does not include 11 states, the science score ranking does not include 12 states, and the reading score ranking does not include 14 states.
²⁰ Congressional Quarterly, 2002 CQ State Fact Finder.
²¹ This is not a scientific analysis of educational spending and educational outcomes, since it does not control for other factors—such as family characteristics and income—that could contribute to educational outcomes. However, there is a growing body of evidence that indicates that higher educational expenditures contributes to higher educational outcomes, particularly for low-income and minority students. This is the case even after controlling for the effects of family characteristics. For more information, see "Does Money Matter for Minority and Disadvantaged Students? Assessing the New Empirical Evidence," in Development in School Finances, 1997 from the National Center for Education Statistics.

Resources

September 2002  - Trends in Minnesota Government Spending, This report takes a comprehensive look at state and local government spending in Minnesota over a 10-year period.

• November 2002 - Report Summary, Minnesota Budget Bites