Finally, this year’s legislative session has ended (more or less). The Republicans have been toasting each other with the passage of their budget and tax bills. Unfortunately, however, those bills will have far-reaching negative consequences for Minnesota, because the totality of what was passed is fiscally not sustainable.
Everyone knows that the budget forecast this session projected a surplus of $1.651 billion for the 2018-19 biennial budget. Budgeting is always difficult. But when a surplus exists, you cannot budget as if the state were in deficit, and that is exactly what the Republican majorities did. Clearly, they wanted to spend money (and lots of it), but couldn’t do it honestly.
The health reinsurance subsidy bill used $327 million from the budget reserve (the reserve is to be used for significant economic downturns, not for spending needs). What will allow funding for this need if Congress does not provide additional federal funding for that purpose? Do we keep on using the reserve until it is gone?
Metro Transit is funded only on a one-time basis for $70 million, and there is a budget shift of $143 million in the human services budget not only for the next biennium of 2020-21, but carried over through the 2022-23 biennium. The Health Care Access Fund is drained, so that fund will no longer be available.
Budgeting mechanisms like one-time expenditures and accounting shifts are used during budgets of deficit, but it is assumed that such expenditures will have to be covered by spending in the later biennial budgets.
Finally, the tax bill costs $660 million for this budget cycle but will cost up to $797 million in the next.
Compounding these budget decisions is a questionable economic forecast. Too often legislators of both parties do not look at the full context of what is happening beyond the borders of Minnesota. This year such a look would have found that 31 states are in deficit (only Minnesota and Michigan in the Midwest have positive fund balances). More important, Minnesota’s budget forecast of the large surplus on which the Republican budget is built is partly based on the economic forecast promulgated by IHS (IHS Markit), Minnesota’s macroeconomic consultant. IHS predicts moderate growth of 2.7 percent in gross domestic product for calendar year 2018. But the forecast is considered to be an optimistic one and is based on many economic positives coming out of Washington, such as tax reform and a large infrastructure bill. Given the last several months in Washington, does anyone expect there will be such legislation passed? If not, our budget forecast is unlikely to work.
And, in Minnesota, the Legislature paid no attention to the April revenue numbers. In a month that is often quite positive because of tax returns, income tax receipts were down by $161 million. The May receipts were determined after the legislative adjournment; they were a little bit better, since income tax receipts were down by only $117 million.
And what are the final budget numbers (which, of course, were known to the Legislature)? The budget balances for the present budget cycle with $48.6 million left on the bottom line. But for the next budget cycle (2020-21), there is a minuscule budgetary balance of only $132.2 million left on the bottom line. By contrast, two years ago the budgetary balance for the upcoming biennium was $729 million.
Where does this leave Minnesota? With ongoing expenditures spent only as one-time money and accounting shifts, an uncertain economy, possible continued decreases in projected revenue, an unsustainable tax bill and a small budgetary balance in the future, it is quite possible, if not probable, that in two years we will face a significant deficit. The Republican legislators might tell all of us how great they did, but the real proof will be in two years when we learn what exactly they have done to the state’s future.
Richard Cohen, DFL-St. Paul, is a member of the Minnesota Senate. He is a former Senate Finance chairman.