Keep building state's reserve fund

  • Article by: EDITORIAL BOARD , Star Tribune
  • Updated: July 16, 2014 - 6:10 PM

Economic news is good, but state revenues remain volatile.

Compared with the bitter numbers that were the standard issue of Minnesota Management and Budget for most of the past decade, the latest batch is easy to swallow. Last week, MMB reported that the state budget finished fiscal year 2014 on June 30 $168 million ahead of projections.

That healthy number is the result of several others that Minnesotans can also savor. Through May, this state has gained 191,800 jobs since the Great Recession’s employment low point was reached in February 2010. That’s nearly 33,000 more than were lost during the recession.

At 4.6 percent, the state’s May unemployment rate ranked a respectable 10th in the nation, not as good as Minnesota’s neighbors to the south or west, but better than Wisconsin’s 5.7 percent, which was 23rd among the states. Minneapolis-St. Paul had the lowest unemployment rate among the nation’s 47 largest cities in May, at 4.0 percent.

Those economic numbers are sweet indeed — though some of them come with an artificial ingredient or two. (More about that in a moment.) But our favorite new number from MMB was served up a week earlier. It was the increase in the state’s budgeted reserve fund to $811 million from $653 million, where it had been stuck during good times for at least 13 years. (During bad times, it was drained to $0.)

That number represents overdue recognition by state policymakers that this state’s revenues are exceedingly volatile. They rise with deceptive ease when the economy starts producing numbers like the ones reported last week, and they crash swiftly when conditions change.

That characteristic has been evident for decades. But for nearly as long, governors and legislators chose not to do much about it. They neither adjusted the tax code to produce a steadier revenue flow, nor enlarged the reserve fund to shave off the highs and better cope with the lows. That’s been despite numerous calls from bond houses and state finance experts for a reserve large enough to get state government through a revenue downturn of average scale and duration without raising taxes or cutting spending, which tend to make a recession deeper and longer.

The latest such call, from the 2009 Budget Trends Study Commission, said Minnesota’s state budget reserve should be $2.1 billion. MMB’s own recommendation earlier this year was $1.9 billion.

The new $811 million reserve total misses those targets by a wide margin. But the legislation that produced this summer’s boost assures that if the economy continues to generate surpluses in the state treasury, there will be more where that came from. It creates a mechanism to increase the reserve fund automatically when the economy generates midterm state budget surpluses. That makes this reserve increase a breakthrough in state fiscal management.

The new law can’t stop politicians hellbent on spending or cutting taxes when surpluses appear in the middle of a budgetary biennium. But it makes a prior claim on those surpluses that will need undoing before they can proceed. That impediment should remind them that state revenues are prone to unsustainable highs and unexpected lows and that too much spending or too many tax cuts at the top of a cycle make the misery at the bottom worse.

They should also be aware that where Minnesota sits on its revenue roller-coaster often isn’t clear until months after the journey has been run. That’s what state officials said about the $168 million in-the-black on the fiscal 2014 bottom line, reported last week. That gain came in good part from income tax payments for 2013, which in turn came from unexpectedly large realized capital gains. That’s not a recurring source of income.

Farm income has been a robust contributor to state receipts in the last several years, state economist Laura Kalambokidis said. But this year’s weather-shortened growing season and comparatively low crop prices may foretell a dip in a sector of the state economy that, although no longer dominant, is still vital.

While the state’s total employment numbers are strong, unemployment and underemployment are still problems for thousands of Minnesotans. As of May, 37,000 Minnesotans — 27 percent of all of the jobless workers in the state — had been unemployed for more than six months, said Steve Hine of the state Labor Market Information Office. By comparison, in January 2006, 14,000 jobless Minnesotans had been without work that long.

Those numbers suggest that Minnesota’s rebound from the Great Recession, while strong, is still incomplete. And with a surplus built of one-time gains and possible trouble ahead in the ag sector, Minnesotans should be wary of campaign promises about tax cuts and/or more spending. We hope to hear from candidates who aim to keep building the state’s reserves.

  • UP AND DOWN

    Here’s how the state’s estimated receipts from major taxes at the close of fiscal 2014 compare with the projections on which the Legislature based its budget decisions:

    • Individual income taxes: up $181 million, or 1.9 percent.

     •General sales taxes: up $35 million, or 0.7 percent.

    • Corporate franchise tax: down $55 million, or 4.1 percent.

    • Other revenues: up $7 million, or 0.2 percent

    Source: MMB Revenue and Economic Update, July 2014.

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