Use expected surplus to better protect Minnesota

  • Article by: EDITORIAL BOARD , Star Tribune
  • Updated: December 7, 2013 - 5:03 PM

More protection from economic storms belongs on 2014 agenda.

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State Budget Director Margaret Kelly and MMB Commissioner Jim Schowalter smiled as State Economist Dr. Laura Kalambokidis talked about the budget surplus. On Thursday, Dec. 5, 2013, Minnesota budget officials release their new budget and an economic forecast as the state continues to rebound from the recession.

Photo: Glen Stubbe, Star Tribune

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A Minnesota-rousing cheer is in order. Propelled by a rebounding Minnesota economy, the state budget has surged deep into surplus territory. Officials announced on Thursday that $1.09 billion more than originally expected is now foreseen on the biennial bottom line come June 30, 2015.

Not since 2006 has a mid-cycle forecast looked this good. Remember 2006 — the year before the housing market tumbled, and two years before the Great Recession’s full force hit?

We hope state lawmakers do. They were busy congratulating themselves Thursday for their parts in producing the state’s newfound fiscal health. DFL Gov. Mark Dayton was magnanimous enough to acknowledge that Republican legislators’ spending restraint in 2011-2012 had something to do with the positive bottom line.

Dayton took the lead in suggesting good uses for the $825 million that remains on that forecast bottom line after the last of the state’s Great Recession obligations to schools is subtracted from the books. First on his list, and deservedly so, is the repeal of three ill-advised sales taxes on business services, for equipment repairs, third-party warehouse services and telecommunications equipment. To his credit, he’s also interested in proposing a $205 million tax cut for low- and middle-income families, if the surplus forecast holds up when revised in late February.

But Minnesota Management and Budget Commissioner Jim Schowalter allowed that he remembers 2006, and how quickly that December’s $1.04 billion surplus evaporated in the months that ensued. Schowalter counseled against committing the entire $825 million to recurring tax cuts or spending.

“I would proceed with caution,” he said. “We are very early in the biennium. We know that there are a lot of uncertainties out there. And we want to make sure that any changes we do make are sustainable. That’s going to require the consistent fiscal management that has gotten us to this place.”

“Consistent fiscal management” is Capitol code for maintaining a substantial reserve fund and the capacity to delay school payments, an option that functions as an unofficial fiscal safety valve for state government.

After an upturn started in 2012, lawmakers did well to promptly refill the state’s official $1.01 billion reserves (the combined total of the rainy day fund and a cash flow account) and restore school payments and school property tax bookkeeping to their normal schedules.

But the return of good times gives lawmakers a chance to make one more needed adjustment for the sake of “consistent fiscal management.” They should enlarge the reserve fund. It has been static since the late 1990s, while the state budget has grown 65 percent larger.

Expert analysts through the years have long urged that Minnesota set aside a larger reserve. A plumper cushion is in order to cope with a state revenue stream made unusually volatile by a progressive state income tax and a sales tax that exempts food, clothing and prescription drugs. In 2009, the Minnesota Budget Trends Study Commission recommended a $2.1 billion reserve.

In 2009, the state budget was awash in red ink and in no position to heed that advice. But the advice remains sound, and the opportunity to heed it has come.

A larger reserve would also lessen the need in a future downturn to delay state payments to schools, which in turn compels many districts to incur short-term borrowing costs in order to operate. “One of the best ways to not go back to school payment shifts in some future bad time is to have bigger reserves,” Schowalter said.

Dayton joked Thursday that his budget commissioner’s middle name is “Reserve.” But the governor did not dismiss Schowalter’s message, and Senate DFL leaders were quick to echo it. A bigger reserve “will be a priority of the Senate” in the coming legislative session, Sen. Katie Sieben said.

Senators have political incentive to think ahead. They are completing the first year of four-year terms and won’t be on the ballot until 2016. Dayton and House members face re-election challenges next year, and they might be expected to take a shorter-term view.

But on Thursday, House Speaker Paul Thissen professed a welcome interest in serving the state’s longer-term needs.

“What we were forced to do (when) we were backed into this corner is we made short-term decisions. … Now we can actually do the job we really should be doing, which is (to ask), what do we want to look like five or 10 years from now? What can we do today to make sure we can get there?”

One important thing the 2014 Legislature can do is buy education, public safety, nursing homes and the rest of state services more protection from economic storms, by enlarging the reserve.

  • Inflation factor

    Since 2002, Minnesota budget forecasters have been forbidden by law from forecasting inflationary growth in state spending, while still obliged to forecast inflation’s impact on tax receipts. That approach tends to make incumbent politicians look good by overstating future surpluses. The projected 2016-17 surplus under that law is $2.20 billion. Put inflation on both sides of the ledger, and it shrinks to $1.02 billion.

    Minnesota Management and Budget

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