It’s almost as if the 2015 legislative session didn’t happen. Despite the Legislature’s spending decisions, the bottom line in Thursday’s forecast for the state’s 2016-17 biennium nearly matches the one announced in February: The state again expects a budget balance on June 30, 2017, of nearly $1.9 billion. That’s $1 billion more than was expected when the Legislature recessed in May.
We’re not complaining, mind you. State government’s fiscal health is a big plus for Minnesota, which relies on state government to set the table for future prosperity. Borrowing state Finance Commissioner Myron Frans’ analogy: After listing badly at the end of the last decade, Minnesota has not only righted its fiscal ship, but also is taking on the ballast necessary to keep it upright through future storms.
The ballast comes courtesy of the 2014 Legislature. It provided that a third of forecast surpluses at this stage in the two-year budget cycle shall flow automatically to the state’s reserve fund until it reaches an optimal size. Because of that law, on Thursday $594 million was added to the reserve.
We’re rooting for it to stay there. If it does, chances improve that the next time the U.S. economy stumbles, state government’s work won’t be imperiled and its bond rating won’t fall. Minnesota is still taking a multimillion-dollar debt-service hit each year because its bond rating was downgraded in 2011. Chances of regaining a top rating will be enhanced if the reserve fund grows. At its new $1.6 billion level, the reserve is at a historic high but still about $400 million smaller than the goal established for the current biennial budget. This year’s opportunity to get closer to the recommended reserve is rare, and ought not be squandered.
The automatic set-aside for the reserve is not all that cuts the spending power of a $1.9 billion surplus down in size. Another is the likelihood that half or more of the $1.2 billion remainder consists of one-time gains, in part a byproduct of capital gains realizations in 2014 that only now are appearing in state forecasts.
That possibility augurs caution among both those who want more spending and those pushing for permanent tax relief. They would do well to seek one-time measures that advance their goals without burdening future state budgets. One-time investments in infrastructure would fill the bill, especially when infrastructure is defined broadly to include roads, transit, public buildings and broadband capacity. A one-time tax rebate akin to the “Jesse checks” of 2000, targeted at low- and middle-income families, is also worth considering.
While the state budget news Thursday was good, the larger context was more mixed. A labor shortage is beginning to squeeze Minnesota’s growth, and the U.S. economic outlook is weaker than it was nine months ago. Those, too, are reasons for legislators to resist drawing down the surplus with promises future legislators would struggle to keep.