John S. Adams: Planning a budget? Remember to maintain

The Minnesota Department of Revenue has forecast a revenue downturn of more than $700 million through June 2008, which prompted Lori Sturdevant to track down five former revenue commissioners for their thoughts on causes and consequences and for suggestions of what it would take to "balance" the budget ("If economy goes south, is Minnesota prepared?" Dec. 2). I have no argument with their comments, but each missed an opportunity to highlight the perennial fiction that the state budget is balanced when current revenues equal current spending. Baloney.

Any business or household that behaved this way would be bankrupt in short order. As a state, we are failing to maintain our asset base, are failing to invest sufficiently to ensure a competitive future and are drawing down assets to maintain cash flow for consumption. We're not only coasting; we're sliding downhill compared with the competition.

A business evaluates its performance at the end of its fiscal year using two financial statements: a profit-and-loss statement and a balance sheet. If it's been a good year (and if statements are honest), we will learn that annual operations have strengthened the balance sheet. Assets will have increased, while current and long-term liabilities will have diminished as a percentage of assets.

What about the state's balance sheet? Turns out, we don't have one. No explicit one, anyway. Yet we know deep in our northern prairie populist bones that the state's principal assets include:

•Human capital: Public health, education, training, values, knowledge and expertise of the Baby Boom generation, and so on.

•The built environment: Transportation, communications facilities, housing, factories, and facilities for work and recreation.

•Natural environments: Clean rivers and streams, fresh air, soil and ground water, forests and wildlife.

And we hope that as a new legislative season rolls around, our political leaders will craft capital and operating budgets aimed at building up state assets while reducing current and long-term liabilities. But like Charlie Brown trying to kick the football, we are usually disappointed.

A company that owns its plant and equipment includes a charge for depreciation on its annual profit-and-loss statement. Not doing so overstates profits and misstates the value of assets on its balance sheet. But when it comes to state budgeting, we routinely leave crucial depreciation charges off the revenue and expenditure statement, even though those costs are real and enormously significant, affecting everything from kids' readiness for school to highways and bridges to shoreline management protecting our lakes to universities that can compete in the 21st-century world. Either we acknowledge that these costs are real or else we resort to fictitious accounting, drawing down state assets to sustain current cash flows and turning a blind eye to the damage wrought to our state's balance sheet.

At present, as we quibble about a 5-cent gas tax hike, we're drawing down assets across the board, all the while asserting that we're engaged in healthy economic activity as we hunt for a parking space at the Mall of America. But one way or another, newcomers and old-timers alike must pay for what they receive, even if much of the price is paid in the form of the slow destruction of what we have prized in Minnesota over the years.

In my opinion, our beloved state is in deeper economic trouble than our elected leaders either know or are willing to admit.