Saturday, February 28, 2015

The Politics of the Minnesota Budget Surplus (Or why it is bad news for Minnesota)

Perhaps the worst thing that could have happened to Governor Dayton’s political agenda was for the
    The first point to consider is that there is not really a $1.9 billion dollar surplus.  It is much lower than that.  The last fiscal forecast from November 2014 which projected about a billion dollar surplus did not exist.  It did not because factoring current spending obligation in, inflation largely erased it.  By that, assuming a normal rate of inflation the $1 billion surplus would have been eaten up by current spending commitments. In their more candidate moments, both DFLers such as Ron Latz and Republican Kurt Daudt admitted that, but nonetheless everyone at the Capitol chose to ignore this.    The only way there is a surplus of $1 billion for the coming biennium is if there is agreement to cut $1 billion from the current spending.
    Let’s then cut $1 billion from the current $1.9 billion projection and we are left with $900 million.  This is sort of a surplus.  Why sort of?  Look at the fiscal forecast.  The surplus is largely a product of forces beyond Minnesota’s control.  A growing US economy, decreasing fuel prices, and a rising dollar.  These are macro and unexpected structural forces that can rapidly change.  Fuel prices rapidly went down and they could rapidly accelerate again, triggering economic events that affect the fourth reason for the revised budget forecast, higher individual income and sales taxes.  Minnesota’s economy is doing better, perhaps for some reasons attributed to state economic policy, including increasing income taxes on the wealthy a couple of years ago, but also for reasons having nothing to do with state policy.
    The remaining $900 million is a surplus so long as current economic conditions continue and so long as current tax rates do not change.  If one cuts taxes then this will pressure the surplus projection downward, and if the economy does not continue to grow along the way projected then too it will go down. Moreover, while the fiscal forecast projections into the biennium beyond the next one too offer a structural surplus, it too is based on assumptions about taxes and economic conditions that may or may not continue.
    But the fiscal forecast also misses something important–depreciation on state assets and deferred maintenance.  What is not calculated here are deterioration of state assets such as roads, bridges, water and sewer systems, and parks.  They all need maintenance.  Lost of value to them due to wear, tear, and deterioration have not been considered.  Yes they should be considered part of a capital budget and not an operating budget, but the state operating budget does not do a good job of factoring in necessary or delayed maintenance.  Factor them in and there is really no surplus.
    In many ways, Dayton is correct.  We still need a long term solution to generate the revenues to repair state infrastructure.  Proposals to use the state’s short term $1.9 surplus are both inadequate and short term.  That amount of money just does not cut it to address the current infrastructure needs of the state, let alone also allow for tax cuts, more K-12 spending, and all the other ideas on the wish list by many.
    So here is where the bad news for Dayton kicks in. He wants a structural solution to infrastructure along with other new commitments on spending.  All are worthy.  Yet news of a surplus has all but ended any hope of tax increases and a structural solution.  At least this is what Speaker Daudt has said.  It was already near impossible for the governor and the DFL to get tax increase before, now it will be impossible.  At the same time there will be pressures to cut taxes, which now doubt there will be  bi-partisan support for.  What we have here is a recipe for budget foolery and gimmickry that reminds me of the last time we had a huge surplus–1999.  Back then Ventura was governor, the DFL controlled the Senate and the GOP the House.  The economy was humming along and the surplus was near $5 billion.  Taxes were massively cut and money given back to all.  Then the economy tanked and it has taken until now–16 years–to recover.
    Now is not the time to talk of permanent tax cuts or rebates.  Nor is it the time to think of a  brief budget surplus as a long term solution to delayed maintenance and infrastructure costs.    Nor are one time cash infusions going to change state graduation rates or educational disparities or the rising costs of higher education.  Yet this “short-term-less-than-meets-the-eye” surplus will obscure  all of this, thereby making it more difficult for Dayton to achieve either his short or long term objectives.
recent fiscal forecast to now project a nearly $1.9 billion surplus for the coming biennium.  While money in the bank is not normally thought of as bad news, in this case it is, and it portends a possibility that his political agenda and timely agreement on a state budget could be derailed.

1 comment:

  1. We need to raise the gas tax at least 10 cents a gallon to take care of our roads and bridges. Penny wise and pound foolish is not the answer. I paid only $2.19 per gallon today for gas, so a rise in gas tax will not be a burden for Minnesotans. Bridges falling down will be noticed. Infrastructure on highways should be paid by the highway users. Logically that is through the gas tax!