The Minnesota Budget Surplus that Never Existed

Minnesota’s fiscal forecast released on February 28, 2019 indicated that it dropped from

approximately $1.5 billion in November 2018 to barely $1 billion now.  The result is that it has changed the politics of the 2019 legislative session.  The reality is that the news should not have changed anything, the surplus never really existed yet everyone at the Capitol has entertained this fiction for political purposes.

Minnesota’s biannual budget in part is premised on two fiscal forecasts for the state–November and February.  The state economist does her best job in projecting the future of the state economy and based on that, predicting tax revenues that will accrue to the State of Minnesota.  These predictions are really best-educated guesses, replete with many variables.  As the state economist repeatedly emphasizes, the state economy is more heavily dependent on national and international variables than many think, especially given how globalized the Minnesota economy is.  Trade policy, immigration, tariffs, worker shortages, consumer confidence, and a host of other factors impact estimates.  Additionally, ascertaining how these and other unforeseen factors in the future might play out all make the fiscal forecast and revenue (tax) estimates difficult.

One should treat the forecasts as having margins or errors built into them of several percent, or perhaps hundreds of millions or perhaps a couple of billions of dollars.  Yet legislators and the governor’s office treat them as real perfect numbers, which they should not.  They budget to the penny, it seems, based on these forecasts, which is hardly prudent because if the forecast changes even slightly, then so do revenue projections and, therefore, the state budget is off.  The problem is complicated even more if the state makes structural decisions or obligations.  That is, making longer term spending decisions as opposed to one time choices.  Structural decisions are permanent tax cuts or ongoing spending choices.

Last November when then forecast projected at $1.5 billion the State economist warned also that there were signs of a slowing economy.  In fact, her projections beyond this biannual  warned of potential looming problems.  But there was another problem too.  Back in 2002 when Roger Moe and Tim Pawlenty were running for governor and the state had a multi-billion dollar deficit, they and the legislature sold out the state and changed state law to codify a legal cooking of the books that persists to this day.  When making fiscal forecasts, inflation is counted  for the purposes of revenue but not for state obligations.

This rose-colored glasses gimmick inflates the state’s positive fiscal picture while glossing over the negative.  If back in November inflation were considered for both revenue and obligations, the $1.5 billion surplus would have dropped to $400 million, given an estimate of $1.1 billion in inflationary costs the state was facing simply if it did nothing more than enact the same budget as before.  A $400 million surplus in a nearly $50 billion budget is less than a 1% margin of error.  For those in business, a contingency of less than 1% in a budget is unwise–standard practices range closer to perhaps 5%.
The governor’s office and the legislators know or should know all this but act in denial.  Politically it makes sense to assume a more positive forecast so as to justify spending or tax cuts.  It is in the collective short-term interest of everyone to indulge the belief that there was a surplus this session when it fact it never really existed.  Thus, the news on February 28, should not have changed anything really.