Policy makers should use caution when dealing with surplus

ECM Editorial Board

The governor, legislators and Minnesota citizens all received good news in December. Minnesota Management and Budget, formerly known as the State Finance Department, in its most recent economic forecast projected an improvement in the state’s economic position of more than a billion dollars for the current two-year budget cycle.

When the Legislature comes back into session late in February this uptick in available revenue will generate a lot of attention from policy makers across the entire political spectrum. This will include those eager to increase spending, those eager to reduce taxes, and many wanting to do both. Inasmuch as 2014 is an election year for the governor and all members of the House of Representatives, we can expect considerable political dimensions to the public policy deliberations surrounding budget matters.

We urge policy makers to be cautious in approaching their fiscal responsibilities during the 2014 legislative session. In fact, we believe most, if not all, of this surplus should be added to the currently inadequate budget reserve.

Past budget experiences should have taught everyone valuable lessons about state fiscal matters. Surpluses can evaporate quickly with economic downturns, and today’s actions can exacerbate tomorrow’s fiscal challenges. Remember the “Jesse Checks” employed to distribute the surplus of the late 1990’s? By 2002 the newly elected Gov. Tim Pawlenty was confronted by a record $4 billion deficit.

The “forecast balance” of $1.086 billion projected this past December was immediately reduced by $261 million by operation of current law, almost all of which was to pay back state borrowings from school districts. This leaves a “budgetary balance” of $825 million for consideration during the upcoming legislative session.

It is important to note that the $825 million is not money on hand, but rather a balance projected to be on hand on June 30, 2015, 19 months from the time of the projection.

While $825 million is a substantial sum, Minnesota’s two-year general fund operating budget is $39 billion. The projected $825 million budgetary balance amounts to a variance of slightly over 2 percent. This relatively small variance could easily evaporate over the next 17 months.

We would hope that Gov. Mark Dayton and legislators read the statement of Minnesota’s Council of Economic Advisors included within the official Budget and Economic Forecast released in December. The Council observed that the “… budget reserve remains well below the level bond rating agencies expect from AAA-rated credits.” The Council further noted that “Moody’s ratings guidelines indicate that Aaa-rated states should have statutory reserves of at least 10 percent of current revenue.” They note that Minnesota’s current reserves amount to 5.2 percent.

We know that legislators will face significant pressures to increase spending and reduce taxes with this remaining $825 million budget surplus. We urge, however, that they heed the cautionary advice of the Minnesota Council of Economic Advisors. We would hope that policy makers take a longer term perspective and restore better fiscal discipline in Minnesota’s financial affairs by avoiding spending increases and revenue reductions during the 2014 legislative session.

 

This editorial is a product of the ECM  Editorial Board.

The Caledonia Argus is a part of ECM Publishers Inc.

 

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