With a recession coming sooner or later, maybe the Legislature should exercise some prudence.
Everyone has grand ideas about what to do this legislative session with money they claim is a “surplus.”
But we have a better idea — albeit maybe less flashy.
We think legislators need to be prudent — and save.
Yawn, you think?
Stay with us.
Minnesota’s budget reserve today is the strongest it’s ever been, thanks to smart, strategic policies passed in 2014:
First, Minnesota sets a target for the size of the budget reserve so that it would most likely allow the state to meet its obligations in an average recession.
Second, up to a third of any surplus in the November economic forecast automatically goes into the budget reserve until that target is reached.
These policies to strengthen the budget reserve were made in response to the consequences Minnesotans felt after economic recessions without a strong state budget reserve.
Thanks to those evidence-based policies, Minnesota is better prepared and has been recognized as a leader among states for fiscal probity.
Much like a family saves to weather an unexpected job loss or long illness, Minnesota builds its budget reserve — a rainy day fund — so that it can avoid drastic and harmful cuts to critical services when a recession arrives.
When the economy slows, the impacts reverberate – like sand in the gears of the economy. Businesses slow or stop production of goods and services, and workers and families lose wages and possibly their health care coverage.
Then folks cut back on purchases, which further destabilizes local businesses. And public resources — in the form of taxes paid to state and local governments — plummet.
Moreover, the state’s revenues shrink at the exact time more Minnesotans need a hand to keep food on their tables and a roof over their heads.
Everyday Minnesotans bore the brunt of budget cuts when Minnesota didn’t have a strong budget reserve last time.
Here are just a few examples from the early 2000s that made it harder for Minnesotans to weather the tough economic times:
- Thousands of Minnesota families lost their health care through MinnesotaCare, while others paid higher copays for office visits.
- Families were dropped from Minnesota’s child care assistance program while others paid much higher copays and thousands of families ended up on waiting lists in counties across the state.
- Seniors and people living with disabilities faced cuts to services that had allowed them to live independently in their homes and communities.
- And training for workers and basic education were cut, while community college tuition soared.
When state revenues plunged again during the Great Recession, many states, including Minnesota, tapped into their budget reserves to respond to the economic downturn.
These rainy day funds helped states avoid $20 billion in service cuts and tax increases, but even so, states still cut funding to higher education, K-12 education, services for the elderly, people living with disabilities and more.
Which brings us back to our legislative priority.
When policymakers passed the budget in 2019, they scheduled a nearly $500 million withdrawal from the budget reserve for July 1, 2021 to help balance the FY 2022-23 budget. This scheduled withdrawal would deplete about 20 percent of the reserve’s balance.
That is an especially risky move given that the most recent economic update gave a 25 percent chance of a recession starting at the end of this year.
It’s critical that policymakers take prudent steps to prepare for the next economic downturn by restoring the full strength of our budget reserve this year.
Because at the same time that many folks are at the Capitol advocating for a brighter future, we still need to prepare for the rainy days we know will come.
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