The missing number that means Minnesota’s surplus isn’t so big, after all

By: - February 27, 2020 1:08 am

Myron Frans, left, is commissioner of Minnesota Management and Budget, which estimates government revenue and spending obligations. Rep. Tony Albright, R-Prior Lake, center, wants to keep the state’s budget process as is. Rep. Jennifer Schultz, DFL-Duluth, wants the budget to include estimates of inflationary increases.

The first two weeks of Minnesota’s 2020 legislative session have been framed by the state’s projected $1.3 billion surplus, setting off debates at the Capitol over how to spend the extra funds and sparking calls for lower taxes in light of the expected windfall.

But the state’s surplus is something of a mirage. Under a law passed 18 years ago, the state economic and budget forecast — which tells the Legislature and executive branch how much money they have — can’t include the cost of inflation in spending calculations. 

“I’m kind of tired of hearing we have this huge surplus when we don’t account for inflation, and I think it will change a lot of our discussions here at the Capitol if we were more responsible,” said DFL Rep. Jennifer Schultz, author of a bill to require that the forecast account for inflation in spending, during a recent committee hearing. 

Publishing that figure could create a significant shift in public perceptions of Minnesota’s financial situation. Inflation alone will increase the cost of the state’s existing programs by about $1.1 billion during the two year budget cycle, according to forecasts, bringing the projected surplus closer to $200 million — a significantly smaller sum than the extra $1.3 billion anticipated by policymakers and the public.

The larger $1.3 billion figure inspires widespread calls for tax cuts and new spending. Meanwhile, state bean counters patiently remind policymakers that the price of everything — and especially programs the government spends the most money on, like health care and education — is forever rising.   

The state law “changed — pretty dramatically — that ability to account for government services,” said Minnesota Management and Budget Commissioner Myron Frans. The goal of a forecast is to tell legislators how much money they’ll need to fund existing programs, and, he said, “It only makes sense that inflation is part of that.”

Although the 2002 measure had support from both parties, the present-day debate in the Legislature over this accounting change is highly partisan, reflecting the stakes: If the state budget outlook stops showing large surpluses, the public’s demand for tax cuts might be tamped down, while Minnesotans would also get a different picture of the cost of government.

Today, some Democrats want to change state law to include inflation estimates in the forecast, while Republicans worry the addition would encourage excessive spending.

The 2002 law was the product of an agreement between DFL Senate Majority Leader Roger Moe and Republican House Speaker Tim Pawlenty — both running for governor — to overcome a deficit and produce a balanced budget. Their plan, in contrast to Gov. Jesse Ventura’s proposed spending cuts and tax increase, was a bit of accounting smoke and mirrors — a way to “cut” spending without making the hard choices that usually accompany those reductions. Legislators overrode two vetoes from Ventura to enact the Moe and Pawlenty plan. 

That February’s forecast was the first that didn’t account for inflation in spending projections since 1991. The change reduced the forecast’s projected expenditures for the 2004-05 biennium by $1.1 billion.

The November 2000 budget and economic forecast included inflation estimates for spending by government program. Under a 2002 law, the forecast can’t account for inflation in spending projections.

The inflation information was presented in varying formats between 1991 and 2002; first as a calculation for some expenditures, then for almost all expenditures, and finally as a sum for total spending, before state law prohibited it.

Today, an estimate of inflation appears in a single table in the 90-page forecast. Frans, appointed by Gov. Mark Dayton in 2015, said the department includes that mention to satisfy bond rating agencies. The bond rating agencies are the examiners that determine the soundness of Minnesota’s accounting practices and fiscal health; their grade can have a huge impact on state government’s cost of borrowing. 

While assessing the accuracy of the states’ budget projections, the rating agencies check whether governments consider the cost of inflation, Frans said. Management and Budget wants those rating agencies to know they’re aware of the cost, even if state law bars them from including it in their spending estimates, he said.

Frans said he thinks the forecast should include the cost of inflation. As inflationary costs add up over time, it becomes more challenging to adjust for them in budgets — and to make the idea palatable to lawmakers. Adding the cost to spending projections for a few programs each year would be one way to reintroduce the calculation, he said.

“Then eventually, we get back to a point where not only is the inflation adjustment included in the budget projections  but included in our budget that’s passed by the Legislature so those programs are protected, and you can actually deliver the services you’ve been told to deliver by the Legislature,” he said. “That’s what we’d like to do.”

Every year since 2003, the Minnesota Council of Economic Advisors has recommended the forecast include inflation. The council, which reviews the state budget and economic projections, called the exclusion of those costs “fundamentally misleading” in the November 2019 forecast.

“It is inconsistent with both sound business practices and (Congressional Budget Office) methods, and potentially encourages legislators and the public to regard the state’s financial position more optimistically than the facts warrant,” the council’s statement in the forecast says. “This distortion will increase if inflation accelerates from current levels.”

A bill introduced by Schultz, DFL-Duluth, would require the spending side of the forecast to account for inflation. In a recent House committee hearing, she said the change would increase transparency and give legislators and the public a more accurate picture of the state’s financial situation and size of the surplus.

One table in the November 2019 budget and economic forecast mentions the cost of inflation.

Several Republicans raised concerns that the change would increase government spending. Rep. Tony Albright, R-Prior Lake, said the growth of state expenditures already outpaces taxpayers’ incomes and that including the cost of inflation would create higher base spending levels.

“We will cede that inflationary budget adjustment to the administration. It will circumvent the process in the Legislature by determining what is best for the citizens,” he said. “It would lead us to pay more for what we’re already getting, rather than getting more for what we’re paying already.”

In the past, publishing inflation costs without creating a sense of entitlement to that money was challenging, Bill Marx, the House’s chief fiscal analyst, told the committee.

Previous forecasts explained that the projections didn’t guarantee funding levels in an effort to dispel that idea. The November 2000 forecast states that projected spending increases due to inflation don’t “preclude the governor or the Legislature from proposing budget changes that will have a significantly different result.”

Requiring the forecast to account for inflation could make it harder for policymakers to balance the budget, Marx told the committee — a task that has already proved difficult for legislators in recent years.

Throughout the hearing, Schultz said several times that the information would be a tool for legislators, not a mandate to include inflationary costs in the budget.

“It is fiscally responsible to have a good forecast that we can build a budget from,” she said. “You can’t hide from inflation.”

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Rilyn Eischens
Rilyn Eischens

Rilyn Eischens is a former data reporter for the Minnesota Reformer. Rilyn was born and raised in Minnesota and has worked in newsrooms in the Twin Cities, Iowa, Texas and most recently Virginia, where she covered education for The Staunton News Leader. She's an alumna of the Dow Jones News Fund data journalism program and the Minnesota Daily. When Rilyn isn't in the newsroom, she likes to read, add to her plant collection and try new recipes.