Minnesota’s budget forecast has become the inkblot test of state government

Myron Frans, the commissioner of the state Office of Management and Budget
MinnPost photo by Peter Callaghan
Myron Frans, the commissioner of the state Office of Management and Budget, kicked off a press briefing by recalling a previous release of good economic numbers, when he wrote a reminder on the top of his notes: “Smile.”

Same numbers. Different spin.

Welcome to forecast day at the Minnesota State Capitol.

For Republicans in the Minnesota Legislature, the announcement that the state had a $1.5 billion projected surplus was good news. It means tax increases aren’t justified, even if the number isn’t so big that it would support increased spending (except maybe for roads and bridges).

For DFLers, the announcement that the state had a $1.5 billion surplus wasn’t so good, at least if you factor in inflation that could carve it down to ONLY $382 million. That might mean that tax increases aren’t completely off the table — and that a gas tax hike, and not money from the surplus, should be used to fill a backlog of needed transportation projects.

Twice a year, the Minnesota Office of Management and Budget produces an official forecast based on national and state economic models, actual revenue collections and the current state budget. It tells policy makers how much, or how little, they have to spend.

But if the February forecast is the one used to write the state budget, the November forecast is the one used to write the talking points for the upcoming session of the Legislature, a process that started Thursday.

Something to celebrate — or a caution sign?

The basic numbers are these: The current budget period, which ends in July 2019, will include spending of $45.55 billion and an ending balance of $720 million. At the end of the two-year budget period, ending in July of 2021, that balance is projected to be $1.54  billion (if current spending patterns continue). In addition, the state’s statutory rainy day accounts are projected to hold another $2.43 billion.

Both increased tax collections and reduced demand for state services — both attributable to a good economy — contributed to the surplus that grew by more than $1 billion since the end of the 2018 legislative session.

Outgoing Speaker of the House Kurt Daudt
MinnPost photo by Walker Orenstein
Outgoing Speaker of the House Kurt Daudt: “What a great position I, and we, have put the state of Minnesota into.”
But because of the way budget projections are required to be presented, most estimates of the impact of inflation on current spending are not allowed to be included. If they were, the price tag for current spending programs over the next two-year spending period would grow by $1.16 billion.

It’s complicated because it’s complicated, which means it leaves room for the same data to be interpreted differently, often depending on the letters after the name of the politician.

“What a great position I, and we, have put the state of Minnesota into,” said Kurt Daudt, the Republican from Crown who is facing a change in title in one month, from House Speaker to House Minority Leader.

Minnesotans worked hard to lift the economy, but Republican budgets and Republican tax cuts are due a lot of the credit, Daudt said. “As a result of these surpluses, I think we can stop talking about increasing taxes right now.” Instead, he said, further tax cuts might be in order.

In the same room 90 minutes later, however, soon-to-be House Speaker Melissa Hortman, portrayed what the GOP had celebrated as a reason for caution. “It’s not a forecast that allows us to go into session to talk about a lot of new spending and tax cuts,” the Brooklyn Park DFLer said. “We also know … that we are closer to our next recession than we are far from the last one, and we have to be cautious.”

Hortman also seemed intent on tamping down spending demands from the DFL base.

Incoming House Ways and Means Committee Chair Lyndon Carlson
MinnPost photo by Peter Callaghan
Incoming House Ways and Means Committee Chair Lyndon Carlson speaking about the latest revenue forecast while incoming House Speaker Melissa Hortman, incoming House Majority Leader Ryan Winkler and Sen. Kari Dziedzic listen.
Myron Frans, the commissioner of the state Office of Management and Budget, began the day by releasing the numbers. Later, he kicked off a press briefing by recalling a previous release of good economic numbers, when he wrote a reminder on the top of his notes: “Smile.”

“I’m not forgetting today,” he said. “I’m smiling today because this really is good budget news. But I’m going to urge some caution for the future. I want to be clear that our continued budget stability is great news for the people of Minnesota.”

Frans pointed out that when his boss, Gov. Mark Dayton, took office in 2011, there was a $6.2 billion deficit that was made harder to address because of what were termed budget gimmicks used by his predecessor to get through the Great Recession. He thinks Dayton should get credit for managing that turnaround.

“Clearly, Minnesota’s economy has been recovering,” Frans said. “Credit goes to business people and the people of Minnesota. But clearly it was important we take advantage of that opportunity to make sure the state’s budget was consistent with the economy.”

Senate Majority Leader Paul Gazelka
MinnPost photo by Walker Orenstein
Senate Majority Leader Paul Gazelka: “It certainly is a sign that we should not be considering a gas tax. This sort of a surplus says we can live within the resources that we have.”
Laura Kalambokidis, the state economist, said the national economy is expected to show moderate growth this biennium and the following biennium before beginning to slow in late 2019. Beyond that, an increasing number of retirements among baby boomers in the workforce will also contribute to a slow down. But the forecasters foresee no negative growth — a recession, in other words — at least through 2023.

The state’s unemployment rate of 2.8 percent is a full percentage point below the national average and is the fifth best among all states. It is also the lowest it has been in 18 years. There are more job vacancies than job seekers, and what is termed the labor participation rate — the percentage of Minnesotans working or actively seeking work — is above the national average and the highest of the 50 states. The state also has the highest credit rating from both of the national bond-rating agencies and could (though Frans isn’t recommending it) borrow another $3 billion and still fit under statutory and constitutional limits on borrowing.

What about Walz?

Gov-elect Tim Walz took the podium after Frans’ budgeting team and was upbeat about the forecast and his first budget, though he didn’t offer much detail, beyond saying he wants Minnesota to become an “education state” and plans to respond to concerns about health care costs and child care needs.

Walz also was critical of outright GOP rejection of any gas tax hikes, saying surpluses won’t be adequate to cover long-term transportation needs. “That’s a short-term approach to a situation we should be envisioning what Minnesota’s transportation infrastructure looks like in 2040, not in 2020,” he said.

Hortman noted that Walz was clear during the campaign that he wanted to increase the gas tax in order to spend more on roads, bridges and transit — and he won. “He had a conversation with Minnesotans about that topic, and he believes it’s a mandate of his election,” she said.

Gov.-elect Tim Walz, right, with Lt. Gov.-elect Peggy Flanagan
MinnPost photo by Walker Orenstein
Gov.-elect Tim Walz, right, with Lt. Gov.-elect Peggy Flanagan, was critical of outright GOP rejection of any gas tax hikes, saying surpluses won’t be adequate to cover long-term transportation needs.
There is, however, the political challenge of walking into a legislative session during a time of near-record surpluses and near-record rainy day savings — and respond to all that good news by asking for a tax increase.

Making it even more of a challenge: Senate Majority Leader Paul Gazelka, R-Nisswa, can block any such move if he can hold his single-vote majority together in that chamber. On Thursday, Gazelka said of the forecast: “It certainly is a sign that we should not be considering a gas tax. This sort of a surplus says we can live within the resources that we have.”

Hortman said the politics of the situation could be affected by how the numbers are portrayed. “It partly depends on what you put in your headlines,” she told the members of the media gathered for the press conference.“That is, whether it is described as a $1.5 billion surplus or a $1.5 billion budget balance that doesn’t take inflation into account.” 

“Inflation is a fact of life and we have to be prepared to deal with it,” she said.

Ending the day of press conference was Dayton himself, still struggling with the effects of recent hospitalizations but in good spirits, which were helped by the forecast — and, perhaps, a last opportunity to brag.

“The state is in tremendous fiscal shape,” Dayton said. “I realize that this success is a great disappointment to a few ideologues who were certain that our administration’s policies would cause the state’s ruination. They were wrong.”

Comments (22)

  1. Submitted by Robert Moffitt on 12/07/2018 - 10:38 am.

    Kurt Daudt: “What a great position I, and we, have put the state of Minnesota into.”

    MN Voter: “What a great position I, and we, have put Kurt Daudt into.”

    • Submitted by Frank Phelan on 12/07/2018 - 01:56 pm.

      I can’t believe the House GOP can’t do any better than Daudt. The guy can’t even balance his won check book.

      But given his party can’t pay it’s bills either, I shouldn’t be surprised.

      • Submitted by Robert Moffitt on 12/07/2018 - 02:47 pm.

        You almost have to admire the chutzpah of a party that loses the House by 18 seats, goes deep into debt, then starts making demands to the new Governor and Speaker-elect on how to run things.

        Almost.

  2. Submitted by Sheila McGinley on 12/07/2018 - 01:50 pm.

    No credit to Governor Dayton. A both grammatically and factually incorrect statement from Kurt Daudt.

  3. Submitted by Frank Phelan on 12/07/2018 - 02:30 pm.

    As a whole, the media does a lousy job reporting basic economic news, and that extends to the media reports I’ve heard of the budget surplus, which, as noted above, is complicated.

    Rather than reporting that the surplus is $1.5B, it would give more context to state it as a 3% surplus. A $1.5B surplus today is not worth as much as a $1.5B surplus from years past.

    To most of us, $1.5B sounds like a lot, but given the overall budget, 3% is good news but not cause for huge celebration.

    • Submitted by Bill Kahn on 12/10/2018 - 02:55 pm.

      It is probably a good amount to have in reserve, at least when the revenue becomes real rather than a best guess.

  4. Submitted by Ray Schoch on 12/07/2018 - 08:40 pm.

    Frank Phelan seems spot-on. A 3% surplus is good news, certainly, and FAR better news than $6 billion in the red, but it doesn’t justify party hats and noisemakers, either.

    On the other hand, and this is largely rhetorical, I can’t help but wonder of Mr. Daudt: When, exactly, IS a “good time” to increase taxes? I do understand that tax increases really are a burden when the economy is in recession and a sizable portion of the populace is struggling just to keep up with basic necessities (as they’re viewed in this country), so increasing taxes is going to be painful – maybe unnecessarily so – when the economy is doing poorly. Fine. No tax increases in recessions.

    Meanwhile, costs continue to escalate. The cement manufacturer charges more for his raw materials, roads continue to deteriorate, and cost more to repair, state buildings need to be maintained and repaired, etc., etc., ad nauseum.

    At the moment, the economy is in a prosperous period. If raising taxes to meet rising costs is a bad idea when the economy is doing poorly, why could they not be raised to meet rising costs when the economy is doing well. If not now, when? The implied alternative – no tax increases, ever – is totally disconnected from reality.

    People who are affluent enough – or malevolent enough, or both – may argue that funding government on anything more than a bare minimum basis isn’t necessary, but they are far out of the mainstream. Most of us can’t pave our own streets, and don’t want to go back to lighting our homes with candles and taking the horse and buggy to town on dirt roads.

    • Submitted by Frank Phelan on 12/07/2018 - 10:31 pm.

      Oh, you’ve figured that?

      “The economy is bad. Lower taxes!”

      “The economy is doing well. Lower taxes!”

      “We have surplus? The tax payers were ‘overcharged’. Give it back!”

      “We’re in a deficit? Charge more in taxes!”

      Oh wait, they never say that last one. Because when the only tool you have is a hammer….

    • Submitted by Tom Anderson on 12/10/2018 - 06:29 pm.

      Well, when the Governor and Legislature increased taxes $2 billion dollars (right before the GOP won control) was a good time and it resulted in a surplus (along with a booming national economy), so there are always good time to raise taxes which we are all glad to pay for quality roads, education, healthcare, and the like.

  5. Submitted by Jim Smola on 12/07/2018 - 09:17 pm.

    The surplus is a result of an economy that has a high number of Minnesotans working and paying taxes coupled with unspent funds from the last biennium. It is not because we are over taxed. Any discussion of tax cuts is irresponsible. The surplus should be invested in roads, schools, and health care. Preserving the current tax structure will lessen the impact of any future economic downturn.

    • Submitted by Frank Phelan on 12/08/2018 - 08:17 am.

      The surplus should not be spent on roads, bridges, or other infrastructure. Those things should not be left to momentary ups and downs of normal budget cycles. Infrastructure requires dedicated funding sources so we can plan on upgrades years in advance.

      Additionally, a benefit to this is that we can continue that work even during economic downturns. This provides the twin benefits of keeping people working and taking advantage for the sale prices that contractors offer during recessions.

      Generations past stepped up and made investments that we have been living off of. But bridges and water treatment plants don’t last forever. It’s our turn to get ‘er done.

  6. Submitted by Dennis Wagner on 12/08/2018 - 05:32 pm.

    You know for some reason terminology seems to be upside down, inside out, and backwards! Smart fiscal conservative investors by definition supposedly, keep a good wad of cash handy for emergencies, and to capitalize on unique opportunities, or to bail out a friend in need. They take responsibility for their actions, pay their bills on time, try to minimize debt, don’t use gimmicks and slight of hand to run thier business, and invest in infrastructure, education etc. because it has solid pay back, lower risk, and has stood the tests of time. Point being after watching T-Paw and the republicans vs Gov. Dayton, the fiscal moniker should probably be changed, because the so called political “conservatives” appear to be light years from the term and understanding of “fiscal conservative”!

  7. Submitted by Paul Udstrand on 12/09/2018 - 09:12 am.

    Once again the fiscal irresponsibility and magical thinking of Republicans rears it’s ugly head.

    Elsewhere on Minnpost there was an article and discussion about what Republican’s could do to rehabilitate themselves and some of us suggested if they were serious about such a project, they’d have to abandon their celebration of ignorance and dishonesty. So a new day dawns in MN and here we have Republicans offering what? The same budget busting tax cuts they’ve been promoting for 40 years.

    No matter what the problem is the Republican answer is always tax cuts. Tax cuts that turn surplus into deficit, and tax cuts that make deficits bigger deficits. Apparently Republicans think that creating deficits and fiscal crises IS being fiscally responsible. And the whole Republican mentality behind magical tax cuts has always been an incoherent rant against “big guvment”. I keep telling them that limited government is feature of liberal democracy that is literally built into our Constitutions but they have an alternate reality that claims otherwise… and so it goes. When you think that dictatorial regimes are the best examples of “small government” and liberal democracies are examples of out of control governments, it just doesn’t come out in the wash.

    Getting back to reality one would need to point out that according any responsible entity that’s examined Minnesota’s transportation system; it’s crumbling and in drastic need of repair, replacement, and expansion (To the tune of a trillion dollars or more). We have the 4th largest road and bridge network in the nation that requires perpetual and constant maintenance. Any fiscally responsible person will tell you that when you have an ongoing and permanent financial responsibility that will persist into the foreseeable future… you need an ongoing and stable source of revenue to pay for that expense. Budget gimmicks will deliver collapsing bridges.

    In other words the over-all budget surplus, no matter how large or small, doesn’t provide the funding needed to maintain, let alone replace and expand roads and bridges, let alone transit. What matters is the transportation budget, budget gimmicks that funnel general fund money or education money into the transportation budget simply cannot provide the roads and bridges that Republican PROMISE to deliver to urban drivers and rural Minnesotan’s. That’s simply a mathematical fact.

    So if your voting for Republicans thinking they follow through on their promises to fix up roads and bridges; you should have long ago realized that all they believe in doing is cutting the budgets for roads and bridges once they’ve created the budget crises that justify those cuts. Whatever.

    Meanwhile we can predict with absolute certainty that Republicans will dig in and do whatever they can to block.any fiscally responsible policy that emerges from intelligent and responsible consideration. It’s what they do.

    • Submitted by Frank Phelan on 12/09/2018 - 07:25 pm.

      To be succinct, that the GOP tax cuts lead to deficits is a feature of their fiscal “planning”, not a bug.

      In private, they refer to it as “starve the beast”.

      • Submitted by Paul Udstrand on 12/10/2018 - 08:39 am.

        I wish I could be concise.

        Putting a finer point on the Republican deficit policy: One of the reasons conservative/libertarian/Republican “values” are crappy is the inherent dishonesty they’re imbued with. Yes, obviously the creation of deficits is a deliberate and durable Republican objective, but it’s one they clearly and deliberately conceal. They never “promise” to create deficits when their bragging about their fiscal responsibility do they? They don’t promise “deficits” and fiscal crises when they’re out telling everyone about all the roads and bridges they want to build do they? It’s an inherently dishonest political model, and just goes downhill from there.

        • Submitted by Frank Phelan on 12/10/2018 - 10:41 am.

          Yes, and the crises is also a feature and not a bug. They can only manage by crisis. Like the way Daudt wouldn’t negotiate or commit until the last hour of the legislative session, then jam through a bill hundreds of pages long.

          Scott Walker passed huge tax giveaways in 2011, then just weeks later “discovered” a budget hole. He was shocked! shocked! to find gambling was going on. It’s par for the course with this crowd.

          No wonder their party is in debt. Still.

          • Submitted by Paul Udstrand on 12/10/2018 - 12:59 pm.

            Well, I’m not sure we can call what they do with their crises: “management”, but they certainly think crises is good for them.

            Try asking these Trumpster business types why they think recessions are so “good” for business sometime. It’s always entertaining.

    • Submitted by Tom Anderson on 12/10/2018 - 06:38 pm.

      “Getting back to reality one would need to point out that according any responsible entity that’s examined Minnesota’s transportation system; it’s crumbling and in drastic need of repair, replacement, and expansion ”

      I agree. The Dayton legacy after 8 years.

      The current biennial budget is 45.55 billion dollars and the Strib often quotes an upcoming $50 billion dollar budget which is only a 10% increase over two years. It is obvious that the State needs to spend a great deal more (look at all the schools crushed by the recent mandates from the State), say maybe $55 billion. Governor Dayton taxed the rich $2 billion a few years ago, I’m sure that they won’t bearing the brunt of another tax increase. Well, the rest of us won’t.

      • Submitted by Paul Udstrand on 12/14/2018 - 08:35 am.

        You’re comment is a little garbled Mr. Anderson, but if I understand it correctly, you’re claiming that Dayton is responsible for under-funding the transportation budget. This simply mistaken.

        Dayton has always sought greater spending, and tax revenue to pay for it. The legislature whether controlled by Democrats (in the first two years) or Republicans has always dialed back his budget requests. Republicans have been specially hostile to his budget proposals, so much so that they’ve pushed the envelope constitutionality a number of times. For instance Republicans tried to build budget cuts and restrictions into “veto-proof” legislation that he would be presumably “forced” to sign. You may recall the kerfuffle over this last year, when Dayton responded by vetoing the legislative budget.

        Had Dayton got the budgets and tax increases he requested from either the Democrats or the Republican in the legislature, we wouldn’t be having this conversation.

  8. Submitted by Paul Udstrand on 12/09/2018 - 09:50 am.

    I would also caution anyone against relying too much on budget forecasts that don’t factor recessions into the equation. Economist have shown us time and time again that they simply cannot predict recessions no matter how likely they become.

    We have an historically stupid and incompetent president at the moment and he’s engaged in an impressive number of destructive policies that will harm and strain the economy. It would be foolish to assume that MN will left untouched.

    In fact in many way’s MN is already being harmed more than other states. From cutting off trade with Cuba to his trade war with China, and the failure to actually provide the promised farm subsidies, he’s hammering rural America rather hard at the moment. Even his anti-immigrant policies are creating expensive labor shortages. And we don’t know what’s yet to come, and he’s doesn’t have record of getting smarter or more competent.

    MN may be outperforming the national average at the moment, but the asymmetrical impact of Trump’s economy in everything from steel to soy beans could end up erasing that advantage. A guy who’s gone bankrupt 6 times is in charge of our economy… these are not normal times subject to normal economic models.

  9. Submitted by R. Hanson on 12/09/2018 - 11:10 am.

    State tax cuts would disproportionately hurt outstate, Republican voting counties. Their infrastructure is already being paid for by taxpayers in the metro area.

    • Submitted by Frank Phelan on 12/10/2018 - 10:42 am.

      I’ll bet my next paycheck against yours the out state vote doesn’t change. They seem more concerned about preventing MPLS from requiring stores to charge for plastic bags than paving their own roads.

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