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

The complexity of Minnesota’s budget forecast means it leaves room for the same data to be interpreted differently, often depending on the letters after the name of the politician.

Myron Frans, the commissioner of the state Office of Management and Budget
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.”
MinnPost photo by Peter Callaghan

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.

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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.

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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.”