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Will Minnesota lawmakers regret spending the state’s ‘rainy day’ funds on something other than a rainy day?

Gov. Tim Walz
Gov. Tim Walz used the news of the surplus to tout the “smart budget decisions” of his administration and that of Gov. Mark Dayton before him.
There was plenty of back-patting going on earlier this month when state budget officials released the latest budget forecast for Minnesota.

Not only does the state have a $1.33 billion surplus, it has a rainy day fund with another $2.36 billion. The final deposit into the account of $284 million was made in November, and the budget reserve is now full — equal to 4.9 percent of state general fund tax collections over the two-year budget period, which is currently estimated to be $48.65 billion.

The law requiring the state to put aside those funds is a direct result of the budget cutting stress caused by the Great Recession. Many current lawmakers still recall the trauma of a $6 billion shortfall that forced six different special sessions. Each time, lawmakers cut deeper into state spending — at a time when demand for services was increasing. Those sessions are frequently cited as a warning to anyone who suggests dipping into reserves for spending increases or for tax cuts.

“Congratulations Minnesota, you saved $2.359 billion for a rainy day!” read the slide at the end of the presentation given by the Office of Management and Budget about the revenue forecast earlier this month. 

Gov. Tim Walz used the news to tout the “smart budget decisions” of his administration and that of Gov. Mark Dayton before him. The DFL governor said Minnesota’s reserve is “the gold standard among states.” In fact, the Pew Charitable Trusts recently cited the reserve as one reason Minnesota is better off than many states in its ability to weather the next recession. 

Senate Majority Leader Paul Gazelka
MinnPost file photo by Briana Bierschbach
Senate Majority Leader Paul Gazelka
The back-patting wasn’t just among DFLers, either. Senate Majority Leader Paul Gazelka, R-Nisswa, included the filled-to-the-brim reserve in his conclusion that the forecast was “really, really good news.”

So it took some members of the minority party caucuses, Republicans in the House and DFLers in the Senate, to put a slight chill on the celebration by pointing out an awkward fact. That rainy day fund will drop to $1.867 billion on July 1, 2021. Not because of any economic downtown but because of the deal that ended the 2019 session of the Legislature.

To conclude the session with a balanced budget, the three top leaders at the state Capitol — Walz, Gazelka and House Speaker Melissa Hortman — agreed to an increase in spending, but not to increase revenue. Therefore, to meet another Minnesota requirement that current budgets not create deficits in the following two-year budget, they agreed to commit $491 million of the rainy day fund to keep the books in the black.

At one level, the move doesn’t mean much except on paper. No money was spent, nothing was transferred from one account to another. It was in essence, an IOU — or in budget parlance, a “future charge” — that will be transferred only if the 2020 or 2021 legislative sessions don’t do something that negates the need for it.

But it also created a precedent, one that budget writers will have to deal with going forward: The rainy day fund was spent for something other than a rainy day.

Sen. Richard Cohen
Sen. Richard Cohen
“The budget reserve is not a slush fund, it’s not a piggy bank,” Sen. Richard Cohen, DFL-St. Paul, said after the new forecast was presented. Cohen, the ranking minority member of the Senate Finance Committee, added: “There’s no question, from the perspective of the DFL, that it was a mistake to have utilized the reserve this year for purposes of balancing the 2022-23 budget.” (Cohen’s mention of the “perspective of the DFL” is in reference to Democrats in the state Senate, which did not have a negotiator in the room at session’s end.)

Cohen warned against seeing the reserve as “the shiny object” and suggested fellow lawmakers “keep our little hands off it.”

After MMB Commissioner Myron Frans presented the forecast to the House Ways and Means Committee earlier this month, he was asked about the budget deal by both Rep. Lyndon Carlson, DFL-Crystal, and Rep. Tony Albright, R-Prior Lake.

“I was here when we didn’t have a reserve and we had six special sessions,” said Carlson, who recently announced his retirement from the House after 48 years.  He said he recalled that former Republican Gov. Tim Pawlenty said his main regret upon leaving office was that the state didn’t have a rainy day account before the recession.

But it was Albright who had the harshest critique of the budget deal that relied on the reserve.“The budget reserve is there for a rainy day, when economic conditions change materially,” Albright said. “The only thing that changed materially in the last budget was three people in a room decided to spend more than their caucuses agreed to.”

Those three people — Walz, Gazelka and Hortman — did make major decisions about the budget in closed-door sessions at the end of the session. Those decisions, however, were ratified by majority votes in the House and Senate.

In responding to the lawmakers, Frans noted that the final deal was the result of negotiations between factions of a divided government — DFLers controlling the governor’s office and the House, the GOP controlling the Senate. The budgets proposed by Walz and passed by the House both raised enough revenue, via a bill meant to align the state with the 2017 federal tax reform act, to balance the next two biennial budgets. But the Senate wanted the tax bill to be revenue neutral, and to make a deal work without increasing revenue, the trio agreed to dip into the reserve fund.

Commissioner Myron Frans
Commissioner Myron Frans
“You had an agreed-upon spending amount without an agreed-upon revenue-raising amount to cover that spending,” Frans said. “We believe the proper statutory purpose for spending out of the budget reserve is for an economic downturn. But in this case it was used to reach a budget deal that all three leaders agreed upon.”

In an interview last week, Albright said he didn’t agree with the budget deal even though it was brokered by a fellow Republican, Gazelka, saying it used the reserve as a “honey pot” to fuel spending that otherwise could not have been approved. He called that uncharted territory.

And while he said he supports the existence of a rainy day fund, saying it helps keep the state’s bond rating high and interest charges low, he doesn’t think it should be used unless an economic downtown causes state tax collections to fall. 

If the state economy continues to be strong, he wonders whether Minnesota should keep putting additional funds into the account. The size of the reserve isn’t set by law; it’s set after an analysis by MMB of the volatility of the state revenue system. The most-recent assessment in September decreased the target from 5 percent of two-year tax collections to 4.9 percent.

“Let’s say in five or eight years we have another 10-to-15 percent growth in the budget, it’s like the tail on a kite. It just keeps going up and up without consideration of: ‘Ok, if we always have this growing budget reserve that potentially is never used, then we’re just securing more and more revenue from Minnesotans for a potential that may be severe or may be minor.’

“When we’ve got almost two and a half billion dollars in budget reserves, I certainly question why we’re not talking about whether that should be capped at some point,” Albright said.

Frans said he thinks “it’s prudent” to maintain the $491 million in the reserve, but that will require passing legislation in the 2020 session to prevent the withdrawal in Fiscal Year 2022.  

Because of growth in state tax collections that have occurred since the budget deal was struck last May, the 2022-23 budget will be in balance without use of the reserve. If nothing else changes between now and then, the forecasted revenues for that period will exceed forecasted spending by $220 million. But that, as DFLers have been pointing out, does not account for estimated $1.21 billion inflationary increase in state costs. Inflation was removed in 2002 from most forecast spending calculations.

Comments (30)

  1. Submitted by Ray Schoch on 12/24/2019 - 11:43 am.

    Too bad the rest of us don’t get to remove inflation from our own personal budget calculations. I’ll argue that “it’s prudent” to keep the budget reserve at 5%, no matter how large that 5% gets in absolute numbers, unless and until Nirvana arrives and we need no longer concern ourselves with economic downturns, foolish federal and state fiscal policies, wildfires, floods and assorted other calamities impossible to predict.

    • Submitted by Dennis Wagner on 12/24/2019 - 07:55 pm.

      We be agreed: Ironically the folks that talk about kitchen table budget issues tend to be the first to trash them out when it comes to state/city government. The general notion/financial consensus for a kitchen table emergency fund is 3-8 months of expenses in your emergency fund, 5% looks like perhaps ~2 weeks worth of expenses. Some of us think it is far better to have extra cash in the bank when you don’t need it than no cash in the bank when you do need it! Strange it appears the more liberal minded tend to be more financially conservative minded than the conservatives, that tend to be very liberal when it comes to financial solvency, go figure!

  2. Submitted by Phyllis Kahn on 12/24/2019 - 03:34 pm.

    The worst use of arithmetic is including inflation in the revenue estimates and not including it ib the spending calculations. An inherently unbalanced

  3. Submitted by John Evans on 12/24/2019 - 04:56 pm.

    Good question; I’m sympathetic to Dick Cohen’s view on this.

    It seems like a cruel joke that Tim Pawlenty now expresses regret now that he and his fellow Republicans destroyed our rainy day fund before the recession hit. Republicans spent a generation fighting to drain the fund so that the next recession would force program reductions and layoffs of unionized workers.

  4. Submitted by Gerry Anderson on 12/25/2019 - 10:05 am.

    What about the unknown principal of cutting back increases to state spending? It’s not a spending cut. It’s a cut in the increase. I know to Democrats it’s unknown territory.

    Like the out of control DHS.

    • Submitted by Frank Phelan on 01/01/2020 - 10:01 am.

      A lot of people, including journalists, don’t understand real dollars. As in inflation adjusted dollars. An “increase” that matches the rate of inflation is merely treading water.

      Try this: You made $50/hour in 2016. Same in 2017, 2018, and 2019. Is your boss paying you the same? Or are your wages going down every year?

      If you’re good with declining wages, I’d like to hire you.

  5. Submitted by DENNIS SCHMINKE on 12/25/2019 - 04:18 pm.

    Not sure if the politicians will regret it…but I am SURE that we, the taxpayers, will. $2.4 B is not enough–remember that we had a $6B shortfall not all that long ago.

  6. Submitted by Andy Briebart on 12/25/2019 - 05:12 pm.

    The desire to spend cannot be controlled.

    It’s never enough.

    • Submitted by Frank Phelan on 12/26/2019 - 05:54 pm.

      Isn’t it great to see WI gov Tony Evers clamping down on the welfare spending for the Fox Conn scam?

      Finally, a politician turning off the faucet.

      • Submitted by Connor OKeefe on 12/28/2019 - 10:23 am.

        In the way the Chinese have implemented the Fox Conn plan, it certianly looks like a scam, and pulling the plug is the right thing to do.

        That being said, the deal as made would have created lots of well paid employment opportunities. In that, I think Walkers motivations are unquestionable.

        Think about that next time you drive by Mark Dayton’s “people’s stadium”. If you listen carefully, you can hear that faucet still flowing freely.

        • Submitted by Dennis Wagner on 12/29/2019 - 12:50 pm.

          Appears the revenue faucet is pouring $ into Minneapolis not out. There sure were a bunch of high paying union jobs building that stadium, I guess from the right wing, high paying and union are dirty words.

          • Submitted by Connor OKeefe on 12/29/2019 - 09:05 pm.

            The revenue faucet thats pouring cash into the people’s stadium is connected to taxpayer pockets. That’s not commerce, sir. That’s not how a healthy, productive economy works. That’s robbing Peter to pay Zygi.

            • Submitted by Dennis Wagner on 12/30/2019 - 01:15 pm.

              Dude, go tell that to your buddy Trump and his $1.5T giveaway to the wealthy as well as his year in & year out $1T federal deficits during the best of times! As a Mpls resident, paying those extra taxes I get it, perhaps you haven’t noticed the amount of construction going on downtown, NE, N Loop, West End, etc.etc. the city is getting stronger, not weaker, but guess for some folks they can’t recognize “We the People of the United States, in Order to form a more perfect Union” when it smacks them in the face, it doesn’t have to be all about me, its about us, big us and little us.

        • Submitted by Frank Phelan on 12/29/2019 - 03:37 pm.

          Walker used good old Democratic Keynesian economics to get re-elected, nothing more.

          Conservatives like to talk a good game about cutting spending, but they know what works. Just like Don Trump giving welfare to farmers (who just want to be left alone but will take public $$$ if they get it.)

          • Submitted by Connor OKeefe on 12/30/2019 - 07:26 am.

            “Conservatives like to talk a good game about cutting spending, but they know what works.”

            Guess what? I agree with you, with a correction. A true conservative would cut spending, because we know what doesn’t work. Problem is, there are precious few of them in government.

            Tim Pawlenty is a case study. He correctly returned the excess tax revenue to its rightful place, our pockets, but he failed to make any real cuts in spending. It wasn’t for lack of support from conservatives, that I can assure you.

            Some on the right will point to his trimming of budget bills, but that’s a cut to increases, not to the bottom line. Pawlenty played taxpayers against the middle because he was grooming himself for higher office. We weren’t fooled.

            Many people have grown up on the public dole, they are supported by an army of professional, lefty poverty portfolio managers who have lefty “journalists” in the MSM on speed dial.

            Cutting government spending will require some tough love, thick skin and strong backs. I’m not convinced there are enough to get the job done in the current GOP.

            • Submitted by Frank Phelan on 12/30/2019 - 08:37 pm.

              Seriously, this is a joke.

              Every conservative POTUS blows up the deficit. Every one of them. They’ve been selling us this Laffer Curve cocktail napkin ap-cray for 40 years now. They forget the huge tax increase their hero Ron Reagan signed into law in 1986. There wasn’t supposed to be any spending cuts, revenues were going to soar.

              This happens every time. Or don’t you recall how it blew up on Kansans when Sam Brownback tried not long ago?

              Yet, we’re still told, “Oh those aren’t REAL conservatives”. Dude, the modern GOP is as conservative as it’s ever been. You’d have us believe that up is down & white is black.

              There is a sea of red ink swamping the Treasury, due to the budget & tax give away scam passed with conservative votes in the Congress.

              • Submitted by Connor OKeefe on 01/02/2020 - 05:55 am.

                Thank you, dude, for repeating my statement in the vernacular. However, you left out an important piece. While so-called conservatives have been profligate spenders, they certianly can’t hold a candle to lefties.

                It’s a frying pan/fire situation, unfortunately.

                • Submitted by Dennis Wagner on 01/02/2020 - 10:42 am.

                  Got something to support that? Like perhaps Deficit created under TPAW went away under Dayton? Or noted RINO Arnie Carlson left office with ~ $2B surplus (wasn’t even endorsed by the R party as a standing Gov.) Or perhaps Clinton left Bush a balanced Budget that he blew up? Or perhaps, Obama left Trump declining deficits which he blew up, and of course, these are the absolute best of times under any American president in the entire history of the country! As my departed pappy used to say “Talk is cheap takes money to buy whiskey”

                  • Submitted by Connor OKeefe on 01/02/2020 - 04:03 pm.

                    With respect to hour departed pappy, sir, any deficit can be made up until the bottom of the taxpayers pockets haven’t been reached, after that, it takes skill to keep the booms balanced without triggering an exodus (refer to what’s happening in IL, NY and CA).

                    Likewise, budget surpluses don’t require any special skill; you simply ta, people above the cost of services. Pretty simple, tbh.

                    • Submitted by Dennis Wagner on 01/02/2020 - 09:00 pm.

                      So evidently Trump doesn’t even know how to handle the simple stuff, nor do most republicans? Truth is in the history books, those that know how to handle a budget and those that don’t! In case you ever considered, states, counties etc. do benefit immensely from good fiscal policies and then we all win and too bad in your world someone has to lose, win-win not allowed. .

          • Submitted by Connor OKeefe on 12/30/2019 - 07:29 am.

            BTW. If there is one group of people that should rightfully be subsidized, it’s small farmers. If you can’t see the danger in allowing our food production fall into the hands of agribusiness conglomerates (looking at you ConAgra and Monsanto), there isn’t much to discuss.

            • Submitted by Frank Phelan on 01/01/2020 - 10:07 am.

              Oh my, this is so rich. Now conservatives are contorting themselves to justify Don Trump’s welfare for farmers.

              How about creating competetive markets for cattle instead of allowing Con Agra et al to rig the market? Oh yeah, conservatives love big business. The little guy gets lip service. And Don Trump doesn’t get to create dependency and buy votes, which is what a Dem would be accused of if they did this.

  7. Submitted by Pat Berg since 2011 on 12/26/2019 - 09:58 am.

    Does anyone care that the term “economic downtown” appears twice in this article? I find this kind of error distracting, but maybe no one else considers it worth correcting since nothing has been done since I pointed this out the other day and my comment about it has disappeared into the ether.

  8. Submitted by Tom Anderson on 12/27/2019 - 06:54 pm.

    Keeping a solid ‘rainy day” fund is certainly a good idea, although rarely is it used to relieve State ills. Floods, tornadoes, drought, and the like are immediately met with requests for aid from the Federal government. What was the last State issue where “rainy day” funds were used immediately to help the citizens?

    • Submitted by Connor OKeefe on 12/28/2019 - 06:40 am.

      That’s a question worth answering, sir. We suspect, however, that the answer will make lefties uncomfortable, which is why it won’t be answered in these spaces.

    • Submitted by BK Anderson on 12/28/2019 - 08:23 am.

      Presumably the (ridiculously named) “rainy day” fund is to be used for general budget shortfalls arising from economic downturns, not “natural” disasters per se.

      But you raise an important point, and this gets to why I place “natural” in quotation marks. As the irreversible effects of man-made climate change wreck the earth’s stable 11,000 year old climate, we are seeing that the damages caused by the increasingly catastrophic storms are falling most heavily on those very states of the Neo-Confederacy which have done the most to ensure that the federal government could not undertake any meaningful response to this looming environmental crisis.

      Ultimately the question will be asked: “why should the citizens of Blue states that consistently sought to address the climate crisis have to continually bail out those very denialists that brought the calamity onto themselves?” In short, federal disaster aid for “natural” disasters (which are now man-made disasters) becomes increasingly unjust and will need to be abolished.

      This means that those states with actual state governments (like Minnesota) will need to have actual funds available to ameliorate these man-made weather disasters in future. So the term “rainy day” fund may indeed come to be accurate!

      • Submitted by Tom Anderson on 12/30/2019 - 05:49 pm.

        “As the irreversible effects of man-made climate change”

        Please tell Greta and all lawmakers that the effects are irreversible and that it is pointless to legislate “green” initiatives as they will drain the public coffers (of the USA) in a futile effort to save the planet.

        • Submitted by BK Anderson on 01/03/2020 - 07:21 am.

          A predictable response from someone who thinks they won’t be around for the final catastrophe. Why the hatred for the planet, sir?

          As for “draining the coffers (of the USA)”, we are one of the only nations on earth whose “leader” has rejected the Paris Accords (the malign work of the demagogue Trump), so the rest of the world is perfectly willing to “drain their coffers” to mitigate the calamitous effects of climate change–effects which were forced upon the world by the American conservative movement’s bad faith insistence that (first) there was no problem, and now (second) that nothing can be done as a result of their lies.

    • Submitted by Dennis Wagner on 12/28/2019 - 10:58 am.

      Well one might recall, Jesse gave a ton of $ back in the form of a sales Tax rebate, T Paw, gave a big tax cut, that was followed by a recession and a what $6B budget hole? The point most folks will probably miss, is that the emergency fund is usually given away one way or the other subsidize road, bridge construction, increase social services, tax rebate, etc, etc, etc. before it can be used for what it was meant. Lets just admit it, lots of folks don’t understand the term fiscal responsibility.

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