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

The deal struck to end the 2019 Legislature used $491 million out of Minnesota’s rainy day fund to keep the state’s books in the black, creating a precedent that budget writers will have to deal with going forward. 

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. 

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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.”

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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.’

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“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.