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Why is the DFL so riled up over inflation?

Because — besides the inherent sexiness of the topic — Minnesota doesn’t account for inflation in state spending forecasts. Why that may (or may not) matter. 

Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, and Rep. Jennifer Schultz
Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, and Rep. Jennifer Schultz speaking to the the House Ways and Means Committee on Monday.
MinnPost photo by Peter Callaghan

In February of 2002, then Minnesota Gov. Jesse Ventura vetoed an emergency plan crafted to get the state out of a $1.9 billion budget deficit. In doing so, the Independence Party governor said the plan built by House Republicans and Senate DFLers had two flaws: One was that it relied heavily on one-time funding; the second was that it “wishes away inflation,” Ventura wrote. 

That wasn’t vintage Ventura bluster. The deal included a decision to omit inflationary increases in state spending for future budget periods, even while retaining such estimates for future tax revenue — a move that made the next budget appear balanced when, in fact, it might be littered with red ink, which Ventura pointed out. 

“Removing estimated inflation from our state forecast simply lowers our financial management standards, but it doesn’t mean that inflation won’t happen,” Ventura wrote. “What it does mean is that those who put together the next budget will have to make budget cuts or raise taxes just to maintain current service levels.”

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Ventura had not yet announced whether he would seek a second term (he wouldn’t), but among the candidates considering a run were the two the men responsible for the deal: then-House Majority Leader Tim Pawlenty and then-Senate Majority Leader Roger Moe.

“Both of them were running for governor and one way they dealt with the deficit was not recognizing inflation,” said current Ways and Means Committee Chair Lyndon Carlson, DFL-Crystal. “That helped them balance the books at the time, so it was a bipartisan agreement.”

Former Gov. Jesse Ventura
Former Gov. Jesse Ventura
Ventura’s veto was overridden by the House and Senate, and the plan — including the provision related to inflation — became law. That Carlson was talking about it now is indicative of how much the deal still impacts Minnesota government. 

When the Minnesota Office of Management and Budget presents its forecast for the current and next two-year budget periods on Thursday, it will estimate how much things will cost and how much money current taxes will raise. 

But knowing that the upcoming spending estimates do not include inflation — even if many of the revenue estimates do — has to be taken into consideration in budgeting, since the outlooks can look rosier than they actually are, feeding spending desires as well as tax cut plans.

“I’m kind of tired of hearing we have this huge surplus when we don’t account for inflation,” said Rep. Jennifer Schultz, DFL-Duluth, who is sponsoring a bill to require MMB to include inflation in its forecasts of spending. “I think it would change a lot of our discussions here at the Capitol if we were more responsible.”

Bill Marx, chief fiscal analyst for the House Ways and Means Committee, told the committee the omission of inflation becomes most apparent in what are dubbed “the tail years” of a spending plan: those not included in the current budget but coming immediately after. 

Take the current forecast that will be updated Thursday. While the state currently is projected to collect $1.33 billion more than it needs for the two-year budget adopted last May, that money would nearly be consumed during the next budget period if the outlook acknowledged that $1.21 billion is predicted to be needed to maintain current services in 2022 and 2023.

Lately, it is DFL governors and legislators more than GOP legislators who think that 18-year-old budget deal made in the midst of a crisis has run its course. Gov. Tim Walz frequently complains that the forecast is less accurate without inflation in the calculation.

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Schultz, also an economics professor at the University of Minnesota Duluth, quoted from both the state council of economic advisors and an op-ed signed by five former state revenue directors endorsing the inclusion of inflation.

“It is naive to think that arbitrarily ignoring inflation pressures in the forecast will somehow control state spending,” wrote those five former commissioners, who worked for Republican, Democratic and Independence Party governors.

Jane Leonard, the president of the progressive organization Growth and Justice, said that “arbitrarily ignoring inflation” creates false impressions for budget writers. “The current law enables both those who want to spend more and those who want to cut taxes to falsely claim there are more than enough resources to do so,” Leonard said.

Scott Croonquist, executive director of the Association of Metropolitan School Districts, said taking inflation out of the forecast — as well as the 2001 elimination of the state’s general education levy — has led to reductions in state funding for schools. He estimated it to have cost his districts $638 per student in the formula that sends $6,438 per student to districts this school year.

But there also were reasons presented at a hearing Monday on Schultz’s bill for not changing current practice. Marx, a longtime committee staffer, said that including inflation in the estimates prior to 2002 created its own issues. For one thing, there was an expectation created by showing how much an agency or a program would need to keep spending current with some cost-of-living estimate. Even though a Legislature is empowered to decide budgets, agencies and their supporters saw the inflation calculation as an “entitlement.”

Budget offices would often include caveats in their forecasts, he said, to show that the dollar amounts listed were not a commitment by governors or legislators that those dollars would be appropriated. Later, the budget office decided to stop including it line-item-by-line-item but instead to present a single total at the end.

Ways and Means Committee Chair Lyndon Carlson
MinnPost photo by Peter Callaghan
Ways and Means Committee Chair Lyndon Carlson said the hearing Monday was for information purposes only and that the bill did not appear to be ready to move out of the committee.
Mark Haveman, the executive director of the business-friendly Minnesota Center for Fiscal Excellence, said the inflation issue is much more complex than it is portrayed in the news media. He said the best approach is the one that “introduces the least amount of bias in the budgeting process.”

The current practice of keeping inflation as supplementary information, rather than including it in the forecast, while also giving it a much-higher profile, “best serves this objective,” Haveman said.

“Including inflation enables a lot of spending on brand new or expanded government programs without ever having to properly recognize it to taxpayers as new government spending,” he said. “Inflation then makes it easier to preserve current methods and practices when new ideas and strategies may be needed.” 

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John Phelan, an economist with the conservative Center of the American Experiment, said inflation has been relatively low and the impacts on a large budget such as Minnesota’s isn’t significant. So even if inflation adjustments aren’t made to spending, the state should be able to manage them.

“This is not Weimar Germany, it is not Zimbabwe, it is not Venezuela, it’s not even America … when inflation hit 13 percent in 1980,” Phelan said. 

Over the last decade, inflation in the U.S. has averaged 1.6 percent. “Are we really supposed to believe that Minnesota’s state government is such a leanly efficient beast that spending couldn’t be 2.4 percent lower over the biennium?” Phelan asked.

Carlson said the hearing Monday was for information purposes only and that the bill did not appear to be ready to move out of the committee. On Wednesday, Walz said that he supports HF 150 but is skeptical of its chances.

“It is just intellectually dishonest not to understand that inflation is a real thing. It diminishes buying power,” Walz said. “I know this is a really tough fight and people don’t want to do it, but to get a better picture of where we stand fiscally then it is something we should do.

“I’m not super hopeful that we can get that in, but I will continue to talk about why it is important.”