The Minnesota state budget is projected to have a surplus of $7.7 billion for the two-year period ending June 30, 2023. That’s a lot of extra dollars for an original budget of $52 billion enacted during 2021, and it’s generating a lot of proposals from reducing taxes to increasing program funding.

The legislative session will begin on Jan. 31, and the projected surplus will anchor much of the political debate and maneuvering. We would offer a few cautionary suggestions to our fellow citizens when considering our newfound wealth.

This surplus is “one time money.” Just like money in a savings account, it can be spent once and then it’s gone. The underlying budget imbalance of revenue in excess of expenditures creates the surplus and that imbalance can be applied to continuous needs only as long as the imbalance continues. That imbalance in the current biennial forecast is $5.5 billion.

The budget projection published in November 2020 called for a shortfall of $1.3 billion for Fiscal Year 2022-23. Three months later, the February 2021 projection reflected a $1.6 billion surplus, nearly a $3 billion swing in three months. The November 2021 forecast increased the surplus to $7.7 billion. In just 12 months, the projected surplus grew by $9 billion! The COVID economy is having unusual effects on our state’s financial fortunes. Again, we advise caution when reducing taxes or increasing expenditures because the underlying revenues and the economy that’s driving them must be sustainable if any legislative actions are to last.

There is another issue that goes to the projection model in Minnesota, and it is provided by the legislature.

The forecast must assume the continuation of current laws and reasonable estimates of projected growth in the national and state economies and affected populations. Revenue must be estimated for all sources provided for in current law. Expenditures must be estimated for all obligations imposed by law and those projected to occur because of variables outside the control of the legislature. State statute dictates that expenditure estimates must not include an allowance for inflation.

In short, revenue projections reflect projected effects of inflation, but expenditures do not. The result is that in each extended forecast the expenditures are underestimated. We currently have high employment and increasing salaries, plus increasing commodity and service costs in the general economy. We should expect the same increases in the costs of state programs and services. Not recognizing the potential of inflationary costs on state expenditures will most likely create an overly positive projected surplus amounting to several billion dollars.

The Minnesota Council of Economic Advisors has focused on this limitation noting that the state’s current practice of excluding projected changes in the prices of goods and services from a majority of the spending estimate is fundamentally misleading and potentially encourages legislators and the public to regard the state’s financial position more optimistically than the facts warrant.

We agree with the conclusion of the Council of Economic Advisors and recommend that the budget projection statutes reflect the effects of inflation in both revenues and expenditures and not just revenues.

The headline is short, “Minnesota Budget Surplus Projected at 7.7 Billion,” but the projection is much more complex than the headline. The projection changed dramatically in 12 months, and it can change again. Certainly, part of the excess of revenue over expenditure can be used for programs or tax relief but we must be careful. If we are too aggressive on either program expenditures or tax reduction, we may not have the long-term finances to sustain our legislative actions. — An editorial from the APG of East Central Minnesota Editorial Board. Reactions are welcome. Send to: editorial.board@apgecm.com.

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