State budget is in the black, but there are challenges ahead

December 7, 2018

The contrast could scarcely be greater between the fiscal condition of the state government that Gov.-elect Tim Walz will lead and the one that confronted Gov. Mark Dayton eight years ago. Dayton faced the need to close a forecasted $6.2 billion gap between revenues and expenditures in the coming biennium. Walz, by contrast, will work with a 2020-21 budget that already has an extra $1.54 billion on its bottom line, state officials said Thursday.

In good measure, thats the difference a long and strong national economic recovery made. But its also the result of two things particular to Minnesota governance. For eight years, the Dayton administration has made state fiscal stability a priority. And last session, Daytons vetoes of two major bills, tax conformity and a spending catchall measure, meant that a $329 million surplus through mid-2019 that was available last February went unspent.

Those vetoes also left a good deal of unfinished business for Walz and the 2019 Legislature to address some of it not cheap. The state tax code still needs to be aligned with federal tax changes enacted one year ago, and depending on the path lawmakers choose, that could carry a price tag of several hundred million dollars per year.

Pent-up spending demands include matters of some urgency, particularly in funding health care and caregiving for the disabled. Only this week, the state learned that it wont receive $100 million in federal reimbursement that it was expecting for its individual-market reinsurance program. That program is itself due to sunset in 2019, as is the so-called provider tax on health care services that this year subsidizes MinnesotaCare and Medicaid with a hefty $675 million.

As Walz and legislators cope with those claims on state resources, theyre likely to discover that a $1.5 billion surplus isnt as big as it sounds. Roughly half of that sum is deemed one-time money, the result in part of lower-than-expected enrollment in government-funded health care programs. That means that it ought not be used to finance ongoing commitments, say to education.

Lawmakers will also see that a 2002 decision (ill-advised, weve long said) to omit an inflation factor from most state spending projections but to include inflation on the revenue side of the ledger creates a misleading forecast. Calculate inflation as was done before 2002, and the forecasted balance would be a modest $382 million in 2020-21.

For those reasons, we concur with House DFL Speaker-designee Melissa Hortman: People need to have restrained expectations of what well be able to accomplish. This forecast doesnt rule out tax conformity or modest investments in education and health care. But it isnt flush enough to spare next years lawmakers from hard choices.

Those choices could get harder still if Thursdays forecast of a gradual economic slowdown but no recession proves too optimistic. State economist Laura Kalambokidis said the best indicators call for Minnesota to experience a mature low-growth expansion in 2020-23. Thats an economy thats particularly vulnerable when shocks occur. The shock of escalating tariffs in an agricultural trade war, for example, is not hard to envision. One need not have a very long memory to recall that Minnesotas state revenue stream is prone to large, sudden swings when recession strikes.

Fortunately, the cushion against that kind of blow has never been larger. The 2014 decision to add automatically to the states reserves when November forecasts show a positive balance has done wonders for that fund, boosting it above $2 billion for the first time in state history. Its now just $175 million below its targeted level 5 percent of biennial expenditures.

Lawmakers should resist any temptation to draw down the fund for reasons other than covering an unforeseen shortfall during a recession. To his credit, DFLer Walz indicates that hes willing to lead that resistance. Protection of the states rainy-day funds is critical, he said. As a starting principle for crafting his first budget proposal to the Legislature, wed say that will do nicely.

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