The splashy headlines and gaudy number no doubt left many Minnesotans feeling pretty good about our state’s financial standing. We’re enjoying a $1.5 billion surplus, the state budget commissioner announced last week. The financial forecast is even brighter than the one released in November.
Except it really isn’t.
Minnesota, when putting together its financial forecasts, only factors in inflation on one side of the ledger, the revenue side, while inflation is ignored with regard to expenditures. The result is a financial outlook that’s far rosier than reality.
Blame politics for this. Of course politics.
“Whoever is in power whenever there’s a surplus wants to take credit for that surplus. It was a political maneuver to take (inflation) out,” Rep. Jennifer Schultz, an economics professor at the University of Minnesota Duluth, said in an interview this week with the News Tribune Opinion page. “It’s a one-sided forecast, because we’re saying, ‘Oh, our revenue is going to go up with inflation.’ … But on the spending side, we just totally ignore (inflation). …
“They just look at, ‘Oh, we have a $1.5 billion surplus, end of story, and we should give back that money in taxes or spend it on new programs.’ In actuality, if we accounted for inflation on the spending side, our forecast estimate would only be $379 million,” Schultz said, referring to 2020-’21. With inflation factored in fully, Minnesota is actually looking at a $654 million deficit for 2022-’23, she added.
A bipartisan deal way back in 2002 removed inflation as a factor on the expenditures side of fiscal forecasting — as though inflation can just be wished away, as Independence Party Gov. Jesse Ventura lamented in vetoing the less-than-honest financial finagling. His veto was overridden by DFLers and Republicans.
The full force of inflation can be returned to financial forecasting in Minnesota with legislation presented last week by Schultz to the House Ways and Means Committee. Her bill has 11 DFL co-sponsors. There’s no companion bill in the Republican-controlled Senate, however. While its passage seems unlikely then, its introduction can at least draw attention to the massaging of figures that’s going on in St. Paul.
“We really should forecast by incorporating inflation on both the revenue and spending sides,” said Schultz. “It would give us a much better, accurate forecast because you can’t just hide from inflation. Inflation is going to happen. … If we want to have the best information possible to put together our budgets, we should have a good forecast. And that’s why so many people talk about putting in inflation. … It would be more transparent (and allow for) an honest conversation about what the surplus really is, so people don’t think that we have all this extra money to spend. We need the best tools possible to make sure that we are being fiscally responsible as a state and as elected officials.”
Minnesota may be the only state in the nation to account for inflation in projected revenue but not in projected expenses. Budgeting that way contributes to shortfalls, as expenses are never fully accounted for. It’s no way to responsibly treat taxpayer dollars.
“Putting together the state budget is an extraordinary task,” Clark Goldenrod, deputy director of the nonpartisan Minnesota Budget Project, said at the House committee meeting. “It makes sense to use all the tools available.”
Those tools have to include inflation — on both sides of the ledger.