Legislative leaders and Governor Dayton continue to negotiate over the possibility of a special legislative session. The absence of a special session means no 2016 tax bill (and no bonding/transportation finance package), which in turn would mean more money left on the bottom line in the forthcoming November forecast. And more money on the bottom line in the November forecast would mean a larger increase in the state budget reserve.
Unlike in 2011, a special session is not needed in order to prevent a state government shutdown. However, many would like a bonding bill to fund infrastructure projects around the state and a transportation finance package to address the funding deficiencies identified in the 2012 Transportation Finance Advisory Committee report. In addition, there is considerable interest in passing a tax bill, which could provide tax reductions for low-income workers through an expansion of the Working Family Credit and new credits designed to make higher education more affordable, as well as an increase in state assistance to local governments.
On the one hand, failure to approve a tax bill and other legislation during a special session would be a disappointment to many Minnesotans. On the other hand, in the absence of a tax bill, the dollars used to fund tax relief and local government aid increases in that bill will not disappear, but will instead translate into a larger budgetary balance in the November 2016 forecast. Under current law, 33 percent of this balance is directed toward increasing the state budget reserve until it reaches the level prescribed by economists at Minnesota Management & Budget (MMB). According to MMB’s September 2015 Budget Reserve Report:
To adequately manage the underlying risks in Minnesota’s general fund tax revenue system, MMB recommends a budget reserve target of 4.8 percent of the current biennium’s general fund non-dedicated revenues, or a $2.027 billion budget reserve for the 2016-17 biennium. These conclusions assume the budget is structurally balanced through the remainder of the biennium, and policymakers desire a 95 percent level of confidence that a biennial deficit will not exceed budget reserves.
A new budget reserve report will be issued in September 2016, although a dramatic change in the recommended budget reserve level for the FY 2016-17 biennium (currently $2.027 billion) is not anticipated.
The amount left on the general fund’s bottom line after the end of the 2016 legislative session was $729 million—which is larger than the usual end-of-session balance due to the veto of the 2016 tax bill. In addition, MMB’s July 2016 Revenue and Economic Update indicated that state general fund revenues for FY 2016 were $230 million higher than expected in the preceding forecast. Thus, assuming no further changes in state general revenues and expenditures before November and no special session changes that would impact the general fund’s bottom line, the budgetary balance in the November 2016 forecast for the FY 2016-17 biennium should be approximately $959 million.
Under current law, 33 percent of this $959 million—or $316 million—would be used to increase the state budget reserve. MMB’s 2016 end-of-session general fund balance sheet indicates a current state budget reserve for the FY 2016-17 biennium of $1.597 billion. A $316 million increase would be sufficient to increase the budget reserve to $1.913 billion—still nearly six percent less than the $2,027 billion level recommended in the September 2015 Budget Reserve Report.
The information presented above is preliminary and subject to a variety of revisions. For example, further changes in state revenue collections relative to the amount anticipated in the February 2016 forecast would alter the size of the projected FY 2016-17 budgetary balance; in addition, changes in the forecasted revenues and expenditures for the remainder of the FY 2016-17 biennium would also alter the projected bottom line. Finally, the recommended size of the state budget reserve could change in the upcoming September 2016 Budget Reserve Report. However, the analysis above represents a best guess of the increase in the state budget reserve likely to occur in November, assuming no special session.
An increase in the state budget reserve would provide additional fiscal stability and improve the state’s ability to weather future economic downturns. In fact, recent increases in the state budget reserve and the standing policy of dedicating a portion of fund balances to the reserve was cited as one of the reasons for the recent upgrade in the state bond rating to AAA. No 2016 special session would mean no 2016 omnibus tax bill, which would in turn translate into a foregone opportunity to provide tax reductions for many working families and less revenue for local governments. However, this downside is at least in part offset by the benefit of an increased state budget reserve.