Modest Changes Mean a “Boring” November Forecast


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The newly released November forecast shows only modest changes to state revenues and expenditures relative to what was projected at the end of the 2016 legislative session. As a result, the forecasted surpluses—now projected to be $678 million at the end of the current FY 2016-17 biennium and $1.4 billion in the upcoming FY 2018-19 biennium—have not changed dramatically relative to the previous estimates. The new forecast was characterized by Minnesota Management and Budget (MMB) Commissioner Myron Frans as “boring.” But when it comes to state finances, boring is good.

Based on the November forecast, projected revenues in the current FY 2016-17 biennium are up slightly relative to 2016 end-of-session (EOS) estimates, while projected spending is down, due primarily to enrollment and cost changes in the Medical Assistance program. The net result is a positive forecast balance in the FY 2016-17 biennium of $1.012 billion—a $283 increase over the 2016 EOS estimates. Under current law, 33 percent of the forecast balance ($334 million) is deposited in the state budget reserve, leaving a budgetary balance of $678 million. With the $334 million increase, the state budget reserve is now at $1.93 billion; MMB recommends a budget reserve for the current biennium of $2.052 billion “to adequately manage the underlying risks in Minnesota’s general fund tax revenue system.”

For the upcoming FY 2018-19 biennium, both revenues and expenditures are now expected to fall below 2016 EOS estimates. The decline in projected expenditures is once again the result of reduced health care spending. The decline in projected revenues is due almost entirely to a decline in anticipated sales tax revenue associated with slower than expected growth in consumer spending. The decline in projected FY 2018-19 revenues is substantially greater than the decline in projected spending, resulting in a $376 million decline in the FY 2018-19 forecast balance, from $1.776 billion based on the end-of-session estimate to $1.400 billion based on the November forecast.

The discussion above focuses on the general fund budgetary balance, which includes balances carried forward from the previous biennium. An arguably better way to gauge the health of general fund finances is to examine the structural balance, which equals general fund expenditures over the course of a biennium minus revenues collected during the biennium, excluding balances carried forward from the previous biennium. The November forecast reveals sizeable structural balances for each biennium through the end of the current planning horizon (FY 2020-21).

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During the November forecast press conference, MMB officials noted that general fund expenditures are projected to grow at a pace below or equal to the growth in general fund revenue. The lower rate of growth in expenditures vis-à-vis revenues is responsible for the long-term projected positive structural balance in the general fund.

Contrast the new “boring” forecast to the “exciting” forecast that Minnesota experienced six years ago. In the November 2010 forecast, the state was facing a projected structural deficit of $6.6 billion in FY 2012-13 and $5.1 billion in FY 2014-15. To make matters worse, these projected deficits largely ignored the impact of inflation on state expenditures; after including these effects, MMB projected a structural deficit approaching $8 billion for both FY 2012-13 and FY 2014-15. In addition, the state had delayed aid payments to schools districts to the tune of $1.9 billion and employed other accounting gimmicks in order to provide a short-term reprieve from state budget woes.

The requirement of state law to ignore the impact of inflation on most parts of the state budget overstates the size of the surplus in future biennia.* Nonetheless, the health of state finances is dramatically improved relative to 2010. The reversal of Minnesota’s fortunes over the last six years is due to a recovering national economy and to the adoption of responsible budgeting practices. The state largely forewent the use of shifts and accounting gimmicks, such as delayed aid payments to school districts. Instead, the budget was balanced the old-fashioned way—by making sure that general fund spending was not exceeding general fund revenues. At the same time, the state managed to pay back the delayed aid payments to Minnesota school districts. As a result, the official November 2016 forecast shows a substantial budget surplus in both the current and upcoming biennia.

The responsible budgeting practices that helped to produce budget surpluses, pay back state funding shifts, and enhance the state budget reserve were among the reasons for Fitch’s upgrade in Minnesota’s bond rating to AAA, as described in an August 10 North Star article.

The boredom of today is undoubtedly preferable to the excitement of 2010. As Commissioner Frans noted at the November forecast press conference, some other states are likely envious of the “boredom” that Minnesota is currently enjoying.

The news of projected budget surpluses has some conservatives already salivating at the prospect of big tax cuts. However, caution is in order, for reasons to be noted in the second part of this series.

 

*The failure to fully account for inflation in the state’s general fund forecast was described in North Star’s summary of the February 2016 forecast and will be examined in greater detail in the second part of this series.