Smart Fiscal Management Contributed to Surplus


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The November 2016 state economic forecast projected an official general fund surplus of $678 million in the current biennium and a $1.4 billion surplus for the upcoming FY 2018-19 biennium, as noted in a recent North Star article. The presence of surpluses is a welcome reversal from the preceding era of recurring budget deficits. At the November forecast press conference, Minnesota Management & Budget (MMB) Commissioner Myron Frans attributed much of the turn-around in the state’s fiscal condition to responsible fiscal management in recent years, as evidenced by the recent upgrade in the state’s bond rating to AAA from the Fitch rating agency.

Conservatives, however, have argued that the large surpluses are the result of improvements in the national economy over the last several years. While it is difficult to determine the precise extent to which current surpluses are the result of prudent state fiscal management versus higher than anticipated revenue collections associated with improving economic conditions, it is possible to approximate the impact of one set of forces if we hold the other set of forces constant.

By holding one set of forces constant, the change in the general fund balance must be the result of the remaining set of forces. Such an analysis is possible—at least at a fixed point in time—if we compare general fund balances from the February forecast to balances as indicated in MMB’s end-of-session (EOS) estimates. The EOS estimates are based on the same set of economic assumptions as the February forecast. Thus, any difference in general fund balances in the EOS estimates relative to the February forecast must be the result of policy changes enacted during the intervening legislative session.

The most significant fiscal policy changes in recent history were made during the 2013 regular legislative session. The tax increases enacted in 2013—most notably, the income tax increase focused on households with taxable income in excess of $250,000*—were anathema to many Minnesota conservatives—but there can be no doubt that these new revenues wiped out a $628 million structural budget deficit† projected for the FY 2014-15 biennium.

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Holding all economic conditions constant, the policy changes enacted during the 2013 session converted a $628 million structural deficit into a $73 million structural surplus—a $701 million improvement in the state’s bottom line.

Of course, with a $2.6 billion increase in state tax revenue, the 2013 legislature did much more than resolve a $628 million deficit. But then again, responsible fiscal management involves more than balancing budgets; it also involves adequately funding critical public investments. Laws enacted during the 2013 session restored a portion of real state funding cuts to K-12 and higher education, funded statewide all-day kindergarten, provided new aid to counties, cities, and townships which had dwindled over the preceding decade, and enhanced the property tax refund program, thereby targeting tax relief to Minnesotans with high taxes relative to their income and contributing to the first year to year statewide property tax reduction in twelve years (including a five percent reduction in homeowner taxes). Other bills passed in 2013 allowed for new state investments in public infrastructure, public safety, workforce development, and affordable housing.

Due to changes in the economy relative to what was forecast in 2013 and subsequent changes in state policy, it is difficult to say precisely to what extent policy choices made in 2013 contributed to surpluses projected in the November 2016 forecast. However, if we ignore all other policy changes enacted since 2013 and all changes in economic conditions relative to what was projected in 2013, the net impact of laws enacted during the 2013 session resulted in an approximately $700 million improvement in the state’s structural balance per biennium‡. This comes to about half of the $1.4 billion surplus projected for FY 2018-19. The remainder of the $1.4 billion surplus is likely due to a combination of changing economic conditions and policy choices enacted after the 2013 session.

While the impact of state fiscal management on the size of the state budget surplus cannot be precisely quantified, an examination of 2013 forecast documents shows that fiscal policies enacted during the 2013 session contributed to a notable improvement in the state’s fiscal condition—not to mention important reinvestments in many critical public assets. While the state’s current fiscal health should not be overstated, there can be little doubt that responsible fiscal management has contributed to the official general fund surpluses projected in the November 2016 forecast.

 

*The new fourth tier income tax rate (9.85 percent) applied to Minnesota taxable income in excess of $250,000 for tax year 2013, the first year that it was in effect. Because the income tax brackets are adjusted for inflation, they increase each year. Thus, for tax year 2016, the fourth tier rate applies to Minnesota taxable income in excess of $259,421; for tax year 2017, the fourth tier rate will apply to Minnesota taxable income in excess of $261,510.

The general fund structural balance is equal to the current resources coming into the general fund over the course of a biennium (excluding balances carried forward from the previous biennium) minus total expenditures and transfers.

A comparison of projected general fund budget balances from before and after the 2013 legislative sessions—which holds all things constant except for changes in state law made during the 2013 regular session—shows an improvement of approximately $700 million in the state’s general fund structural balance in both the FY 2014-15 and FY 2016-17 biennia.