On the surface, today’s release of the February economic forecast was no big deal. Projections of state general fund revenue went down (mainly due to national and global economic trends that state policymakers have no control over), but so too did projected spending. The net result was a $300 million reduction in the size of the projected state budget surplus for the current biennium—from $1.2 billion (in the November 2015 forecast) to $900 million. The $300 swing in state revenues amounts to 0.7 percent of total general fund spending in the FY 2016-17 biennium. So in other words, things didn’t change much.

However, a deeper dive into the February forecast information provided by Minnesota Management & Budget (MMB) reveals at least one eye-opening development. Consider the following string of facts:

• In the “out-biennium” (i.e., FY 2018-19), state general fund current resources are expected to be $45.7 billion, while expenditures are projected to be $44.5 billion, leaving a positive structural balance of $1.2 billion.
• However, projections of state expenditures largely ignore the impact of inflation. (Curiously, the forecast does include the impact of inflation on state revenues; this inconsistency is a result of a deliberate state policy choice made in 2002.) If—per the recommendations of the State Council of Economic Advisors—inflation is factored in on the spending side of the equation, projected state general fund expenditures increase by $1.7 billion for FY 2018-19.
• So—after factoring in inflation—the FY 2018-19 positive structural balance of $1.2 billion actually becomes a small negative balance of approximately $0.5 billion.

In other words, based upon the educated guess of the non-partisan policy wonks at Minnesota Management & Budget, there might not be much, if any, surplus in the next biennium, after we take into account the impact of inflation both on the revenue and the expenditure side of the state ledger. Thus, the budget surplus could be temporary and might not extend beyond the current biennium.

More February forecast information, including the full forecast document, a one-page overview, the news conference handout, and the summary general fund balance analysis, are available on-line.