War, inflation complicate Minnesota’s budget projections

Published 9:04 am Monday, February 28, 2022

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An all-important state budget forecast will be released Monday that lets Minnesota lawmakers know how much money they have to work with as they wrap up the legislative session.

But the ramifications of recent world events — namely the war in Ukraine and its broader fallout — are unlikely to be fully factored in. Already, calls for a cautious approach are running headlong into grand ambitions for splitting up what was a substantial surplus at the start of session.

In December, the Department of Minnesota Management and Budget projected a $7.7 billion surplus in the current budget. Revenue considerably beat expectations for the last several months, a combination of unusual timing of certain tax payments and money attributed to a growing economy.

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That said, the picture heading into this forecast is somewhat fuzzy.

The report combines previous tax collections and makes predictions far into the future. State finance officials have pointed to tapering in economic growth — from 4.3 to 4.1 percent for this fiscal year and 2.9 percent to 2.5 percent in the next — that would translate into less money than previously anticipated if that pattern holds.

That was before the recent Russian invasion of Ukraine and the resulting sanctions that could ripple outward.

The state department will undoubtedly nod to the crisis and the potential fallout on the economy.

It’s important to keep in mind that these forecasts aren’t produced overnight. The invasion in Europe last week was a distinct possibility when the forecast document began taking shape many weeks ago, but the extent of it and the reaction by the U.S. and its allies weren’t as clear until after the fact.

Tom Hanson, the state finance commissioner for four years under Republican Gov. Tim Pawlenty, said unfolding events like the one now are hard to account for.

“When I was MMB commissioner in 2008, when we saw the downturn in the economy from what was going on on Wall Street, we got the economic forecasts from our consultants at the beginning of the month. By the time we issued the forecast at the end of the month, it was horribly outdated,” Hanson said.

Of the current situation, he added, “I would say there probably is going to be an asterisk to some degree.”

Tax collections aren’t the only ingredient in the forecast.

Past and projected spending are also vital.

“State expenditures are generally speaking much more stable,” said former MMB Commissioner Pam Wheelock, who served under third-party Gov. Jesse Ventura.

“The spending side is passed by the Legislature, with the exception of those entitlement programs that are based on eligibility. That’s the only thing that has some volatility,” Wheelock said.

The state has spent a lot of money on the COVID-19 fight. Much of that has been federal money and took the burden off some state programs. Last week, the Department of Education reported that public school enrollment for this year was a couple thousand students smaller than the prior school year. That translates into millions of state dollars not sent to districts.

Then there is high inflation, which has an effect on government entities as it does for households. Forecasters are limited by law in the way they can factor inflation into their spending calculations, although they always offer side estimates about its impact.

The prospect of rising interest rates in the weeks and months ahead will matter, too.

With some of these variables, lawmakers are already starting to curtail expectations or say they’d like to tread carefully.

“We have to be very cautious and very prudent with the surplus and I have no problem saving a lot of it if I had my way,” said Senate Minority Leader Melisa Lopez Franzen, DFL-Edina. “But we certainly have a lot of different strains and different proposals being put up by different groups. And we want to make sure that we take care of Minnesotans first and make sure that we’re ready for that next rainy day.”

Senate Majority Leader Jeremy Miller, R-Winona, agrees there’s added uncertainty. But he said that shouldn’t get in the way of permanent tax cuts his caucus wants.

“Oil is up, gas prices are up, heating costs are up. It’s really, really having an effect on family budgets in the state of Minnesota,” Miller said last week. “And we feel the best way that we can help at the state of Minnesota is putting more money in the pockets of Minnesotans.”

In divided government, as is in place in Minnesota, the most-cautious approach often wins out over the more-aggressive proposals just by default.

It’s not a budget-setting year, meaning lawmakers aren’t staring at a potential shutdown if they deadlock. And there are differences of opinion on measures that have a lasting fiscal impact versus those that have a one-time cost: Things like pandemic worker bonuses, the unemployment fund rescue and construction project matching dollars fit into that temporary column. New classroom aid, income tax rate cuts and those kinds of proposals carry into the future.

“You wouldn’t go out and move out of your apartment and buy a new house with a one-time bonus, especially if you think you might lose your job next year,” Wheelock said. “You just don’t make a long-term commitment with money that might not be available long term.”