The Free Press, Mankato, MN

Editorials

November 29, 2006

Our View: Be tight with state budget surplus

The good news: The state of Minnesota may have as much as a $2 billion projected budget surplus.

The bad news: The state of the economy is more fraught with risk than almost any other time in history.

The challenge for legislators will be to impose upon themselves a kind of uncomfortable prudence. In fact, it might be worthwhile to adopt a state of mind that there is no surplus. State Commissioner of Finance Peggy Ingison notes in a press release that “The 2008-09 forecast makes no allowance for the effects of general inflation on spending. Adjusting for inflation alone could use up about a billion dollars of this balance.”

So we’re back down to a $1 billion surplus. But even longtime Republican budget hawk and former finance commissioner Dan McElroy offers words of caution.

He told The Associated Press that the forecast doesn’t take into account the expected inflation in state programs due for reauthorization, and he even avoided using the word “surplus.”

“Surplus implies psychologically that it’s ‘extra money’ — money that the government doesn’t need, money that should go for tax rebates or tax cuts,” he said, adding, “The money on the bottom line isn’t extra or frivolous dollars. It’s money that in the past would have been baked into the forecast for inflation.”

The current budget also leaves less of a cushion in a rainy day fund than in years past.

The recent forecast noted that the budget reserve, which if we include what’s called the cash flow account, was 4 percent of the two-year spending budget in 2000-01. It is now just 3.1 percent.

In fact, the Minnesota Council of Economic Advisors says it would be prudent to increase the budget reserve account. At one time, in the 1990s, the budget reserve was mandated in law by a more prudent Legislature at 5 percent of spending. That would require about $600 million more, thus cutting our so-called surplus to $400 million or so, or about 1 to 2 percent of project revenue. If the projections are off 5 percent, we’re facing another deficit.

While we have less reserve, the forecast is by no means a sure thing. In fact, forecasters estimate that there is only a 60 percent chance the forecast will become reality when 2009 budget year ends. There is a 20 percent chance it will be better, but also a 20 percent chance it will be worse.

Legislators of both parties seem to be suggesting prudence with this new budget surplus. It will be difficult to keep that tone with lots of groups and people knocking at the door of the state to increase funding. And many of them may be justified given the starvation diet some have been put on over the last few years.

Above all, legislators must remember, a projection is a projection and we have a lower budget reserve now than we did in days before a Sept. 11 economy.

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