Budget reserves should be built up [UPDATED]Published 9:38am Wednesday, June 12, 2013 Updated 11:46am Wednesday, June 12, 2013
Minnesota’s growing economy pumped an extra $300 million into state coffers recently and some political leaders seem to be licking their chops.
We say not so fast.
The $300 million sounds like a lot but represents just 0.7 percent of a two-year state budget of about $38 billion.
We doubt most Minnesotans would go on a spending spree if they got a 0.7 percent raise.
The $300 million sounds good until we realize the state still owes schools about $850 million and our budget reserve is about $1 billion below where experts say it should be.
Still, the news seemed to excite some political leaders. If revenues continue to grow, they say, there may be new spending on education, roads and tax relief.
DFL House Speaker Paul Thissen told the Star Tribune such new spending is “very possible” if the economy continues to improve.
We suspect Republican leaders would just as soon also “spend” the extra in the form of lower taxes or tax breaks as has been their mode of operation. They favored reducing reserves last year.
Windfalls look great. Everyone’s happy. No one argues. The green is spread around.
That was the trap that snared Democrats, Republicans and an Independent Party governor in 2001. The state was rife with cash. School funding was expanded by some $900 million. Tax rates were lowered and sales tax rebates were doled out like free candy at a carnival.
Then the economy reminded us we weren’t that smart.
It’s a legacy that left a decade of deficits, not one but two state shutdowns, crumbling roads and a quality of life that went backwards.
And yet we don’t seem to have learned much from history.
While current law requires any surplus we have June 30 go toward the school payback, the fiscal prudence of our leaders seems to have gone missing. A new rainy day strategy is needed.
There are few political risks in this approach. Political leaders only need to consider the advice of their own just a few short years ago.
In 2009, the Minnesota Budget Trends Study Commission recommended a reserve of $2 billion. The current requirement is $653 million and we have met that.
That group was made up of 15 people, Republicans, Democrats and one independent.
The commission determined through research that the state’s revenue stream was volatile and becoming more so all the time.
Old budget reserve levels put the state at risk of a yo-yo fiscal policy that we’ve witnessed over the last few years, a policy that has wreaked havoc on all kinds of important, and basic, public needs like good roads.
Private and public sectors studies, including the budget commission and another by the Minnesota Business Partnership, have pointed out that the growth in Minnesota spending will continue to outpace the growth in our revenues and that deficits will likely re-occur if we don’t “structurally” balance our budget.
Even Gov. Mark Dayton urged a strong reserve when he vetoed the Republican tax proposals in 2012. He vetoed the Republican plan to draw down reserves to pay back money the Legislature had borrowed from schools, a plan Dayton said would have cut the reserve by two-thirds.
Dayton went on to say Minnesota Management and Budget was recommending a reserve of $1.3 billion, with current reserves at half of the amount needed to protect against risks in revenue volatility.
Since Dayton was a champion of reserves last year, we would expect his enthusiasm would not have waned, but rather, increased, given a brighter economic outlook.
As Dayton said in his message last year, “As elected officials, we are responsible for the wise financial management of our state.
Our first priority should be assuring state government’s financial stability.”
We couldn’t agree more.
Budget reserves are designed to staunch the fiscal bleeding that comes with deficits and prevent the lights-out political battles that lead to government shutdowns.
Minnesota’s first priority with any “windfall” revenue should be to pay back the schools but also to increase budget reserves.
— Free Press