Budget surplus should be used to keep Minnesota moving forward

The state’s November 2014 Economic Forecast released today has positive news over three budget cycles.

The forecast projects a $556 million positive balance for the remainder of the FY 2014-15 biennium. Because of a policy change passed last year, up to one-third of a positive balance in the November Forecast goes to strengthen the state’s budget reserve. In this case, that means $183 million has been added to the reserve, bringing total general fund reserves up to $1.3 billion.

In the 2015 Legislative Session, policymakers will need to pass the budget for the upcoming FY 2016-17 biennium. The forecast measures a $1.0 billion positive balance for FY 2016-17 biennium. Taking into account the impact of inflation reduces this figure to $121 million.

This forecast also gives us a first glimpse at the FY 2018-19 biennium. A $2.8 billion positive balance is projected. When the impact of inflation is taken into account, this becomes a slight deficit of $143 million.

The positive balance in today’s forecast is due to a few factors. Revenues in FY 2014-15 have come in higher than previous projections, primarily in the income tax.

There is also a reduction in spending, with the largest driver being a drop in Medical Assistance spending resulting from changes in the projected caseload. Overall enrollment is expected to stay the same, but with a different mix. Fewer children, families, elderly people and people with disabilities are expected to participate in Medical Assistance, which results in a cost savings. More childless adults are enrolling in Medical Assistance, but this has no additional cost to the state, as the federal government fully funds health care for this population until 2017, and covers most of the cost after that.

The forecast shows that Minnesota’s economy has continued to improve. This fall, Minnesota had the fifth lowest jobless rate in the nation at 3.9 percent. Importantly, this economic improvement has been broad: unemployment has fallen for workers across races, genders and ages. However, even though the U.S. economy continues to improve, growth is projected to be slower than in the February Forecast. This contributes to slightly lower revenue projections for FY 2016-17 than those from February.

Minnesota has been on the right path for the past several years, making public investments in shared prosperity and making our tax system fairer and more sustainable. However, too many Minnesotans still find financial security is out of reach. Minnesota should continue to make smart investments that help Minnesotans get ahead. In the upcoming legislative session, policymakers should increase funding for Basic Sliding Fee child care assistance and expand the dependent care tax credit so that more Minnesota parents can find affordable child care that meets their needs.

While this forecast shows some good news for the state, policymakers need to make sure their choices are sustainable. For example, history shows that when we cut taxes too far in good times, it makes things worse in the next downturn. Any tax cuts passed in 2015 should be limited in size and focused on making our tax system more fair.

The forecasters are confident in their projections. Global Insight, Minnesota’s economic consulting firm, assigns a 70 percent probability to their baseline economic forecast, and a 15 percent probability to their more pessimistic and optimistic scenarios. In the pessimistic scenario, the U.S. just avoids a recession due to a weaker housing market. In the optimistic scenario, oil prices drop more than expected and foreign growth is higher than anticipated.

Governor Dayton will use the numbers in this forecast to form his budget, which is expected by late January.

-Clark Biegler

About Clark Goldenrod

Clark Goldenrod is the Minnesota Budget Project's policy analyst.
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