New report shows Minnesota is half way towards budget reserve goal

Progress accumulates in steps. And Minnesota is taking critical steps to ensure we’re better prepared for the next economic downturn.

The state should have $2.0 billion in its budget reserve to be able to meet the needs of Minnesotans in tough economic times. That’s according to Minnesota Management and Budget’s (MMB) most recent Budget Reserve Report, an annual projection of how much the state needs in savings to adequately prepare for the next downturn in the business cycle.

Similar to the way a family might have a savings account for emergency expenses or to weather a job loss, Minnesota keeps a budget reserve so that when a recession hits, the state can continue to serve Minnesotans’ needs. Because the need for public services often increases during a recession, a reserve is especially important to avoid drastic cuts to health care and other services that Minnesotans turn to when times are tough.

By evaluating the state’s current revenue system, MMB regularly produces a budget reserve recommendation designed to prepare the state to absorb the shock of most future economic downturns.

Building and maintaining a healthy level of reserves are also indications of sound fiscal management that can help the state earn a stronger bond rating. Similar to having a good credit score, a strong bond rating allows Minnesota to borrow funds to build roads, bridges and other infrastructure at a lower cost.

For FY 2016-17, MMB recommends a target of 4.8 percent of general tax revenues, or $2.0 billion. Currently, the state has $994 million in the reserve, or under half of the recommended target.

We’re making progress with sound policy decisions. In the 2014 Legislative Session, policymakers took a step toward strengthening the state’s long-term fiscal health by requiring that up to one-third of any projected surplus in the yearly November Economic Forecast automatically go to the state’s budget reserve until it reaches the MMB target.

Last session, policymakers left $865 million unallocated from the state’s projected surplus. Combined with good news of higher than expected revenues in the July and October economic updates, this indicates that Minnesota will likely have another strong surplus in the upcoming November Forecast. That’ll bring us closer to ensuring that Minnesota has enough resources to weather the next bout of tough economic times.

-Clark Biegler

About Clark Biegler

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