Billion Dollar Guesswork
When Gov. Arne Carlson recently announced a projected surplus of $1.3 billion in the state budget, visions of sugarplums--from tax cuts to social-service increases to yet another stadium plan--began dancing in the heads of Minnesota politicians and their constituents alike. But the economists who compile the numbers are far more leery of what they are projecting. They maintain that the actual surplus is well below $1 billion. They also acknowledge that the methods used to arrive at their economic forecasts are part science, part common sense, and part wishful thinking.
Here's the way it works: Twice every year, in November and February, the Minnesota Department of Finance prepares an economic forecast. Calculated for a two-year period, these projections are used by the Legislature to determine how much is available to spend on education, road repairs, and every other item in the state budget. After each June 30, which marks the end of the state's fiscal year, the department's staffers tote up the actual amount of revenue collected in the state's coffers and measure it against the amount they had projected would be received. They feed this data into their economic trends and review the results of just-completed legislative session for any changes in state law that will affect the budget. Then they feverishly begin to assemble another forecast.
In other words, budget analysts are continually working on the fly, with constantly changing numbers and economic conditions, to try and predict the status of the state's economic health two years down the road. The obvious problem is that, no matter how diligent the bean-counters are and how prescient their formulas, their methods necessarily can't capture the dynamics of the state economy.
That's why, according to Minnesota State Economist Thomas Stinson, budget forecasts will always be quasi-fictional. "It's contingent on the fact that everything remains the same," he says of the projections. "The forecast looks at current law, and if we don't change either what we take in or what we spend, this is what the state's fiscal condition will be in another two years." But of course things will change. "This is the risk the state always assumes," concedes Stinson. "It makes plans to spend money that isn't in their pockets."
Forecasts aside, the good news is that a robust economy and prudent (some might say penurious) spending have resulted in a genuine surplus in the current state budget. But even here, Carlson's claim that it amounts to $1.3 billion ignores changes in the process that his administration, in tandem with the Legislature, has already set in motion.
During the last session, lawmakers created a special property-tax-reform account and earmarked 60 percent of the '97 budget surplus for its coffers. As a result, more than $800 million of the purported $1.3 billion surplus will be spent exclusively on research and revisions in our state property tax. "And that's tax reform," notes Dan Salomone of the Minnesota Taxpayers Association, "not relief." In other words, homeowners and renters won't directly be getting a piece of that action. Another $81 million is also out of the budget equation, having been earmarked for Gov. Arne Carlson's education tax credits and deductions. Take those two chunks away, and the billion-dollar-plus surplus shrinks to less than $500 million.
It shrinks even further if the Legislature continues its recent tradition of keeping a multi-million dollar "rainy day fund" in reserve. A primary advantage of the reserve fund is to compensate for fluctuations that can't be built into the budget forecasting process. This is especially important, says Salomone, because relatively minute changes in the workings of the state economy can have large ripple effects.
For example, one of the first areas of state services affected by an economic decline are health-care costs. This year, because the economy was stronger than anticipated, and thus more people could pay for their own health care, the state spent less than it had allocated; when the upcoming forecast is put together, economists will take this into account and adjust health care spending down. But if the economy takes a turn for the worse, and the state has failed to hold onto a cushion of cash, those surpluses can quickly turn into deficits. "It's a lesson we learned the hard way during the Quie administration" in the late 1970s, Salomone says.
Indeed, there are some remarkable similarities. Two decades ago the national economy was strong, spending was down, and the state's surplus at the end of the year was unusually large. At the time, Republican Gov. Al Quie and the Legislature spent the entire surplus to avoid any tax increases or budget cuts, leaving the state poorly positioned for the recession of the '80s.
Right now, Gov. Carlson is crowing about a billion-dollar surplus without factoring in the cost of his property-tax and education reforms. What's more, the long-term impact of welfare reform and other decreased federal contributions to social spending have yet to be determined. Meanwhile, Salomone and Stinson have no choice but to track the positive trends and keep their fingers crossed. "We are betting that both the national and state economics forecasts are correct," Salomone says before wryly adding, "there's a lot of places for things to go wrong."
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