Stop me if you've heard this one: Minnesota's running a surplus

Here comes another round of happy-face headlines with the word "surplus" in them to describe the current condition of the Minnesota state economy. You're going to hear and read that the state's latest forecast has uncovered an extra $88 million, even after paying off the $93 million Minnesota borrowed from its public schools four years ago. When you do, keep a couple of salient facts in mind that might provide a more realistic appraisal of the state's current financial health.


First, Minnesota is the only state in the entire nation that counts the dollars inflation adds to its pool of government resources but ignores those same inflation adjustments when calibrating the cost of government services. The February forecast by the Minnesota Department of Finance shows just a 0.4 percent increase in general fund revenue for the 2006-07 biennium over the November forecast numbers; which is less than the inflation rate during that period. Budget numbers that honestly factor in inflation are called "real dollars," which is why in the "real" world, there is no meaningful surplus to speak of.

Even if you want to ignore the way the state plays smoke and mirrors with inflation, there is another significant factor tripping up the rosy projections of a budgetary "surplus." According to the latest court ruling on the matter, the state's "health impact fee" (the politically correct term for the 75-cents a pack cigarette tax proposed by Governor Pawlenty and passed by the Legislature at the end of last year's session) is illegal, depriving the state of some $200 million per year in projected revenue.

You have to go to the bottom of page five on the Department of Finance's "Economic Forecast Summary" to read how they have finessed this situation: "There was no material change in the forecast for the health impact fee. It reflects the current agreement between the state and the plaintiffs which allows the state to continue to collect the fee. The state has agreed not to transfer those fees or any earnings on them to the general fund before the end of the biennium while the case is under appeal."

In other words, the state budget is expected to show a surplus as long as you count the revenues that it's collecting but can't spend. Will the state ever be able to spend those dollars? It depends on the ruling of the Minnesota Supreme Court, which will have to pass judgment on whether the fee violates the terms of Minnesota's 1998 settlement with tobacco companies, which precluded the levying of any further health-related taxes on smoking.

Meanwhile, the forecast for the state's economy shows it continuing to lag behind the national average in terms of jobs and wage growth. Specifically, the Department of Finance's Economic Forecast Summary states that, "Job growth in Minnesota continues to be weaker than would be expected at this point in an economic expansion. In the four years since the end of the recession, employment has increased by just 2.3 percent. In the four years following the end of the 1990-91 recession, employment grew by 11 percent....[I]n the last two years, employment growth in Minnesota has fallen further behind the national average. During the second half of 2005 Minnesota payroll employment grew at an annual rate of just 0.4 percent. U.S. payroll employment, even with the disruptions from the hurricanes along the Gulf Coast, grew nearly twice as fast.

So much for the idea that "no new taxes" stimulates job growth.

Looking ahead to the 2008-09 biennial budget, the Department of Finance projects that if you factor in inflation and also factor in the passage of a constitutional amendment endorsed by Governor Pawlenty, which would dedicate all motor vehicle sales tax revenues to transportation and transit, the general budget will be $24 million in the hole. And that's without any geopolitical surprises in the world economy, using a relatively modest estimate of inflation, and assuming the state prevails in court on the cigarette "fee" issue. Governor Pawlenty frequently says that Minnesota has "a spending problem, not a revenue problem." Unless one subscribes to the belief that there should be real-dollar cuts in education and health care, Pawlenty's own Department of Finance proves that is not the case.

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