February Forecast shows $323 million surplus now, $1.1 billion shortfall in next biennium


We can all breathe a sigh of relief…at least for now. The February 2012 Economic Forecast, released on Wednesday morning, revealed that financial conditions continue to improve in Minnesota, resulting in a $323 million surplus for the current two-year budget cycle (FY 2012-13). This is in addition to the $876 million surplus that was reported in the November 2011 Economic Forecast. This good news means policymakers don’t have to make any budget adjustments during the 2012 Legislative Session.

State law has already determined how these surplus dollars will be used. The first $5 million will go toward refilling the state’s budget reserve back to its target of $653 million. The remaining $318 million will be used to begin to buy back the school payment shift, with schools seeing the first of these dollars by mid-March. That is good news for Minnesota’s children, because it brings us closer to making good on the state’s promise to pay back what it borrowed from our schools. However, it will take another $2.4 billion to completely reverse the shifted payments.

But there are reasons to temper optimism over the state’s improved financial situation with some caution.

We should not lose sight of the reality that the state hasn’t found a sustainable way to fund our priorities. Despite the positive news, the forecast still shows a $1.1 billion deficit in FY 2014-15. If the impact of inflation is included, the deficit is closer to $2.2 billion. And paying back the rest of the school shifts would add another $2.4 billion.

When they come back next year to set the FY 2014-15 budget, policymakers will have the opportunity to take a balanced approach, including raising revenues fairly, as they seek a sustainable way to fund the services Minnesotans want and value.

Although concerns about another recession are easing, there still remain real risks to the national economic recovery. Will Europe succeed in resolving its debt crisis? Will the tensions with Iran lead to higher oil prices, or even open conflict? And will federal decisionmakers focus too much on long-term deficit reduction and harm our short-term economic growth? Fallout from any of these situations could throw a wrench into the recovering U.S. economy.

So yes, the economy is doing better and the state’s financial situation is improving…but not by much. It’s a good time to remind ourselves that managing the natural ups and downs of the state budget is a delicate business. For policymakers to do their jobs effectively, they need the ability to use all the tools that are available, and the flexibility to act quickly as circumstances change. Any artificial restrictions – like supermajority requirements or constitutional budget amendments – would just interfere with their responsibility to legislate in the best interests of the state.