Minnesota’s budget is facing a deficit. Or it’s not.

Both statements are true, depending on how far into the future the governor and the Legislature look.

The current two-year budget that ends on June 30 has a surplus. The budget that lawmakers will approve — hopefully before the deadline of July 1 — is also projected to be in the black.

Only if the budget writers look 27 months into the state’s fiscal future does a deficit appear, which could be why it is nearly always described as “looming.”

Which raises an important fact about how Minnesota, and about half of the states, do their spending and revenue forecasts. Since at least the mid-1980s Minnesota’s finance agency and its economists look four years or more into the future. While that can expose deficits that otherwise might be hidden, it also gives the governor more time to address future disconnects between projected spending and projected revenue.

What is fiscally smart can sometimes be politically awkward. But for that long-range look, no one would be talking about that looming deficit. Gov. Tim Walz and legislative DFLers wouldn’t be defending their spending choices and Republicans wouldn’t have their primary talking point of the 2025 session.

“Thirteen states look over the horizon. Thirty-seven states would only show you those first two columns,” Walz said, pointing to a slide showing the long-range outlook. “If you just look at those, everything’s fine. A two billion dollar surplus? Everything’s fine. The over-the-horizon — especially in areas where we can contain costs while maintaining services — keeps us Triple-A bond rated…

“So we have an opportunity to tackle these things,” Walz said.

That is the primary benefit to longer range forecasts. If a deficit is projected in four years, spending decisions made now can make them lower (or higher). Minnesota Management and Budget officials call the second biennium “the planning years” for that very reason.

Said MMB Commissioner Erin Campbell as she presented the latest forecast March 6: “As you can see, spending decisions made this legislative session will impact the planning years.”

“We’re in the black. We’re in a solid position,” Walz said in January when he presented his proposal for the two-year budget that begins this summer. “But if we set and rest on our laurels, it will be eaten up by these (cost) drivers.”

Walz proposed a budget that would reduce the projected deficit for the following budget by half. Much of that was capping increases in payments for long-term care and reducing the state share of special education transportation from 100% of costs to 95%. Both have been increasing far faster than inflation and, if uncapped, will take up higher and higher percentages of the state budget.

He proposed a slight cut in the sales tax rate while spreading the tax to financial services. That, said Walz, moves the sales tax into purchases that are now untaxed and will be a larger share of the altered sales tax in the future. Spending on services is growing faster than spending on goods.

He also called for other savings including ending a 50-year program of paying for books, curriculum, counseling and transportation for non-public school students and shifting the state share of light rail operation costs to a new regional sales tax collected by the Met Council.

Balanced in the tails

All are unpopular. And the DFL governor has said repeatedly that if lawmakers have better ideas, he’s all ears. But before the House and Senate present their spending targets, Walz will adjust his plan soon based on the more-current and more-gloomy projections released earlier this month.

“When have we ever started budget negotiation before we got the March forecast?” Speaker Emerita Melissa Hortman said last week. “This is when the work usually begins and the work really doesn’t begin until we get the governor’s budget.”

“The gun hasn’t fired at the starting blocks yet,” the Brooklyn Park DFLer said.

The forecast is built using national and state data as well as long-range forecasts purchased from a national economics analysis firm. Twice a year — November and February — a formal forecast is presented (though once, during the first months of the pandemic, a special May forecast was presented). It is the February forecast that is used to craft budgets.

MMB also does a look back to grade how close the forecasts were to what eventually happened.

Minnesota also has a budgeting practice, though it isn’t a legal requirement, to never make revenue and spending decisions for the current budget that would cause the balance in the next biennium to turn negative. This is referred to in legispeak as being “balanced in the tails.”

That can lead to some odd statements, as in 2023 when Hortman warned against spending too much.

“There are different things you can do in a state budget that have small costs this year but when you look out five, 10, 20 years, you can have what we call in state government ‘exploding tails,’ ” Hortman said.

Professionalized forecasts

Minnesota hasn’t always gazed into the future for budget and spending trends. The state law requiring forecasts to look at the next budget period plus the following didn’t pass until 1994. But it was common practice before then.

In 1990, Peter Hutchinson was the commissioner of what was then the Department of Finance under Gov Rudy Perpich. The state had suffered through a period of financial chaos in the early 1980s with repeated special sessions needed to resolve deficits.

“Forecasting was a joke,” Hutchinson said of that period. “It was just a disaster. And out of that there was a push to professionalize forecasting. Or to put it a different way, to depoliticize forecasting.”

It was in that period that Tom Stinson, a University of Minnesota applied economics professor, became the first official state economist. He held the position for 26 years. Hutchinson said it was in Stinson’s early years that the state began doing what are called the planning estimates — looks ahead beyond the next budget.

“As far as I was concerned as a finance commissioner, it was fabulous,” Hutchinson said. It was an election year, and the state faced a $145 million deficit — budget dust now but a lot of money then.

“We couldn’t get the budget balanced because no one wanted to do anything in an election year — they didn’t want to raise taxes or cut spending,” he said. “But the fact that we had four years to look at changed the playing field. Now you have more variables you could manage. Even if we can’t balance the budget in the short term, we can balance it in the long term.

“I became a devotee,” Hutchinson said. “It’s a way of looking around the corner to see what’s the real consequence of what you’re doing.”

What could go wrong otherwise? Having just one budget period in mind led to fiscal shenanigans, he said. Politicians could make popular decisions knowing the pain would come later, perhaps after the election. A tax cut could kick in on the last day of the current budget period, for example, which wouldn’t put the current budget out of balance but would cause, in Hortman’s phrase, “exploding tails.”

“If you never told anyone about the long-term impact, you could make it look pretty reasonable,” Hutchinson said. Long-range forecasting “redesigned the sandbox” and it was put into state law by then-Gov. Arne Carlson, who had been state auditor.

“You forced people to have to look longer term and to be honest, honest in a political context,” Hutchinson said. 

Myron Frans was the commissioner of what is now called Minnesota Management and Budget under two governors — Mark Dayton and Walz. He recalls coming into the job facing a major deficit, blamed on the Dotcom bust.

“OK, Myron, we need you to find $6 billion in revenue,” Frans recalled. It was difficult, made more difficult because the four-year forecast horizon no longer allowed politicians to push problems off to the next budget — or maybe the next governor.

“From a budgetary perspective it is so easy to play games if you don’t have a planning horizon,” Frans said. “Of course you have to have it or else people would just game the system. It’s a truth-teller.”

Trust in numbers

According to the Association of State Budget Officers, Minnesota is one of 10 states that leave it up to the governor to create revenue forecasts, with 28 having an executive/ legislative consensus group and 12 others having dueling forecasts.(Corey, the ASBO graf here) In a partisan legislative environment, having forecasts solely in the domain of the governor could lead to partisan doubts about its honesty. It rarely happens, but it did once while Frans was commissioner and he still gets angry about it. 

The December, 2017 forecast showed a $188 million deficit for the current budget and Daudt suggested Dayton wanted an overly pessimistic forecast to discourage tax cuts.

“I’m not blaming the governor that we have a deficit today,” Daudt said. “I’m saying that I don’t believe we do have a deficit today because these are not accurate numbers that reflect the environment we’re in right now.”

Frans said he pushed reporters to verify whether that was a fair criticism.

“First of all, we don’t have time to cook the books. Second of all, we wouldn’t know how to do it in the first place,” Frans recalled saying. “It’s hard enough to do the forecast straight.”

By the time of the February forecast, the deficit had turned into a surplus, but not because the numbers were manipulated, Frans said.

Generally, however, legislators of both parties accept the forecast.

“I think in general we trust the people who put the forecast together,” said Rep. Paul Torkelson, the Hanska Republican who is in his first year as chair of the budget-writing Ways and Means Committee. “Not that we think they have nailed it down to the last billion, but more so that they identify the trends. I’m more concerned about the trend than the actual number.”

“I think there is broad consensus that these are real numbers — they are forecast numbers — but they give us a pretty good idea which direction we’re going,” Torkelson said. And he is a fan of the four-year outlook.

“It’s like that flashing light out in the distance,” he said. “If you see those flashing lights on the highway, you really should slow down because you don’t know what is happening. We need to do long-range planning. It’s just smart.”

Torkelson’s criticism is aimed at Walz and DFL leaders who he said he thinks continue to overemphasize the short-term surpluses and underemphasize the future deficits and blame those deficits more on threats from Trump Administration policies rather than their own decisions of the last three years.

But that is where forecasting stops and politics begin. Hutchinson speaks of the long-term forecasting setting up the size of the sandbox, leaving the politicians to decide how to play in it.

“The politics is the politics,” Hutchinson said. “You’ve redesigned the sandbox and the politics is still gonna take place inside.”

‘Looming’ forecasts, and whose problem it is

This particular Minnesota budget cycle has an unusual quirk. Because it comes in the second half of the governor’s term of office, and because it comes just before an election in which all 201 legislative seats will be on the ballot, some of the current decision makers will not be around when that deficit-projected budget arrives. Only if they run for reelection — certainly not clear for Walz — and win another term will they be the ones to fill the hole.

So is the looming deficit somebody else’s trouble? Walz and legislative leaders say no.

“If you’re really concerned that we have this high-risk environment in the future biennium, we should recognize that in the current biennium we are working on and be a little more cautious and conservative in that effort,” Torkelson said.

With a tied House and single vote DFL majority in the Senate, both parties have both the ability to check the other’s control of the budget and a disincentive to try to blame the other for the final budget document.

And it starts now. As of Monday, the House returns to the 67-67 tie that has been expected since Election Day, and Walz’s next budget plan is due this week.

Editor’s note: Peter Hutchinson is the chair of MinnPost’s board of directors, which does not weigh in on editorial decisions.

Peter Callaghan

Peter Callaghan covers state government for MinnPost. Follow him on Twitter @CallaghanPeter or email him at [email protected].

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