Reaping the Whirlwind of Honest Budgeting

The Governor released his revised budget yesterday adding another $1.18 billion to his ambitious agenda.   The three largest line items are a $250 million bump in public safety aid, $240 million for lead pipe remediation, and $135 million in reimbursement aid to school districts for extending unemployment eligibility to certain school district employees that only work during the school year.  Modest additional bumps in LGA and County Program aid, a number of health and humans service program increases,  and about $43 million for Minnesota State University System initiatives are some of the other more notable elements.

The result is a proposed 28.4% biennium-on-biennium spending increase and a 19.8% increase over current FY 24-25 forecast.    Looking further into the planning horizon, the structural balance (projected revenues minus projected expenditures) for FY26-27 is a $1.94 billion deficit and the planning estimate budgetary balance is a negative $12 $894 million including inflation. 

We will have more on all this in the weeks ahead, but our attention was drawn to the triumphant return of forecast inflation in the budget and its implications for tracking and understanding growth trends in government spending.  Here’s one example of the potential type of head scratching that exists in trying to figure out what is going on:

• In the Governor’s original budget, total expenditures were $11.239 billion over FY24-25 forecast.
• The Governor adds an additional $1.18 billion in FY24-25 spending in his revised budget
• Total expenditures are now only $10.851 billion over FY24-25 forecast

The explanation lies in the fact the inflation was treated differently in the November forecast (informing the original budget) than the February forecast (informing his revised budget.)   The $1.18 billion of new spending is now offset by the $1.42 billion of prebooked expenditure inflation that is included in his proposed budget appropriations giving the appearance of a $300 million or so cut  – even though the Governor’s proposal accommodates his inflation adjustments. 

Having consistent treatment of inflation in forecasts from now on will rectify this problem.  However, this does point out how having prebooked inflation in the forecast creates a situation that is advantageous for the Governor.  The Governor saves $1.4 billion relative to the February forecast because he already built inflation into any areas that he wanted it in his proposal. 

The result is, with inflation in the forecasted expenditure number, new spending proposals will always appear to cost less than without inflation.

Then there is the challenge of making sense of the curious numbers accompanying the out-biennium – what might be called the “Mystery of the Missing Inflation” if it was a Hardy Boys book.  Three weeks ago, the February forecast estimated FY 26-27 inflation to be $3.09 billion.   Now in the revised budget, which adds another $11 billion in General Fund spending in FY24-25, the FY 26-27 inflation estimate is only $894 million.  We had to ask a state budgeting and finance expert (who shall remain nameless) to help us understand just what is going on here.  Here's the reply:

“That is one of the wonderful and confusing tricks that inflation provides.  When a forecast is done, inflation is applied to both biennia that are being forecasted. In the February forecast fiscal year CPI is 2.9% for FY 2024, 2.1% for FY 2025, 2.2% for FY 2026 and 2.2% for FY 2027.  So inflation for FY 2024 is 2.9%.  Inflation for FY 2025  is 2.9%  plus 2.1%.  Inflation for FY 2026 is 2.9% plus 2.1% plus 2.2%. And inflation for FY 2027 is 2.9% plus 2.1% plus 2.2% plus 2.2%.

However, once appropriations are made for FY 2024 and 2025 inflation is applied only to FY 2026 and 2027.  So inflation for FY 2026 is 2.2%  And inflation for FY 2027 is 2.2% plus 2.2%  That means FY 2026 and 2027 inflation total a lot less once appropriations are made for FY 2024 and 2025 than when FY 2024 and 2025 are still being forecasted.  Another way that adding inflation makes budgeting more confusing and more complicated.”

There is logic to how inflation is applied.  But it makes budget tracking much more complicated.  And I think it hides money - inflation for FY 2026-27 goes from $3 billion to less than $1 billion.

Welcome to more accurate budgeting.”

If all of this is still confusing, it's totally understandable.   Godspeed to the talented fiscal staff in the House and Senate who have to explain this to lawmakers.   And good luck to taxpayers trying to obtain an accurate understanding of what is really happening in state budgets and discerning how the looming calls for tax increases are influenced by this.