Getting your Trinity Audio player ready...

Inflation should be included in forecasts to give Minnesotans a full picture.

Minnesota’s twice-a-year economic forecasts, vital for determining the state’s fiscal picture and the basis for budgets, has for too long suffered from a built-in flaw. For the last 20 years, inflation has been prohibited as a formal part of fiscal projections.

If only it were that easy. As Minnesotans have been reminded, inflation pushes up the cost of most everything, either directly or indirectly — including goods and services needed to deliver programs. A budget forecast that fails to account for that basic fact gives an incomplete picture of the state’s finances.

The decision to set aside inflation was a pure accounting gimmick, a bad holdover from 2002 when then-Gov. Tim Pawlenty urged the Legislature to strip it from spending projections. Doing so artificially reduced the size of spending deficits projected at the time.

What it couldn’t do was change the actual cost of delivering goods and services. It was, as with other devices from that era, a cosmetic fix, designed to create the illusion that government could deliver this year’s services at last year’s prices. It was mitigated only by the fact that inflation was fairly low at the time.

But that is no longer the case. In the face of inflation not seen in decades, it has become imperative for state government and taxpayers to have honest accounting.

This Star Tribune Editorial Board has for years decried this bit of budgetary hocus-pocus. Finally, this year there appears to be a strong movement by top DFLers, who control the House and Senate, to return Minnesota to truth in budgeting.

Chief among these is House Commerce Chairman Zack Stephenson, who is leading the push. “This has frustrated a lot of us for a lot of years,” Stephenson said. “It’s dishonest and it makes the state appear to be in a much healthier financial situation than it really is.” For example, this year’s $17 billion projected surplus does not account for the fact that goods and services the state purchased last year will cost more in the coming years.

“Picture your family doing a budget in January 2022, sitting at the kitchen table and looking out at the rest of the year,” Stephenson told an editorial writer. “You would have to assume that even if you got an inflationary increase in your salary, all your expenses would cost exactly the same as in 2021. By the time you got to December 2022, you’d be in a world of pain and your budget would be out of whack. I don’t know of any responsible business that does this.” Stephenson described it as a “uniquely Minnesotan absurdity.”

Critics of restoring inflation claim it puts spending on autopilot. But, as Stephenson notes, “The forecast doesn’t appropriate one dollar. The Legislature still has to make the decisions on how to appropriate money. This just means they have an accurate financial picture to work from.”

Deciding to spend less, to do less than the previous year “is a valid decision the Legislature could make,” he said. “They are entitled to make that decision. But we need to be honest about what we’re doing. What we’ve done for years now is deliver less for Minnesotans while pretending that we are doing more.”

Five former finance commissioners who served in the administrations of DFL, Republican and Independence Party governors — including the one who served under Pawlenty — have called for restoring inflation to the forecast.

They specifically addressed the notion that simply including inflation in spending projections would somehow put government spending on automatic pilot, noting that not adding it “impairs the ability of the governor and Legislature to make responsible, long-term financial decisions.”

Stephenson said that because finance officials must calculate the effects of inflation — even if they are not allowed to include the costs as a formal part of the forecast — Minnesota could return to honest budgeting as soon as the next forecast, due in late February or early March.

Should the bill pass, the next projected surplus may not look quite as gargantuan. A fiscal note currently estimates that inflation could reduce the surplus by $1.5 billion in the coming biennium.

That’s a hard step to take, but one that every legislator who seeks honesty in budgeting should be willing to make.

— Minneapolis Star Tribune, Jan. 12