Legislature: Hot debate on how to count inflation

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	Legislature: Hot debate on how to count inflation 11/2/2008 8:56 AM by Charley Shaw, Finance and Commerce Since 2002, state lawmakers have excluded inflation when putting a price tag on future general fund spending, though they’ve included it when counting revenue. An expert panel that includes several former state finance officials plans to recommend that state lawmakers either account for inflation in both spending and revenue from the general fund, or do away with projecting inflation altogether. The panel, which has been meeting for about a year, is called the Minnesota Budget Trends Study Commission. Its charge: by December, deliver proposals to state lawmakers aimed at smoothing out the state’s often wild budgetary ups and downs. On Tuesday, the panel clashed over how the state should account for inflation, with much the same heated partisan divide reflected in the GOP-DFL split over the issue in the Legislature the past five years. Peggy Ingison, who served as finance commissioner during incumbent GOP Gov. Tim Pawlenty’s first term, said the twice-annual economic forecasts prepared by the state Finance Department should tell legislators what they can expect. “To have it in one and not in the other really distorts,” said Ingison, chief financial officer of the Minneapolis school district. Advertisement Pawlenty and the DFL-controlled House and Senate each appointed five members to the 15-member Budget Trends commission. Jim Knoblach, a former St. Cloud Republican representative and Ways and Means chairman, said inflation shouldn’t be automatically factored into the forecast because that method of forecasting automatically increases spending. Spending in the forecast should be based on current law without future inflation thrown into the mix, according to Knoblach. “That to me is the appropriate way to start. … I don’t think we should change the baseline if we haven’t changed the law,” Knoblach said. John Gunyou, who served as finance commissioner during GOP Gov. Arne Carlson’s first term, proposed that the commission recommend consistency on the inflation issue when it comes to revenue and expenses. His proposal, which the commission passed on a voice vote, recommended the forecasts shouldn’t automatically require lawmakers to pay for inflation. He noted that not including inflation in a forecast gives a “false picture” about the costs of services the state has already committed to offering. The commission is also going to recommend that the state forecast its budget along a trend line. That would happen in addition to the current budget forecast, which projects specific amounts of spending and revenue. Legislation will result from the commission’s findings. Co-chairman Kevin Goodno, a lobbyist and former Human Services commissioner under Pawlenty, said the upcoming state budget deficit, which is expected to be in the multi-billion-dollar range, could make lawmakers more interested in introducing legislation based on the commission’s work. But the state would probably have to wait to pay for the new policies until the budget situation returns to the black. Looking longer term, co-chairman Jay Kiedrowski, a finance commissioner under DFL Gov. Rudy Perpich, said health care’s impact on the state budget will be part of the recommendations. “Clearly the fact that we see health care spending growing in the next 20 years at an 8.5 percent clip when our revenues are only growing 3.9 percent means the state of Minnesota has a very difficult problem,” Kiedrowski said. The recommendations will also look squarely at the state’s fiscal policies. Among the pillars of the state’s financial structure receiving scrutiny from commission members is the state’s cash reserves. Prior to the 2007 legislative session, the state had $653 million in its budget reserve and $350 million in its cash-flow account. State lawmakers used $500 million in the 2008 legislative session to help solve a budget deficit, leaving $153 million in the budget reserve. The cash-flow account was untapped. The group has looked into new policies for the state’s reserves that would provide policymakers with more financial cushion in times of economic distress. Kiedrowski said the commission will recommend that the state’s cash-flow account have enough money to pay for state government operations so that the state doesn’t have to do short-term borrowing. Kiedrowski recalled the difficult situation that arose in 1983, when he was deputy commissioner of finance and the state didn’t have sufficient dollars on hand and so had to borrow about $240 million on a short-term basis. The state can borrow money to pay for operations internally, according to Kiedrowski. But the cash-flow account needs to be sufficient to handle an economic crisis when money is no longer available within state government. “Since the early 70s, we’ve had problems forecasting state revenues and expenditures. It’s because the economy is cyclical. But when the federal economy is sneezing, Minnesota gets pneumonia. What we’re looking at is a way in good times not to overestimate revenues like we have the last 30-plus years,” Kiedrowski said. “In essence, it would be to reduce some of our optimism in good times and build up our budget reserves for bad times.”