The Minnesota’s Budget Is Balanced Bamboozle

The best meaning for “balanced budget” is a budget in which revenues are projected to be at least as much as expenditures. If revenues exceed expenditures, nothing bad happens. But if expenditures exceed revenues, then either savings must be drawn down, borrowing will be required, or expenditures must be cut. This is true for individuals, families, businesses, and local, state and national governments.

Minnesota’s governor and legislative leaders proclaim at the end of each legislative session that Minnesota’s budget is balanced, but it frequently is not balanced in the foregoing sense. This misleads the public, and perhaps the political leaders themselves, sets the stage for trouble in the next legislative session and frequently imposes cash flow problems on local governments.

Minnesota’s Constitution severely limits state government’s power to borrow money to fund its operating budget. (Borrowing to fund capital improvements is allowed, and is done through a “capital budget” and legislation called a “bonding bill,” but neither that type of borrowing nor the line drawn between the capital and the operating budget is part of the balanced budget bamboozle. The bamboozle relates only to the operating budget.)

The Constitution requires the governor and legislature to agree on a budget that can be technically claimed not to require the state to borrow money, other than short term borrowing to address differences in the timing of revenues and expenditures during the two year budget period – a “biennium.” This is generally known as the balanced budget requirement, but it does not really require a budget balanced as described above.

Governments employ “fund accounting” to record revenues and expenditures. Minnesota state government has about 30 separate funds, each used for different spending categories, generally because the legislature wants or is required by law to restrict how a particular type of revenue is spent. The largest is the General Fund, which is the subject of almost all publicity and most political wrangling over the budget.

The Constitution’s borrowing prohibitions apply to each fund. Each is prohibited from ending a biennium with a negative balance, and short term borrowing to cover cash flow needs arising from differences in timing between revenues and expenditures is allowed only if the adopted budget projects a zero or positive fund balance by the end of the biennium. This is the constitutional “balanced budget requirement” with which the governor and legislature must and do comply. It falls short of demanding a truly balanced budget in two important respects, and creates a frequently used ability for the governor and legislature to force fiscal problems upon local governments.

First, there is nothing to stop the legislature from spending all or part of a fund’s beginning balance as well as all the revenue that flows in, so projected expenditures are allowed to, and frequently do, exceed projected revenues. Governors and legislators would call the budget balanced, but it would not really be. This is a good way to create future trouble, because most spending is intended to go on into the future, and if the beginning balance in the fund was needed to cover this year’s spending, there may not be enough on going future revenue to continue funding the spending next year.

Second, whether a fund has any money left at the end of a biennium is determined on a modified cash rather than a full accrual basis. The legislature can and sometimes does pass a law (which generally requires the governor’s signature) to require postponement of payments that ultimately must be made. Examples include aid to local governments and tax refunds. A governor may also be able to affect the fund balance by ordering deferral of payments, though that is less clear. Either way, the situation is a little bit like a credit card. While plenty of people have spent their way into serious problems by charging more on their credit cards than their incomes provide for them to spend, nobody would claim that such people were achieving balanced budgets. Yet governors and legislators can and regularly do make that claim for the state general fund budget when they do exactly that.

Finally, governors and legislatures frequently keep the state general fund from unconstitutionally ending up with a negative balance by passing the problem down to local governments. This they do either by just cutting aid payments to local governments that they have previously approved, before the payments are made, but after the local governments have counted on them in their own budgeting, or by postponing such payments. The former is the favorite way to cut payments to cities, the latter the favorite in cutting payments to school districts.

These practices in dealing with local governments are incongruent with the respective roles of state and local governments. Governors and legislators have great power to affect the entire state and generally enjoy exercising it. After all, that’s why they ran for office. It is not much of a stretch to say they characterize themselves, and are seen by the public, as the parents and local government officials as the children in state-local relationships.

Yet, in the fiscal relationship, the state acts like the child conducting a spending spree with the parents’ credit card, and the locals are like the parents who have to pay the bills – either borrowing money, or raising local taxes, or cutting local program spending to close gaps created by the state’s reneging on its commitment to them because legislators and the governor made commitments that they cannot meet.

This virtual role reversal, in which the lower level public officials are forced to be responsible for the excesses of the higher level officials, is an inevitable consequence of the balanced budget bamboozle. This bamboozle also can lead to a structural deficit, in which ongoing intended expenditures exceed ongoing expected revenues, sometimes by a widening margin. For example, the state may set school aid at a particular level in a biennium, but postpone paying a portion of it because there is not enough money. The next biennium, school expenses will be running at or near the higher level, and the unpaid portion of the prior biennium’s aid will also come due, creating a double whammy – higher than sustainable aid level, plus the need to pay off the debt already accumulated creating an even bigger problem for the next budget. This is exactly what is happening in 2010, looking toward the 2011 budget setting session.

So long as Minnesota’s constitutional balanced budget requirement is not supplemented by statutes that require governors and legislators to act like adults in balancing the state’s budget, state officials’ claims that the budget is balanced should not be believed.