Minnesota's budget forecast on Tuesday could reveal an even larger surplus than officials projected earlier this year, thanks in part to strong revenue collections and failed negotiations last spring that left billions of dollars on the table.
The forecast will shape major spending decisions at the State Capitol over the next few months as Gov. Tim Walz begins to craft his two-year budget proposal and the newly DFL-led Legislature pores over a flood of proposals from top constituencies.
But that number doesn't take inflation into account and hasn't since 2002, when state leaders changed it during hard budgeting times. Now, with inflation running high and a potential recession on the horizon, some are pushing for lawmakers to again consider rising costs as they set the state's budget.
"Inflation is a word everybody learned again. It will go back down to the traditional long-term number, but I've always made the case that we need to think about budgeting in critical areas with inflation," Walz said in a recent interview. "Especially around education, I think we need to think about pegging it to inflation."
Minnesota leaders get an updated economic outlook twice a year. But two decades ago, lawmakers decided to prohibit budgeting officials from including inflation estimates in the forecast, in part because the state was facing significant deficits.
By removing inflation, lawmakers were hoping to "artificially reduce the size of projected deficits" that they'd have to balance, said Clark Goldenrod, deputy director of the Minnesota Budget Project. The Minnesota Constitution requires the state to have a balanced budget.
The Budget Project has been pushing for years to restore inflation in the forecast, which they argue would improve the budget-setting process by giving lawmakers a more accurate picture of how much the state needs to meet spending obligations.
For example, Minnesota's education funding formula grows with the student population but not the inflationary costs of serving it, which is why many districts are strapped for resources, Goldenrod said.
"The forecast gives policy makers and the public a mistaken impression of the state's budget situation and future, so the forecast underestimates the funding needed for existing public services," she said.
Minnesota's last economic update in February showed the state had more than $9 billion on the bottom line. Walz and top legislators failed last spring to strike an agreement to spend that surplus on tax cuts, classrooms, health care and public safety initiatives, leaving the money behind for the 2023 session to allocate.
Since the spring, state revenues have continued to come in higher than projected. The October revenue update from Minnesota Management and Budget showed the state had collected $126 million more than forecast in February.
But the Minnesota Council of Economic Advisers, a group of experts who advise state officials, warned that inflation would reduce the surplus by more than $1 billion. The council has advised the state to return inflation to both spending and revenue projections every year since 2003.
"Excluding projected changes in the prices of goods and services from a majority of the spending estimate is fundamentally misleading," the council wrote in February, adding that doing so potentially encourages "legislators and the public to regard the state's financial position more optimistically than the facts warrant."
Inflation remains high, and many market watchers are predicting a recession as the Fed continues to raise interest rates.
Adding inflation back into the forecast has had several hearings in the House in the past, but the change has failed to gain enough momentum in the full Legislature. Democrats will control both the House and the Senate in January.
Nan Madden, who has led the Minnesota Budget Project since the 1990s, said adding inflation to the forecast again would be an important measurement tool — but lawmakers would still have to make budgeting decisions.
"It's just making it clearer whether or not we're keeping programs up with inflation," she said. "And if we use the surplus on other stuff instead, it's making it clear we are doing that at the expense of keeping up current commitments."
