Our View: State should maintain budget reserve

/ 15 March 2012 / jennifer

Mankato Free Press Editorial, March 15, 2012 –

— At one time, back in the 1990s, one could count on the Republican Party to err on the side of fiscal restraint.

Gov. Arne Carlson brought fiscal discipline to a state that needed it badly. And he favored the unsexy but important political policy of adequate budget reserves. And he often got the fiscally conservative side of the DFL to go along with him.

So it’s puzzling when House Republicans want to raid the state’s reserve that has only just achieved a level of only half of what some experts think it should be.

They have proposed using part of the state’s projected surplus of $1 billion to pay back part of the state’s $2.4 billion IOU to the schools. Few would argue schools need to be paid back and that they became the state’s banker of choice when it ran into budget troubles it couldn’t fix with its own tools.

And part of the current state law requires surpluses, even projected ones, to be used in part to begin paying schools back. When the state’s February forecast showed an increase in the surplus of $323 million, by law $5 million was directed to the budget reserve and the remaining $318 million was put toward school payback.

The House Republican plan aims to use another $430 million of the budget reserve to pay schools, cutting the total reserve by nearly 40 percent.

The budget reserve requirement (excluding cash-flow account) in current law amounts to about 1.75 percent of the two-year state spending, an amount that seems small even in economically improving times.

In the 1980s and 1990s, the reserves were sometimes as high as 3 percent of the state budget.

Solid reserves are needed to not only maintain Minnesota’s recently downgraded credit rating, but to push it back to the AAA level the state once had achieved. The state’s lower credit rating is likely impacting the interest rates paid on state, school, city and county borrowing. The increased borrowing costs amount to higher spending on debt and drain funds from schools, roads and the safety net for the disabled, veterans and others.

A bipartisan state budget study commission also recommended in 2009 that the state have nearly $2 billion in budget reserves because the nature of the state’s revenue stream, based on income taxes and sales taxes, was very volatile.

Sure, the economy looks brighter, but taxpayers know all too well how things can turn sour. We need to keep our rainy day fund healthy because, as we know all too well, it rains more often than not when we least expect it.