Ed Lotterman: Dealing with surpluses presents choices, challenge

The thing about surpluses is, they never last.

Our nation’s federal system of 50 states makes it a laboratory of democracy and that is especially true in fiscal policy. Illinois, Louisiana and Kansas, for example, still wallow in budgetary messes while my home state of Minnesota faces a budget surplus of $1.8 billion for the fiscal year. We currently have a law requiring that a third of any surplus be allocated to environmental and budget reserve funds, so there is $1.2 billion up for grabs.

Such fiscal health poses a problem for elected officials, however. What do we do with this projected surplus? That illustrates broader questions that our nation as a whole faces about the extent we are willing to save for the future and what we are willing to invest in for longer-run returns. So let’s run through the options we face here in my home state and that we could face at the national level if we ever run a federal budget surplus.

First, we could simply save the money. Current law here requires that one-third of any projected surplus in the November forecast be allocated to the state’s formal budget reserve. That $594 million slice will bring this reserve to a projected $1.871 billion. That sounds like a lot, but it is less than 4 percent of the some $42 billion in annual state revenues and spending.

This 33 percent provision is a minimum, as is a targeted total reserve of $2.032 billion for the 2016-2017 fiscal year. Our legislature could simply direct to set aside any additional amounts above these minimums from any surplus that actually develops.

If not “saved,” then surplus revenue could be “invested” in long-term physical assets like roads, bridges and government buildings, whether DOT garages or vocational college classrooms. It could also be “spent” on short-term goods and services.

We have a backlog of needed road and bridge work, and catching up on much of this strikes me as the best use for a big chunk of the projected surplus. We have let roads and bridges get to such a bad state that the rate of return on repairs and upgrades is high. There is the issue of how quickly projects can be “shovel-ready,” but the money does not all have to be spent in the 2016 construction season. We just need to get it earmarked.

One advantage of buying physical infrastructure is that it need not lock us into long-term annual outlays. Yes, if you build a new classroom or office building, you do have to heat it and clean it and periodically replace the roof. If you build an entirely new highway, you have to plow snow from it and seal-coat it. But many projects in the backlog of road and bridge work would actually save on short-term stop-gap spending.

There are many ways one could increase current spending. We could hire more staff at state hospitals, prisons and colleges. We could boost the fraction of higher-ed instructional costs actually paid by the state at least partway back to the levels that baby boomers like me enjoyed. We could relax eligibility criteria or increase benefit levels for the state’s medical care services for low-income people and other social welfare programs. We could increase the state’s transfers to local school districts, add educational programs at state parks and plant bee habitat on public and private land. The list is nearly endless.

But here we have to acknowledge the challenge with making long-term funding promises with a short-term windfall.

The problem with increasing current spending is that pressure for it tends to continue even when the economy slows and tax revenues shrink. This is particularly true for human services. One can easily curtail planting milkweed on state lands or eliminate some nature walks at parks when revenues dwindle, but taking away someone’s medical care -- or state-funded job -- in the face of a recession is hard.

There are programs that fall into a gray zone between traditional one-time physical investment and augmenting current services. Advocates of early childhood education argue that outlays for it are an investment in human capital that makes citizens more productive throughout their lives and reduces outlays for remedial education, criminal justice and other social programs later in these children’s lives. These are far longer-term benefits than keeping the library open longer hours at a state college. Because they involve a current expenditure that produces a return over decades, such early childhood programs meet the classic definition of “investment.”

The notion of early childhood education as an investment is a classic example of what fellow prairie farm boy Ted Schultz had in mind in his work on “investment in human capital” that won him the Nobel Prize in 1979.

Skeptics counter, however, that once you argue for one social services program for its “investment in human capital,” you open the door to that rubric being applied to all sorts of other programs. Won’t better dental care for the poor improve their health later on? Won’t more bee habitat foster better crops years from now? One will imagine many such pleas.

Of course, one could deal with a projected surplus by simply giving money back to citizens. Cut taxes “permanently” for either households or businesses. Or give everyone one-time rebates, as when we did with a similar “boatload of money” in the late 1990s. The problem is, such rebates can be channeled to people, such as senior citizens, who may not pay a great deal in taxes.

Tax cuts, like new programs, that are instituted when the economy is sailing along mean the state is much more likely to run into fiscal trouble when the economy slows. No one seems to be saying the economy is booming right now. But we need to be honest and recognize that in the current global economic and political environment, my state’s economy in late 2015 is about as good as it is going to get. The latest forecast already incorporates an assumption that U.S. economic growth will be somewhat slower than that assumed last spring. But I think that further downside potential, looking out three to five years, greatly exceeds any upside possibilities.

The projected level of surplus revenues is not permanent. They are likely to be a short-term phenomenon. Time and again, our legislature has acted prematurely to make long-term tax cuts and spending increases based on ephemeral surpluses. It did so with much approval from voters. It is likely to do so again in the coming session unless citizens communicate their desire for erring on the side of fiscal prudence in a very uncertain world.

My mother’s old saying of “hope for the best and expect the worst” applies very well right now.

This story was originally published December 18, 2015 at 11:11 PM with the headline "Ed Lotterman: Dealing with surpluses presents choices, challenge."