How to handle Minnesota's $1.65 billion surplus

Too often during this year's session of the Minnesota Legislature, someone has argued that state government is "flush with money." With a forecasted $1.65 billion general fund surplus through mid-2019, surely the state can afford a favorite spending increase or tax cut, pleaders have claimed.

That premise is flawed — and not just because the surplus is now $1.5 billion, thanks to a health reinsurance bill enacted earlier this month. A larger defect lies in the notion that a surplus of that size in a two-year budget of about $46 billion is a windfall, generous enough to allow for big tax cuts and/or spending increases. It's not — not if state government is going to keep doing the work it does today while maintaining the fiscal stability it only recently acquired.

The Star Tribune Editorial Board recommends that "steady as she goes" be watchwords for the budget-setting that will dominate the session's remaining five weeks. Modest tax cuts and spending increases are affordable; big moves are not. And moves that risk the return of deficits in future years are much to be avoided.

Prudence has not been sufficiently in evidence as the House and Senate have assembled their initial budget bills. They feature large tax cuts that swell over time, coupled with unrealistic cuts to some government operations and a return of gimmicks (remember "shifts"?) better reserved for a crisis.

But DFL Gov. Mark Dayton's proposed alternative is built on a politically unrealistic assumption. Despite the election of tax-averse Republican majorities, Dayton built a budget premised on the enactment of new taxes for transportation purposes. Unless Republicans undergo a stunning change of heart, a gas tax increase and a metro sales tax option for transit will not be included in any of the bills that reach Dayton's desk.

Yet a way must be found to boost transportation spending, which has fallen badly behind assessed needs. As GOP House Speaker Kurt Daudt often says, transportation is a core function of state government.

Reluctantly — because we hold that raising the highway-dedicated gas tax and a transit-dedicated sales tax would be wiser policy — we challenged ourselves to build a budget plan that directs more of Minnesota's general fund revenue to transportation.

• Save first: $100 million. Even though the state's reserve fund is well-stocked at $1.6 billion, the financial uncertainty the state faces may be at an historic high. We'd plump up the cushion to cope with potential shocks from both the federal government and Mother Nature. The state's disaster-relief fund is down to $6 million and needs replenishing.

• Pass a $350 million tax bill composed of $300 million in tax relief and $50 million in additional aid to cities and counties, which would ease local property tax burdens. On our tax cut list: Help for low- to middle-income families with increases in the working family credit and the child care credit and creation of a new credit for student loan repayment. Relief for farmers who pay a disproportionate share of school bond levies. And an exemption of the first $100,000 of a property's assessed value from the statewide business property tax, thereby skewing that break in favor of small businesses and Greater Minnesota.

Versions of these features were all part of the 2016 tax bill that Dayton vetoed, citing a costly drafting error. That bill's bipartisan backing commends it as a template for this year's bill.

• Direct $350 million to transportation. We'd divide $250 million among state, county and municipal roads in the same way that gas tax proceeds are split today. With another $50 million, we'd send help to small cities that gas tax proceeds do not reach and bolster the state's Corridors of Commerce program, which accelerates work on economically significant trunk highways.

The last $50 million would go to transit, with the bulk spent to shore up Metro Transit's operational balance sheet. Metro Transit has become ever more critical to the whole state's economic health, even as lawmakers' willingness to support its expansion has waned. That attitude is exceedingly shortsighted. State help is particularly justified for Metro Mobility, a federally mandated service that saves government money by helping elderly and disabled people live independently.

In previous years, we've argued that tapping general fund monies for transportation should be done via the constitutional dedication of particular taxes, such as the sales taxes associated with auto leasing and rental. That would assure a dependable flow of funds for multiyear infrastructure projects. But years of legislative futility have caused us to lower our sights. A transportation funding increase at the level we recommend, with no guarantee for the future, is not sufficient to meet the state's needs. But it beats another year of doing nothing.

• Increase education spending, $475 million. That's a skimpy increase for the most important work state government does. But make more room in the general fund budget for transportation — and simultaneously insist on a tax cut, as Republicans vow to do — and education inevitably gets squeezed. Our plan directs $250 million to an increase in K-12 spending, which should allow for a 1.25 percent increase per year in the general education formula. Another $50 million would go to better early education efforts; our emphasis would be on scholarships for needy children, though we would allow some growth in school district-based preschool, as Dayton prefers.

We've long argued that higher education deserves a larger share of the budget, even as that share has fallen from 14.5 percent in 1991 to 7.35 percent today. Our plan puts $175 million into a higher-ed bill, $25 million more than the larger of the Legislature's bills. We'd also give the state's campuses top priority in a bonding bill. (We'll say more about that on these pages soon.)

• Add $225 million to other agencies. Several worthy state efforts would get a taste of this piece of our pie. Among them: The public-private matching fund for broadband infrastructure, $30 million; courts and public safety improvements, $75 million; child care subsidies geared to ease a shortage of licensed child care in Greater Minnesota, $40 million; and a $75-per-month increase in the cash grants provided by the Minnesota Family Investment Program, costing $50 million. It's shameful that the state's poorest parents and children have not seen a cash grant increase since 1986.

We'd also make a $30 million down payment on deferred maintenance of the state's information technology systems. Chronic neglect of those systems is sapping government's efficiency and risking a costly data security breach. Legislators should expect to spend more on cybersecurity each year for the foreseeable future.

• Reallocate funds. This would be essential for our plan to work. The state's budget forecast does not account for inflationary increases in government costs save for Medicaid, and neither do we in most instances. But unlike the Legislature, we are not calling for unrealistic cuts. For example, the House's 23 percent cut for Minnesota Management and Budget, the state's finance agency, would render it dysfunctional.

Other options legislators might consider include raising fees and closing corporate tax loopholes. But they should avoid gimmicks and one-time raids on special-purpose funds for the sake of ongoing obligations. Those maneuvers are safety valves to be kept at the ready when the bottom falls out of state revenue, as happens during recessions. Open those valves now, and they won't be available when they are truly needed.

Admittedly, our plan would not give legislators a lot to brag about. But neither does it risk as much future harm as do the bills they've sent to conference committee. We hope Minnesotans who take the long view will help lawmakers see the virtue in "steady as she goes."