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The Art and Science of Budget Forecasts
By Laura McCallum , Minnesota Public Radio
February 24, 2001
Part of MPR's online coverage of Session 2001
Click for audio RealAudio

The governor and state lawmakers find out this week whether they still have a big budget surplus to carve up, or whether the slowing economy will lead to less money than expected for tax cuts and spending increases. Nearly everyone at the Capitol expects the earlier projection of a $3 billion dollar surplus to have shrunk when state finance officials release the latest revenue forecast on Wednesday. The last 18 forecasts have underestimated the strength of Minnesota's economy, prompting some lawmakers to question why forecasters can't get it right. But coming up with the numbers is a tricky business.

BUDGET FORECASTING is described as an art, a science and an educated guess.

"The one thing we know is, we're always going to be wrong," says state economist Tom Stinson, who adds it's virtually impossible to predict exactly how much money the state will take in. "We know if it came out to the dollar, it wasn't because we were good, it was because we were just incredibly lucky."

Stinson and other finance officials use a three-step process to come up with the numbers. They start with a national economic forecast from Data Resources Inc, or DRI. Step two is to run DRI's forecast past the Council of Economic Advisors, a group of leading Minnesota economists. Then Stinson says finance officials adjust the national forecast to reflect Minnesota's economy, and calculate how much money the state will likely collect.

"We figure out how much you and everybody else in the state of Minnesota are going to pay in income taxes this year, next year, the year, and the year after. And then, on top of that, we figure out how much you're going to pay in sales taxes, how much you're going to pay for motor vehicle excise taxes, how much you're going to pay for deed and mortgage taxes, and so on and so on," says Stinson.

Stinson says forecasters have come close to projecting the exact dollar amount the state will take in. House Taxes Committee Chairman Ron Abrams, a Republican from Minnetonka, says they've been much closer in the past. He says he remembers forecasts in the early '90s that were only off by about $50 million.

"In the context of a multi-billion dollar budget, (that) isn't bad, but recently we've been off by about $3 to $4 billion a biennium, and I don't think that that's healthy for the long-term economic viability of our state," Abrams says.

Abrams and some other Republican lawmakers have argued the Legislature should set up its own budget office to offer a competing forecast, rather than simply accepting the numbers provided by the administration. But Democrats and state finance officials say a legislative budget office is unnecessary.

DFL House Minority Leader Tom Pugh of South St. Paul says legislators will always second-guess the numbers, but he sees no need to duplicate a forecast that he considers more art than science.

"If we had a government artist as opposed to an independent artist, would the numbers be any more correct? I doubt it. We'd be expanding government at a time when a Governor and a lot of legislators are talking about not creating new agencies, and downsizing," Pugh says.

Pugh and many Democrats would rather have a more conservative forecast that leaves the state with more than enough money, instead of a shortfall.

Senate Finance Committee Chair Doug Johnson, a DFLer from Tower, says it's better to have 18 surpluses in a row than to have 18 deficits.

"I was around during the years when Al Quie was our governor in the early '80s, and we had deficit after deficit, special session after special session, and so I think what's been happening has been healthy, we've been able to cut taxes, we made good investments for Minnesota," according to Johnson.

But many Republicans say surplus after surplus means the state has been overtaxing Minnesotans. They argue for cutting taxes so that the state takes in only what the legislature has budgeted.

Rochester Republican Dave Bishop, who chairs the House Ways and Means Committee, has criticized state finance officials for underestimating the robust economy.

"How can you explain that you've been wrong on the low side 18 consecutive times, and how can you expect looking ahead now for the next two and a half years to be more accurate?" asks Bishop.

But Bishop and other Republicans were pleased with the November forecast, which used more optimistic growth projections to predict the $3 billion dollar surplus. Bishop says he's no longer planning to push for a legislative budget office, and he says his change of heart came after he spent time studying the way the state comes up with its forecast.

State economist Stinson says while the forecast isn't an exact science, it does provide a credible starting point for lawmakers and the Governor, as they decide how much to tax and spend in the next two years.

Laura McCallum covers the Capitol for Minnesota Public Radio. Reach her via e-mail at