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Lawmakers debate the need to inflate
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Minnesota House Ways and Means chair Jim Knoblach, R-St. Cloud, shares the position of Governor Pawlenty that putting inflation into the state budget forecast is like putting spending "on autopilot." (MPR File Photo)
When lawmakers convene in January to discuss the state budget, they will face a choice of deficits: Big, and bigger. The official projection, released by Governor Pawlenty this week, forecasts a $700 million shortfall over the next two years. But by law, that forecast leaves out inflation. Factoring in rising prices over the next two years yields a deficit as large as $1.4 billion.

St. Paul, Minn. — Imagine you did your own budget as scrupulously as the state does. You probably don't -- but you might, if you were required by law to prove that everything will balance out. And suppose you know, pretty confidently, that the prices of things you buy are going to go up over the next few years. Bigger things like doctor bills and college tuition, along with daily expenses like food and buying a tank of gasoline.

With rare exceptions in American history, prices go up. At the moment, they're rising more than three percent a year. So do you count this inflation when you plan your budget? In the private sector, it's a no-brainer.

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Image Gaworski: In the private world, you "need to take a look" at inflation

"If there's inflation, you really need to take a look at it. Otherwise the next year or two is going to come along and your budget is going to deviate by how far you were off in your estimation," says Joe Gaworski. Gaworski is a self-employed actuary; that means financial forecasting is his life, and inflation along with it.

"Any business or economic unit dependent on gasoline prices is going to need to take a close look at that, even if you are just looking at the next year or two," Gaworski says. "Anybody who's dependent on health care would probably be remiss if they didn't include health care inflation in their projections."

In fact, health care inflation is a big factor for the state of Minnesota. The rising cost of health care for state employees is one reason some officials say the state faces an unofficial budget gap almost twice the size of the one released by Gov. Pawlenty. The state also spends money on fuel and countless other commodities that are likely to rise in price over the two-year term of the budget.

In 2002, though, lawmakers banned inflation in budget forecasts. Then-governor Ventura argued against the change, but the provision passed as part of a giant catch-all budget bill.

Rep. Jim Knoblach, R-St. Cloud, chairs the House Ways and Means Committee. He says it's harder to cut costs if you automatically assume they're going to rise. "I don't think it's in the state's interest for inflation and spending just be on autopilot," he says.

"It was kind of wrong to look at the inflation-side and assume that costs were going to automatically go up, without looking at the efficiency side -- and say, 'We're going to figure out some ways to deliver services better, productivity might go up and costs might go down.'"

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Image Senate Finance chair Dick Cohen

Gov. Pawlenty also points out that accounting for inflation involves a certain amount of guess-work -- we can't know for sure how much prices will rise.

Knoblach favors attaching a footnote to budget projections that would include the inflation-adjusted estimate. That could be politically tricky -- Knoblach, for example, does not agree with the $1.4 billion dollar number finance officials have given as such a figure this time around.

A footnote wouldn't go far enough for state Sen. Dick Cohen, DFL-St. Paul. The Senate Finance Committee chair has coauthored a law to reinstate inflation in budget projections. Cohen says the state can control some costs, like employee salaries. But, in a sense, he says many state costs are on autopilot, and state projections should recognize that.

"Any place where the state is dealing with outside vendors, we don't have control," Cohen says. "If the cost of paper goes up, if the cost of heating fuel goes up, we don't have any control." Cohen says not accounting for such inflation "makes for an unrealistic budget, it makes for an understated deficit, and it makes it that much more difficult to budget in a realistic way."

A researcher from the national Center on Budget and Policy Priorities had two things to say about Minnesota's inflation situation. First, Minnesota is one of just ten states that even does these kind of detailed budget projections in the first place. That, she says, is commendable. But to her knowledge, no other state has actually banned the use of inflation. In fact, most other states include it.

As to whether that's good or bad -- well, that's a political question.

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