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Ways and Means hears presentation on how forecasted inflation affects the state budget
Summary
House analysts and Minnesota Management and Budget staff briefed the Ways and Means Committee on how the state estimates discretionary inflation for the general fund, explaining the methodology, the portion of the budget affected, and numbers used in the November forecast.
The Minnesota House Ways and Means Committee spent an extended portion of its Feb. 24 meeting on how Minnesota Management and Budget (MMB) and House analysts calculate inflationary pressures on state spending and how those estimates affect the general fund outlook.
Colby Sullivan of the House Research Department, Anna Minghe (state budget director at Minnesota Management and Budget), and Emily Adriance (chief fiscal analyst for the House) explained that the forecasted inflation figure is an estimate intended to show the cost of maintaining current services when prices rise, not an automatic appropriation.
MMB applies a single inflation index—the consumer price index forecast produced by Standard & Poor’s Global Market Intelligence—to portions of the general fund that do not already have statutory inflation adjustments. Anna Minghe said approximately 60% of general-fund spending is excluded from the discretionary inflation calculation because underlying statutes or formulas already adjust for price growth; the remaining roughly 40% is the base to which MMB applies CPI.
Minghe described the calculation as compounding: annual CPI percentage changes stack over multiple years, so the estimated inflationary cost for later years reflects cumulative growth. She said the November forecast showed year-over-year CPI changes of about 2.2% and 2.7% in the near years and lower but positive changes thereafter, and that MMB’s materials present both the estimated discretionary inflation for the current biennium and the portion set aside for future biennia.
House fiscal staff and MMB staff described two pots: a discretionary amount available to the current legislature (about $2.3 billion in the November materials) and a “set aside” for the next biennium (reported as about $887 million). Emily Adriance cautioned the numbers change with each forecast and with legislative changes to base spending.
Presenters emphasized that discretionary inflation is not automatically appropriated; policymakers choose whether to fund inflationary adjustments, reallocate the funds, or leave them unspent. Minghe noted MMB excluded programs from the discretionary calculation where statutes already provide cost growth, including portions of medical assistance (managed care and nursing facility payments), childcare assistance, Minnesota Family Investment Program cost-of-living adjustments, and certain special-education and disability-waiver increases.
Committee members asked how MMB selects sample files when auditors follow up on implementation of program recommendations, why CPI is used rather than alternative indexes such as the implicit price deflator, and how the governor’s budget treated inflation. Colby Sullivan said CPI is used because it is widely understood and readily available from the state’s macroeconomic forecaster, though staff are open to modeling with other indicators. MMB staff said the governor’s budget included some operating adjustments and targeted changes (for example, capping certain disability-waiver annual increases at 2%), but did not appropriate the full value of the forecasted discretionary inflation.
MMB and House analysts also reminded the committee that the forecast’s inflation figures will be updated in February and can change by tenths of a percent, which can alter state-dollar estimates by millions.
