Budget forecast projects short-term surplus, shortfall in '22-23

[Updated 2:38 p.m.]

Amid a sea of continued uncertainty, the state's financial situation has gotten much better.

But caution is warranted.

Minnesota Management and Budget officials released the November 2020 Budget and Economic Forecast Tuesday, saying the state's expected budget deficit has been replaced with a projected $641 million surplus for the current biennium that ends June 30, 2021.

“Someone told me this morning they had forgotten you could get good news in 2020,” said Gov. Tim Walz. “The reason this is good (is) because of the resiliency of Minnesotans … in an unprecedented public health crisis to figure out how to work in a different way.”

The forecast provides the most recent snapshot of the state's financial health. Lawmakers will use it to begin looking at budgeting and policy decisions to be made during the 2021 legislative session, which is scheduled to begin Jan. 5 and must end by May 17.

State Economist Laura Kalambokidis said the forecast assumes no additional federal stimulus and that a mid-2021 broad rollout of a coronavirus vaccine will boost consumer confidence. Nor does the forecast touch the state’s rainy day fund, which MMB Commissioner Jim Schowalter said is “at the highest level in our state’s history.”

A forecast expected to be released in late February will provide more updated numbers to help legislators and the governor finalize their plans for spending in the 2022-23 biennium that begins July 1, 2021. A $1.27 billion budget shortfall is now forecast for that two-year spending cycle.

Calling the forecast, “undoubtedly good news,” House Speaker Melissa Hortman (DFL-Brooklyn Park) offered a reminder that it does not factor inflation on the spending side.

“If you include inflation … we’re looking at about a $2.6 billion deficit going forward. So we have to have tempered expectations,” she said.

Short-term help for some coming soon?

The projected surplus could provide some early holiday cheer for many Minnesotans.

While continuing to call for more federal assistance, the governor and legislative leaders have been working on differing financial relief packages for businesses and workers hurting due to the COVID-19 pandemic.

“We do have enough money in the short-term to provide some assistance to those who need it the most,” Hortman said. “COVID-19 is not hitting everybody evenly, and some of the people being hit the hardest need some economic relief to get through these tough times.”

Walz hopes to call a special session soon for a plan that he believes will be in the $300 million to $600 million range.

“There’s every reasonable opportunity that we get this thing done in the next week or so,” he said. “… I’m very optimistic. I’m not getting any what I feel is pushback, around the desire for us to do a package and get it done as quickly as possible.”

“The pandemic is not a partisan issue, and it’s an opportunity for us all to work together,” said House Minority Leader Kurt Daudt (R-Crown).

Hortman suggested a framework be completed this week, details worked out next week and a public hearing held before package passage in a special session the week of Dec. 14.

“If we keep it clean, we could get it done this week,” said Rep. Pat Garofalo (R-Farmington).

House Majority Leader Ryan Winkler (DFL-Golden Valley) said there have been positive conversations with House Republicans, but Senate Republicans have yet to engage.

“Hopefully, the forecast frees them up to come to the table with some ideas about what they would like to do,” he said. “I think there’s a strong understanding we need to help workers and we need to help small businesses. Today’s forecast should show we have the reserves in place to be able to do that.”

“Hopefully, (the forecast) makes the path to getting it done just a little bit easier,” added Rep. Anne Neu Brindley (R-North Branch).

Last week, House Republicans unveiled the $400 million Main Street Relief Act.

Lots of uncertainty

With the rapidly changing financial effects of COVID-19, including the possibility of more federal funding and a vaccination available to everyone by spring of 2021, predicting state finances is harder than normal.

This calendar year is an example: the forecast released in February showed a $1.5 billion projected surplus for the current biennium. Then the coronavirus took over and the projected monetary excess went kaput. A May projection showed a $2.43 billion projected deficit.

Yet tax collections have bettered expectations. The state has brought in $1.9 billion more than anticipated this biennium largely from three major categories: general sales tax ($808 million), individual income tax ($500 million) and corporate franchise tax ($390 million).

Additionally, state spending has fallen by almost $1.06 billion from prior estimates.

For example, State Budget Director Britta Reitan said health and human services spending is down $919 million in the current biennium and projected to drop by $250 million in the 2022-23 biennium. This assumes, in part, the state and federal COVID-19 declarations continue through June 30, 2021.

“Assuming an extension of the federal public health emergency means the state will continue to receive increased federal support for the Medical Assistance program,” she said. “The federal match is increased by 6.2 percentage points during the emergency period. This increase lowers the state share for Medical Assistance by $310 million in the first two quarters of calendar year 2021.” 

E-12 spending is down $118 million largely because 12,600 fewer students are enrolled in public schools as parents have chosen to enroll their children in private school, delay kindergarten enrollment or educate them at home.