(Updated 3:50 p.m.)
About those looming state budget deficits? Never mind.
Minnesota Management and Budget officials released the February 2021 Budget and Economic Forecast Friday, and the upshot is that a higher revenue forecast, lower state spending and an increased surplus for the current fiscal year have conspired to produce a positive balance.
The U.S. economic outlook has improved considerably since autumn and an infusion of federal money into the state has softened the budget blow from the pandemic. Hence, an anticipated $1.27 billion shortfall in the Minnesota budget for the 2022-23 biennium has morphed into a $1.6 billion projected surplus for the two-year spending cycle.
That said, the budget report emphasized that unemployment continues to disproportionately impact lower-wage workers.
Lawmakers will use the forecast to make budgeting and policy decisions during the current legislative session, which must end by May 17. The forecast will likely lead to revisions in the $52.4 billion budget proposal that Gov. Tim Walz released in January, and shape the budget targets legislative leaders will announce in the coming weeks. Those will dictate the appropriations laid out in legislation this session.
“We have weathered a tumultuous year and are aware that COVID-19 is affecting health and pocketbooks,” said Jim Schowalter, commissioner of management and budget. “While the sun is starting to shine, we’re hardly in the clear. We know that a lot of this is based upon anticipated federal response. That’s not money in the bank. … We know that we have difficult choices, but we have better choices than we did yesterday.”
Indeed, the forecast came with several caveats about impending unknowns. These include the path of the pandemic and the timing of widespread vaccination, federal support, consumer behavior, business confidence and financial market volatility.
MMB’s presentation on the forecast emphasized that the state budget isn’t back to pre-pandemic levels. Projected revenue totals for the 2022-23 biennium are about $461 million below what was projected last February before the state’s first COVID-19 diagnoses.
On the spending side, estimates have been adjusted downward due to E-12 education costs being lowered by about $500 million over what was projected a year ago. And federal support for the state’s Medical Assistance program lowered the state’s share of funding it by $305 million.
Other changes since the November forecast come from a required transfer of $491 million from the state’s budget reserve that was approved during the December special session, a carryover of $940 million from the 2020-21 budget, and a $260 million structural balance.
The latest forecast projects that the state will take in $50.9 billion in revenue in the next biennium, an increase of $3.2 billion over what’s expected to be collected in fiscal 2020-21. The biggest driver in the increase is individual income tax revenue, which is expected to be about $2.8 billion higher, while general sales taxes are projected to collect about $1.2 billion more than in 2020-21. Meanwhile, state corporate tax revenue is expected to drop by about $9 million.
The report also offered a snapshot of Minnesota’s employment picture that looks positive at first glance: A state unemployment rate that was at 9.9% in May is now down to 4.4%.
But much of the decline was due to a reduction in the labor force of 102,000 workers since February of 2020. There are 248,000 fewer jobs in the state than pre-pandemic, and 35,000 more Minnesotans are unemployed and seeking work than a year ago. While manufacturing jobs are at similar levels to a year ago, service sector employment is down considerably.
As for the long-term budget outlook, MMB projected continued growth through the 2024-25 biennium.“This is good news,” Walz said. “Our fundamentals are strong and the outlook is good. It proves that the measures we took during the pandemic have both saved lives and protected the economy. … But COVID-19 has not treated everyone equally. … We need to come out of this stronger than we were, invest in the places that were hit hardest, and make sure that those families are able to be brought back. Now democracy starts. We get to come together and fashion a budget that serves Minnesotans and is fair in how we go about it.”
“Today’s forecast is good news,” House Speaker Melissa Hortman (DFL-Brooklyn Park) said in a statement. “But it's important to recognize that our budget doesn't currently meet the needs of all Minnesotans. Every day, there are Minnesotans who struggle and find it hard to make ends meet while there are others who have more than enough to get by. We must pull together and make the investments all Minnesotans need to recover from the pandemic and thrive once it’s over.”
In a statement, House Minority Leader Kurt Daudt (R-Crown) said the forecast supports Republicans’ position of no new taxes.
"Minnesota's economy is bouncing back, and will continue growing if we let it,” he said. “Unfortunately, Democrats will continue pushing for completely unnecessary tax hikes that would hurt struggling businesses and families. Raising taxes will slow our economic comeback, and make it harder to bring back jobs and paychecks to where they were before the pandemic."
"Instead of increasing taxes, state government should be sending the surplus back to the people,” said a statement from the New House Republican Caucus. “We should eliminate the tax on Social Security, get rid of the state income tax on PPP loans, and stop taxing Minnesotans when they get sick. Government must yield and return this money to the people."