Will economic uptick make Minnesota’s deficit vanish?

Melissa Hortman, Paul Gazelka, Tim Walz.
Senate Majority Leader Paul Gazelka (center) and Gov. Tim Walz (right) speak to each other at the Minnesota State Capitol in St. Paul on Feb. 5, 2020. House Speaker Melissa Hortman is at left.
Scott Takushi | Pioneer Press via AP 2020

The Minnesota Legislature’s debate on a new state budget takes a big turn this week with the release of an updated financial forecast.

A projected $1.3 billion budget deficit that lawmakers have been calibrating expectations around could shrink or vanish entirely before the Legislature takes a single action. 

Unlike typical years when there are only small changes between an economic forecast produced in the fall and the one released in February, there could be a wide swing when a new forecast is released on Friday.

Since the deficit estimate was made in December, Congress approved another massive stimulus bill, some coronavirus restrictions have loosened and state tax revenues have perked up.

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Monthly tax collection reports released since then have shown an uptick in revenue compared to expectations. At last check, the excess collections versus projections amounted to $459 million, a 3.5 percent boost. Most of that money came in since the first of the year.

Even beneath those figures are encouraging signs. For example, sales tax collections have zoomed by expectations, a signal that people are buying items rather than sitting on their wallets.

But it’s not as easy as just subtracting extra tax money from the earlier deficit estimate. A lot goes into the forecast, such as spending patterns and longer term economic trends. Lately, overall state spending for schools has dropped as enrollment has fallen and the federal government has absorbed a greater share of health care program expenses.

This forecast carries a ton of weight. The next two-year state budget will be based on the prediction from the Department of Minnesota Management and Budget.

State budget director Britta Reitan said even as the situation improves, some caution is warranted.

“The forecast during this time period still remains pretty volatile and uncertain and is really dependent on the path of the pandemic,” she said last week.

A brighter forecast would alter the budget debate that’s about to kick into a higher gear.

If the tax increases proposed by Gov. Tim Walz weren’t a hard sell already, they’d be next-to-impossible if the fiscal outlook greatly improves. 

Leaders of the Republican-controlled Senate insist they won’t raise taxes. A better forecast would strengthen their argument.

Sometime in March, Walz will get a chance to revise his budget proposal. Legislative budget plans will take shape in the Senate and DFL-led House over the next six weeks, with bicameral negotiations and final votes anticipated in May.

Senate Finance Committee Chair Julie Rosen, R-Vernon Center, is pushing state agencies to slice their spending.

“I know the numbers look better, but we are in a budget deficit. It is fair to ask these agencies to do their administrative work more efficiently and succinctly,” Rosen said. “I know there’s some cost savings available.”

MMB Commissioner Jim Schowalter said most of the state’s spending is on customer-facing programs and not on overhead operations. He said several agencies have had to scramble in the past year to take on new assignments amid the pandemic.

There are some caveats with the forecast as well. It doesn't include inflationary cost increases for most programs, so Democrats argue that it doesn’t capture the true picture. And the $1.6 billion in tax increases sought by Walz would also ramp up spending on education and other priority initiatives.

There’s one other unknown: President Joe Biden and congressional Democrats are steaming ahead with another pandemic rescue package that would almost certainly send more money to state and local governments and schools. That would ease Minnesota’s budget load even more.

Current discussions center on $350 billion for state and local governments. It’s not apparent how that will be divvied up, but some analysts have suggested Minnesota will be in line for at least $2 billion of that.

Some veterans of the Legislature sense this will shape up as a status quo session on the budget given political dynamics and the uncertainty around COVID-19.

Sen. Tom Bakk, an independent from Cook and a legislator since 1995, said lawmakers will face pressure to focus on essential items rather than stretch for ambitious, new initiatives.

“People are going to get what they need; people aren’t going to get what they want,” Bakk said. “This is a budget where let’s do absolutely the state needs and figure out how we pay for that. In a pandemic, wants have to be put on the shelf when you take care of needs.”