How well is Minnesota state government prepared to weather a COVID-19 recession?

There’s never exactly a good time for a major fiscal crisis. But if one is coming for the state of Minnesota, now isn’t the worst time.

After a record-breaking economic expansion — ended by the COVID-19 outbreak — Minnesota has a record-high rainy day fund, a $1.5 billion surplus and an unemployment insurance trust fund that tops $1.5 billion.

A state-by-state analysis by the Pew Charitable Trust shows that Minnesota is, of course, above average when measuring the size of state rainy day funds and slightly above average for all reserves. The trust compared the funds by determining how many days a state government could last on reserves only as a way of accounting for differing sizes of state governments, since a billion dollars lasts longer in Montana than California. Minnesota could last for 48.6 days, while the national average is 48.1 days. 

Last October, Pew had given Minnesota relatively high marks for its ability to withstand a recession. At the time, it looked at reserves, rainy day funds, pension systems and the state’s ability to restore cuts made during the Great Recession. 

The test of that resiliency is coming sooner than expected. States have begun tapping reserves to respond to public health requirements from the coronavirus outbreak. According to an analysis by the National Association of State Budget Officers, every U.S. state and territory has appropriated some new funds for the crisis response. 

The good news is most states have healthier rainy day funds than before the 2008 Great Recession. The bad news is that the savings were set aside to prepare for a “normal” recession, not an event like a global pandemic. The impact of federal stimulus spending is not yet clear, and raising revenue during a recession is both unpopular and, in some circumstances, not permitted. 

Minnesota has appropriated $21 million for a public health emergency fund and $200 million for hospital and health provider grants, while Gov. Walz’s supplemental budget asked to spend $346 million of the surplus. Taken together, the reserve would drop to around $760 million and fall lower still as additional COVID-19 related expenses mount. 

“That is gone now,” Walz said of the surplus on Friday on WCCO radio. “There will not be a surplus. I think what most people understand it will not be unusual to see that be at a deficit because of the recessionary pressures upon us.”

The current reserves also do not take into account what will likely be a decline in state revenues as a now-predicted recession hits the state economy. “There’s no question that revenues will continue to drop as we watch them, although we don’t have a lot of good evidence yet,” said Myron Frans, commissioner of the state Office of Management and Budget. “They will continue to be dropping and at the same time expenditures are likely to go up. Whenever you have an economic disruption like this, demand for services goes up.

OMB last week received an updated economic projection from a consultant that told the agency that, though “uncertainty is high” about all the ways COVID-19 will impact the economy,  it “now expects a U.S. recession beginning in the second quarter of this year and continuing until the end of the year and a recovery to begin in the first quarter of 2021,” MMB said last week. 

Walz had begun the year asking lawmakers to reverse a budget maneuver used to help balance the budget passed last year. Since the following biennial budget needed to stay in balance, the 2019 budget deal committed $491 million of the state’s existing rainy day account to showing that the next budget was not in a deficit. That means the current rainy day account of $2.36 billion — equal to 4.9 percent of the state’s two-year tax collections — will drop to $1.867 billion on July 1, 2021.

Any hopes of refilling it though are being dashed by the expected downturn from the coronavirus.

Another fund that gets less attention, at least until recessions begin, is the state unemployment insurance fund. “The trust fund is in really good shape,” said state Department of Employment and Economic Development Commissioner Steve Grove. “There’s about a billion and a half dollars in it. We’re in good shape there and don’t think there will be a general fund need.”

The fund is filled with a payroll tax on employers and is tapped to pay jobless benefits when workers lose jobs. The state has already expanded eligibility and has already seen a spike in applications: 72,245 by the end of the day Wednesday; the same week a year ago drew 2,100. The state is urging residents to apply on-line if possible at uimn.org.

The feds have, in the past, come in to refill state unemployment trust funds when they are drained by longer-lasting downturns. And those who are still employed add money to the account while jobless workers are tapping it. “As a whole, Minnesota is in good shape compared to many of our neighbors,” Grove said.