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Minnesota legislators told to brace for a brutal budget forecast

State Economist Laura Kalambokidis
MinnPost photo by Greta Kaul
Laura Kalambokidis, shown in 2017, told a special state Senate COVID working group that neither of two scenarios she examined for how the recession would reduce tax collections assumed things would be worse than the Great Recession of 2007-09.
Minnesota budget writers got a glimpse of the coming state budget woes Monday, when they were told that a worst-case scenario crafted just two weeks ago might not be pessimistic enough.

Laura Kalambokidis, the state economist, told a special state Senate COVID working group that neither of two scenarios she examined for how the recession would reduce tax collections assumed things would be worse than the Great Recession of 2007-09.

Turns out, they might be.

The state Office of Management and Budget engaged in what Kalambokidis described as “a thought exercise” that attempted to show how far state revenues would fall if the COVID recession was half as bad or equally as bad as the Great Recession. If it is just half as bad, the state will lose $1.5 billion in revenue between now and the summer of 2021. If it is equally as bad, the revenue loss will be $3 billion, Kalambokidis said.

“In retrospect, perhaps we should have done a 125 percent as well as a 150 percent,” she said. 

That’s partly because the latest forecast from the state’s economic consultant, IHS Markit, is projecting a 5.5 percent decline in the gross domestic product over three calendar quarters, with a recovery not starting until the first three months of 2021.

“It reflects their view that activity will not begin to turn up materially until U.S. cases of COVID-19 are driven essentially to zero,” Kalambokidis said of the consultant’s forecast.

By comparison, the Great Recession saw a contraction of 4.3 percent in GDP over three quarters. While the current recession and the Great Recession might be similar in length — nine months — Kalambokidis said the pattern is much different.

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The state Office of Management and Budget engaged in what Dr. Laura Kalambokidis described as “a thought exercise” that attempted to show how far state revenues would fall if the COVID recession was equally as bad as the Great Recession.
“This one has just started with a bang! We just slammed the door shut on the economy,” she said. “So it has started much more abruptly.” Yet because the U.S. economy was strong when this recession started, “when we get back into business, maybe the recovery is faster,” she said. 

So what do all the models mean for the ability of the state to keep paying for government services? The more severe scenario would consume all of the state’s current forecast reserves and all but $547 million of its Rainy Day fund. 

But both Kalambokidis and state MMB Commissioner Myron Frans said this estimate on impacts on tax collections doesn’t account for what appears to be a sooner-than-estimated decline in revenue, nor does it measure all of the pressures on the spending side of the budget.

“When I see money left in the budget reserve I have to remind myself that that was assuming that (fiscal year) ’20 ended up OK, and it assumed that the recession scenario that we’re heading into is not worse than the Great Recession,” she said. 

Minnesota is just over nine months into a $48.3 billion, two-year operating budget.

Regardless of whether the economist was as pessimistic as she should have been, she said she hoped the Legislature gets the broader point: “We’re not going to get all the money that we had expected.”

Added Frans: “Spending has increased some with all of the emergency expenditures we’ve been granted from the Legislature. We also know that revenues are shrinking. We just don’t know how fast they are shrinking.”

The first official glimpse of the revenue picture will come on Friday when Frans’ office releases its quarterly financial update, which will show March tax collections and update the state’s budget forecasts. Until then, the only hard economic data has been the explosion of claims for unemployment insurance. More than 340,000 people have applied since March 14, portending declines in income tax withholding and sales tax collections.

The MMB leaders warned that report will have flaws, however, because of the delays in tax payments that are being allowed to help businesses get through the shock of state-ordered shutdowns. Kalambokidis referred to the situation as a “Reverse Tsunami” because the state has to wait to see the full effect of the COVID-related economic shutdowns.

In response to a question from Senate Finance Committee Chair Julie Rosen, R-Vernon Center, Kalambokidis said she doesn’t know when the state will have enough new and reliable economic data to update the official state revenue and spending forecast.

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MMB Commissioner Myron Frans, shown in 2019: “Spending has increased some with all of the emergency expenditures we’ve been granted from the Legislature. We also know that revenues are shrinking. We just don’t know how fast they are shrinking.”
“I want to know the answer too, and I know you all need to know what’s coming down the pike and what we can expect,” Kalambokidis said. “I want to produce that information at a time when it is useful and credible and not just adding to confusion or noise.

The state is also starting to get more information on how much money it will get from the $2.2 trillion federal stimulus bill, known as the CARES act. Direct payment to the state will be $1.87 billion with another $317 million going to Hennepin and Ramsey counties.

The state, however, will also benefit from many other appropriations in the federal act for public schools, colleges, social services, tribal nations, public health and transit systems. 

In the meantime, Frans said he has put in place a freeze of hiring new state workers outside essential jobs. He is also moving state workers around — even between agencies — to put them where they are most needed.

Senate Majority Leader Paul Gazelka told Frans that the state needs to start looking at ways to reduce spending. At the same time, he said, Walz should consider allowing work that can be done safely, such as landscaping and lawn care, to resume. “It’s obvious that the coronavirus has dramatically changed our budget forecast and where we’re going,” said the Nisswa-area Republican. 

He also agreed with Frans on the need for budget action to be surgical, with cuts to some areas but not to others depending on needs.

Walz was also asked about the state budget during his daily media briefing on the COVID-19 crisis. He noted that the state was in good financial shape when the crisis started — with a projected $1.5 billion ending fund balance and a rainy day account of $2.4 billion. 

“The good news is we are in solid financial shape, we’re able to pay our bills but we will certainly have to balance our budget when we come out of this and there will certainly be a lack of revenues because of the shutdown,” Walz said.

And he pushed back on any suggestions that the modeling he is using to direct his actions, especially closures and shutdowns, are contrived to justify any specific result.

“Trust me, no one wants to run a deficit as governor and no one wants 10 percent or 12 percent or 15 percent unemployment,” he said. “There’s no joy in this. There’s heartache and pain. These are terrible decisions.”

Comments (15)

  1. Submitted by Dennis Wagner on 04/07/2020 - 09:47 am.

    So, can we finally agree that building and holding sizeable emergency/rainy day funds are a good thing to have during the good times, no matter what your politics?

  2. Submitted by Dennis Litfin on 04/07/2020 - 11:15 am.

    ….which further embraces the fact that in the future you do not play the republican game of nicey-nicey and return rainy day fund money to the taxpayers with the ‘tongue-in-cheek’ goal of personal
    reelection.

    • Submitted by Bob Petersen on 04/07/2020 - 12:34 pm.

      Or you can look at it as if the DFL had their way, our budget would be much, much bigger thus creating even larger deficits when things sour. If our spending even wasn’t what it was now, the hurt would be much less. There’s only so many times you can go to the well.

    • Submitted by Ron Gotzman on 04/07/2020 - 02:06 pm.

      Has anybody proposed returning the “rainy day fund” to the taxpayers?

      I think the proposals dealt with returning part of the surpluses not raiding and closing down the “rainy day fund.”

  3. Submitted by T.W. Day on 04/07/2020 - 02:11 pm.

    It’s going to be hard to feel sorry for state and local politicians and bureaucrats when we all get our inflated property tax bills and discover that even when half of the houses are in foreclosure the county won’t honestly appraise property values under the excuse that “the state won’t let us.”

  4. Submitted by joe smith on 04/07/2020 - 02:49 pm.

    Any chance at all in cutting some fat off of programs that are not totally necessary like adding 100M to Metro light rail? I know cutting Big Government waste is not something either party will do but most households will be cutting after this crisis is over. I guess asking the State to do the same is a waste of time.

    • Submitted by Frank Phelan on 04/07/2020 - 05:37 pm.

      How about cutting local government to Paul Gazelka’s district?

      Last November he was so proud to tell us, or at least the listeners to the conservative radio show he was on, that rural folks don’t like all that gubmint. Why, they just rely on each other for help. It’s only those dirty Cit-diots who feed at the gubmint trough.

      Step up Paul, show us how it’s done.

  5. Submitted by Ron Gotzman on 04/07/2020 - 02:52 pm.

    I will be more interesting if the DFL actually propose “draconian cuts” even to the rate of increase.

  6. Submitted by Don Casey on 04/07/2020 - 03:34 pm.

    It is certain that the state budget will take a big hit. Wouldn’t it make sense to start cutting back state spending now, rather than waiting for the next biennium? Cut back non-essential spending, leave open positions unfilled … . Money “saved” now – even a relatively small amount — will lessen the strain of the coming financial challenge.
    Haven’t the feds been criticized for not acting soon enough with the pandemic? The state has more of an advance warming with its s financial picture.

  7. Submitted by Dennis Wagner on 04/07/2020 - 05:55 pm.

    So, the Fed and US Govt. is dumping $2T++++ and evidently its OK to a lot of folks, that’s on top of the already $1.3T deficit (during the best of the best of the best of times). Seems like a bad, bad case of selective critiquing. And the state is the problem because they carried enough cash to pay their bills with a few $ on the side for emergencies. And as the state doesn’t hire folks what does that due to unemployment? Or they don’t provide services, just kick those not so well off folks to the curb?
    It gets pretty crazy when you try to use an open mind vs. political ideology.

  8. Submitted by Dana Dickson on 04/08/2020 - 09:22 am.

    Clearly this will be an opportunity for the Republicans to honor their oath to “starve government and drown it it a bathtub”. An oath that every Republican officeholder swears to Grover Nordquist. An oath they hold in higher esteem, that their oath to uphold and defend the Constitution or to promote the general welfare.

  9. Submitted by Carin Peterson on 04/12/2020 - 12:01 pm.

    Grover Nordquist and the “pledge” have got to GO!

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