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Minnesota projects $2.42 billion budget deficit in wake of COVID-19

The emergency budget forecast — based on skimpy data and educated guesses on what the fallout from COVID-19 is doing to state finances — was released Tuesday by Minnesota’s office of Management and Budget and projects a $2.42 billion shortfall.

Minnesota Management and Budget Commissioner Myron Frans
Minnesota Management and Budget Commissioner Myron Frans: “There’s a reason we call that a rainy day fund. It’s for a rainy day. And well, today is a rainy day, unfortunately.”
Glenn Stubbe/Star Tribune/Pool

In normal years, Minnesota state government makes changes to taxing and spending based on a forecast released in February. But the coronavirus pandemic made that work of state economists and accountants outdated a month after it was released.

So an emergency update — based on skimpy data and at-best educated guesses on what the economic fallout from COVID-19 is doing to state finances — was released Tuesday by the state office of Management and Budget.

It was bad, as expected. But depending on the people reading it — and their politics — it was either not-so-bad or catastrophic. A $1.5 billion pre-COVID surplus has morphed into a $2.42 billion post-COVID deficit, a $4 billion turnaround in 10 weeks.

First, the numbers:

  • Minnesota’s current budget for the two-year from July 1, 2019 to June 30 2021: $48.3 billion
  • New spending since that budget was adopted: $550 million
  • Amount of that new spending that can be reimbursed from the more than $2 billion the state has received from the federal CARES Act: $530 million
  • Projected revenue surplus in February, 2020: $1.5 billion
  • Projected revenue deficit in May 2020: $2.42 billion
  • Amount in state’s rainy day savings account: $2.36 billion.
  • Cash reserves: $350 million

“There’s a reason we call that a rainy day fund. It’s for a rainy day,” said Minnesota Management and Budget Commissioner Myron Frans. “And well, today is a rainy day, unfortunately.” 

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The fund can be used to help the state “weather this economic downturn and give policymakers — the governor and the Legislature — time to consider options to maintain critical services and support growing needs in the face of declining revenues.”

Minnesota Management and Budget
Minnesota can dip into the rainy day account once there is an official projection of a deficit, such as this one released Tuesday. That could be used to pay for the existing budget and be done without further action by the Legislature.

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But Walz and his finance commissioner preached caution in the use of the savings account. He said conditions could worsen, and while he and other governors are asking for further help from the federal government, such help is far from certain from arriving. 

Those reserves, “are one of the reasons Minnesota’s fiscal health is one of the strongest going into this and it positions us better to come out of that,” Walz said. “But there are … decisions to be made. There’s gonna be shared sacrifices.” Rather than think that he and the Legislature will fix the budget before the regular session ends May 18, Walz said he expects lawmakers will need to return over the next months to make additional adjustments.

Gov. Tim Walz
Glenn Stubbe/Star Tribune/Pool
Gov. Tim Walz said conditions could worsen, and while he and other governors are asking for further help from the federal government, such help is far from certain from arriving.
“This is not a one and done and leave,” he said. “There are uncertainties in how long this lasts, there are uncertainties in how society responds to a reopening and social distancing, there are uncertainties in how soon we get to therapeutics and vaccines.”

The governor advised against assuming the state or nation is past the worst period of the crisis.

“We are not,” he said. “As a nation our peak is still coming. I’m going to anticipate that this could deepen in terms of the deficit and take this a step at the time. It’s not just dump the budget reserves in and you’re even today because tomorrow it’s not there.”

The state has already received $2.2 billion directly from the federal CARES Act with another $900 million going for state social and health services, emergency services colleges, public school districts and transit agencies. 

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The effect of those dollars was clear in the forecast. Even though the state is paying out more in medical assistance payments, it ended up with a $160 million positive impact on the budget because federal funds more than offset that increased demand.

Still, Frans said they are looking at different scenarios for reducing spending.

“We’re gonna look everywhere. That’s our goal,” Frans said.

Reactions from lawmakers

The reaction from legislators and interest groups was predictable, and sets the stage for the last two weeks of session. Republicans and conservatives groups called for cost savings and opposed tax increases. 

“The state is going to have less money next year. About $4 billion less. That falls on the shoulders of the legislature to manage,” said Senate Majority Leader Paul Gazelka, R-East Gull Lake. “We are doing everything we can to limit the negative financial impact of COVID, but it’s clear a holding pattern is not enough.  

“At the end of the day, we need to be able to look into the eyes of the small business owner and the laid-off worker and tell them, state government is making sacrifices too. Empathy is not enough. Actions speak louder than words,” Gazelka said.

GOP House Minority Leader Kurt Daudt echoed those thoughts. Today’s budget update shows that our state is seeing the same financial struggles that families and businesses are facing. Democrat Governors in New York and Wisconsin have already come forward with billions in budget reductions to react to the COVID crisis, and it’s time for Gov. Walz to do the same.” 

Minnesota Jobs Coalition executive director John Rouleau called for a pay freeze for state employees. “At a time when over half a million Minnesotans have filed for unemployment,  workers have had their hours and pay cut and Minnesota spirals toward a budget deficit, state government must tighten its belt. We’re all in this together.”

The update was also invited Republicans to call for more-aggressive reopening of the economy as a means of decreasing demand on social services and unemployment insurance and increasing tax collections. “Most importantly, we need to open the economy to revenues that fund essential government services,” Gazelka said.

Minnesota Management and Budget
Democrats and liberal groups, meanwhile, said the forecast shows that the reserves are in good shape and that cuts should be avoided. Some also blamed past tax cuts for playing a role in the deficit.

“While we expected the state’s financial picture to worsen, I am relieved that the size of the projected deficit was not larger,” said House Speaker Melissa Hortman, DFL-Brooklyn Park. “Investments are needed to make Minnesotans secure in their housing, help small businesses, facilitate distance learning and telemedicine, and to ensure we have the workforce we need to provide care for the elderly and people with disabilities. The federal assistance allows us to make these needed investments, while our state’s savings will cover our expected dip in revenue.”

Senate Minority Leader Susan Kent, DFL-Woodbury, agreed that new spending should be considered. “Now is the time to join together to help our neighbors by passing forward-looking legislation in order to ensure every one of us can care for our families, earn a fair return for our work, and protect the people who are protecting us during this public health emergency.”

A prominent DFL-affiliated advocacy group suggested that tax increases on business and the wealthy should be considered before any cuts. “Minnesota has come through tough economic times before, including the last recession, by pulling together and requiring the wealthiest corporations and individuals to pay their fair share in taxes,” said Elianne Farhat, executive director of TakeAction Minnesota. “We can get through this and come out stronger, but the days of Republicans passing trillions of dollars in tax cuts for the richest 1% need to end. We deserve a government in Minnesota that’s working for the people, and that starts with a fair tax system.”

Walz landed somewhere in between, at least in his reaction to the update Tuesday. The rainy day account helps, but it shouldn’t be drained because conditions could well worsen. He also said he was open to savings and adjustments to the current budget and didn’t rule out reductions in state employment through layoffs or furloughs.

But Frans noted that the state could eliminate all employees and save just 7 percent of the state budget. Most goes to public school districts and to medical assistance and social services programs.

Recession predictions

Two weeks ago, state economist Laura Kalambokidis told a Senate committee that trying to update the state forecast was like trying to fly an airplane while building it. That’s because the data that is often relied on to estimate the future of the economy either isn’t available or is incomplete. The best example of that is tax collections that are often a quick look at activity but that have been delayed as a way of helping businesses and individuals weather the crisis.

Tuesday she said the one piece of hard data is the use of unemployment insurance in Minnesota. Since March 15, 600,000 Minnesotans have applied for benefits, far outreaching the entire demand during the Great Recession of 2007-09. 

“The shock to the U.S. economy from the pandemic is unprecedented in modern post-war history and the economic outlook is exceptionally uncertain and volatile,” she said. The run of the pandemic spread, the development of treatments and vaccines, federal financial support, the length of shutdowns and the willingness of consumers to resume spending are the unknown variables.

The state has also received an update from its national forecast vendor, IHS Markit. That forecast predicts a recession lasting three calendar quarters and a decline in gross domestic product — the most common measure of economic output — at 5.4 percent. Just three months ago, IHS Markit said the national economy would grow by 2.1 percent. The primary reason for that decline is that consumer spending that accounts for two-thirds of GDP has been hit the hardest by stay-at-home orders and shutdowns of stores, restaurants, theaters and sporting venues.

State Economist Laura Kalambokidis
Glenn Stubbe/Star Tribune/Pool
State Economist Laura Kalambokidis: “The shock to the U.S. economy from the pandemic is unprecedented in modern post-war history and the economic outlook is exceptionally uncertain and volatile.”
This forecast, however, is based on a prediction that the virus spread will peak in early summer and then dissipate. If that happens, economic growth could begin to recover by the end of 2020, the forecaster predicts, with growth reaching 6.3 percent in 2021 and getting back to February 2020 levels by mid-year. But it will not catch up to where it would have been absent the pandemic, Kalambokidis said.

“We never get back to that dotted line,” she said, pointing to the graph that showed pre-COVID growth. “Some amount of economic activity is simply lost.”