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Despite projected deficit, Minnesota officials in no rush to implement budget cuts

Compared to other states, Minnesota hasn’t taken drastic measures, or many measures at all.

Gov. Tim Walz told WCCO Radio Friday morning: “You don’t tax businesses who don’t have the capacity to be able to pay it and get back on their feet.”
Gov. Tim Walz told WCCO Radio Friday morning: “You don’t tax businesses who don’t have the capacity to be able to pay it and get back on their feet.”
REUTERS/Lucas Jackson

The budget news for Minnesota state government has been grim.

In May, the state  budget office projected a $2.4 billion deficit for the two-year budget period that ends next July. And last week, the same office released an estimate for what the recession would do to the current forecast for the next two-year budget: an additional $4.7 billion deficit. 

That it came so suddenly and was such a reversal from a budget with a $1.5 billion surplus in early spring added to the shock. But despite the suddenness of the COVID-19 recession — and the depth of the hole it has created — there doesn’t appear to be much haste or panic in state government.

Gov. Tim Walz had ordered a few savings: a mostly symbolic pay cut for commissioners, some job losses at prisons and a hiring freeze for jobs not considered essential to pandemic response. Compared to other states, Minnesota hasn’t taken drastic measures, or many measures at all.

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A $2.35 billion rainy day fund, hopes for more help from Congress and the awkwardness of getting a deal in a divided Legislature have tilted decision makers toward waiting. And now, election politics suggest there will be no significant action anytime soon, and perhaps not until the new Legislature is sworn in in January.

“We’re in a little better position than a lot of states, probably in the Top 10 for being prepared,” Minnesota Management and Budget commissioner Myron Frans said this week. “The key to a budget reserve is to buy you time.” 

Without the reserve, the state’s legal requirement to stay in balance would have meant slashing payments and cutting jobs, Frans said. And there have been some layoffs: at the Minnesota Zoo and at the Department of Corrections. But across state government, widespread job cuts and pay reductions have not been instituted.

In some ways, the state has gone the other way. A proposed supplemental budget last month would have spent much of the savings from the hiring freeze. And in July, over the objections of Republican legislators, a 2.5 percent pay raise for 47,000 state workers kicked in at a cost of $750 million in the next budget.

Frans said the administration has ordered agencies to produce budget cut scenarios of 5 percent and 10 percent. But the cost of agency operations is a relatively small part of state spending compared to school funding and social program grants. The budget reduction scenarios, for example, would save between $50 million and $100 million.

“You can’t solve billion dollar budget problems with agency operating cuts,” he said.
Minnesota Management and Budget commissioner Myron Frans: “The key to a budget reserve is to buy you time.”
Frans said the administration will look to further budget cuts as well. But they will be looked at with the goal of not cutting social services that will be in more demand as the recession continues. And the administration has a policy of saving payroll costs by reducing hours of workers rather than cutting entire jobs, thus preserving access to health insurance and other benefits.

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Nor is the administration looking to use tax hikes to resolve the deficits. You don’t tax businesses who don’t have the capacity to be able to pay it and get back on their feet, Walz told WCCO Radio Friday morning. We can talk about everything, but the idea that you’re gonna fix it with a tax increase alone is not going to work. And the idea that you’re gonna fix it just by cutting instantly, cuts off your growth for the future.

And though Walz said there will be additional job cuts, he also said the state has some time to address the deficit: “I don’t think you have to fix this overnight. We need to be smart. We’ve got a couple years to balance this. We’ve done it before.”

A prediction of ‘massive cuts’ for state government

Republicans in the Legislature have complained about the lack of concrete action on state spending, and warned of the long-term impact of the deficit. If the state isn’t going to cut spending, at least it shouldn’t add it, they have said. But they have not presented a detailed budget plan of their own.

Sen. Julie Rosen, a Republican from Vernon Center who chairs the Senate Finance Committee, has been asking Frans to produce a formal revenue and spending update this month. There was an extra update in May, but Rosen said waiting until the next scheduled update in November will not give lawmakers the data they need to react to the recession.

“I don’t think we can wait until November,” Rosen said. “It’s hard to commit to anything without knowing what the numbers are.”

State Sen. Julie Rosen
Rosen said agency budget cuts exercises are helpful but called it “disingenuous” to have a conversation about this when the administration implemented the state employee pay raises. “How can we talk with a straight face about how to solve this budget when you just spent $700 million (in the next budget),” she said. 

State law requires the governor to bargain contracts and the Legislature to approve them. While the House did so, the Senate tried a qualified ratification, saying the raises from last summer would remain but those due this summer would not. Frans decided that action equaled ratification and went ahead with implementing the contracts. Threatened lawsuits from the Senate GOP have not materialized.

Rosen predicted the need for “massive cuts,” but said there doesn’t appear to be a political atmosphere to work through those. “Everyone needs to go to their corner and start figuring out how it’s going to look and make no commitments at this point because there isn’t a lot of trust right now,” she said.

Rosen’s budget counterpart in the House, Ways and Means Committee Chair Lyndon Carlson, DFL-Crystal, said the rainy day account does provide time to make changes. Given how much uncertainty there is about additional federal spending, the depth and length of the recession and its impact on tax collections, the extra time is especially helpful, Carlson said. 

And though he won’t be involved in solving the next budget problem — he is retiring after 48 years in the House — Carlson said his experience with past recessions demonstrates that early decisions are better than late ones. “Whether revenue has to be a part of it or whether it can be done just on the spending side or whether we’ll have enough with the state reserves or other reserves, we still don’t know,” Carlson said.

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Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, which studies state tax and spending policies from a fiscally conservative viewpoint, says that there was an expectation that lawmakers and Walz would begin tackling the budget when the Legislature met last month.

“When the interim budget projection in May flipped the state from a $1.5 billion surplus to a $2.5 billion deficit, one might have expected budget repair to be a focal point for lawmakers.  That was most certainly not the case,” he wrote. “In the context of policing reform, civil unrest, emergency powers, bonding, and COVID aid to local governments, the state budget deficit seemed to be a legislative afterthought.”

House Speaker Melissa Hortman
MinnPost photo by Peter Callaghan
House Speaker Melissa Hortman
Pressure for tax increases will certainly come from the DFL’s constituency groups, especially should the party win total control of the Legislature in November. “Fair state revenues also need to be part of the solution,” wrote the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits. “State revenues are dropping, but the current crisis is not impacting all businesses and people equally. It makes sense to ask those who have not been hard hit – profitable corporations and high-income people – to shoulder more responsibility for funding the essential investments that we need to make to help us all get through.”

House Speaker Melissa Hortman said her attitude toward the deficit changed with last week’s estimate of the impact of the recession on the next two-year budget cycle. The $2.4 billion deficit forecast in May was equal to the rainy day fund. The $4.7 billion hole for 2022-23 is not.

“I am definitely in the mode of starting the conversation with the Republicans and the administration,” said the Brooklyn Park DFLer. “Are there things we should do now?” 

Yet doing anything in an election season is complicated.

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“I can tell you right out of the gate almost everything we would do the Republicans would consider off the table,” said Hortman. Both parties would do fund shifts and delayed payments, standard tools for budget holes. “But then it gets difficult. At the moment the political philosophies are so different the question is, should we start attacking this year’s deficit today? I don’t think that’s gonna happen.”

As if on cue, while Hortman was talking, the Senate Victory Fund, the campaign arm of the Senate GOP caucus, announced a Friday press conference. The subject: “Senate Republicans Ask the Question: Who does Minnesota want in control of Senate with a $5 billion deficit?”

Bond sales as a backdrop

All this is background for an annual trip to the bond market that the state will make August 11. That is when Minnesota will ask New York based bond firms to bid on $1.2 billion is state general obligation bonds, a way for the state to borrow money to pay for public construction projects throughout the state.

Missing from that sale will be any new bonds to fund dozens of projects contained in various iterations of the 2020 bonding bill, which would have likely been in the $1.3 billion to $1.4 billion range. For the third-consecutive session, lawmakers could not agree on a bonding package

Despite the recent downgrades in the state’s own forecasts, Fitch assigned the state its highest credit rating. The other rating agencies had similar reports, and the state expects to get attractive interest rates for a bond issue that will also include the refinancing of previously issued bonds with higher interest rates. 

What other states are doing 

All states have been hit by the COVID-19 recession. Last month, The Tax Foundation estimated that states have lost $191 billion in expected tax revenue between this budget year and the next. The National Conference of State Legislatures is also keeping a running tally of state revenue reductions that are not pleasant reading for state budget leaders.

The same organization has been compiling a list of the budget cuts decisions made by various states, which include: Arizona cancelling a tax cut on pension income; California cutting $1.75 billion from higher education and $12.5 billion from K-12; Colorado ordering cuts by executive order; Florida implementing a 6 percent across-the-board budget cut; Michigan cutting local government aid; New Jersey “deappropriating” $1.3 billion in spending; Ohio ordering 16,000 state workers to take 10 furlough days; Oregon ordering state agencies to prepare budget plans with 17 percent cuts; and Washington vetoing $445 million from a just-passed budget.

Several of those states have made cuts with promises to repay them should states get additional money from Congress. Yet so far there is no certainty that the latest version of federal pandemic relief will provide money for state and local governments, though negotiations continue. 

Democrats have passed the $3 trillion HEROES Act, which includes $500 billion to state and $375 billion to local governments. But Congressional Republicans have been reluctant to provide more money to state and local governments, though there was some support for letting states use money from the March CARES Act to replace lost revenue, something currently prohibited. 

This week, there were reports of White House negotiators supporting up to $200 billion for states, which would provide $3.7 billion for Minnesota and its local governments if it’s enacted.