New Minnesota state Office of Management and Budget Commissioner Jim Schowalter admitted to showing his age when he compared the upcoming challenges in managing a large state budget deficit to a TV commercial from the 1970s.
“There used to be this old ad of somebody trying to cut a diamond in the back of a car,” Schowalter told the annual meeting of the Minnesota Center for Fiscal Excellence on Wednesday. Make a mistake and a gemstone worth $125,000 could be “worthless dust,” says the ad’s narrator.
“The bottom line is, trying to do precise work while you’re moving, while you’re experiencing bumps in the road, is very difficult,” he said.
The state’s current budget forecast — crafted in May when COVID-19 pandemic-induced recession was in its early months — foresees a $2.4 billion deficit by the time the current two-year budget period ends July 1 of next summer. Later, a glimpse into the two-year budget period projected another $4.7 billion shortfall between projected spending and projected revenues. All of which is based on the current spending plan of $48.3 billion over two years.
The next official budget outlook is set for early December, which will be the one used by Gov. Tim Walz to propose a supplemental budget for the state and the next two-year budget.
On Wednesday Schowalter said that even those numbers will be best estimates at a time when uncertainty reigns. Will the federal government come through with an additional stimulus plan, one that overcomes congressional Republican reluctance to replace lost state and local tax revenue? Will the recent surge in infections damage the economy even more than was projected in May? Will a vaccine arrive in time to save hundreds of Minnesotans’ lives as well as the economy?
Without having that information in hand, Schowalter and Walz not only have to craft an updated forecast, but they’ll have to present a budget and manage a divided Legislature. “We’re gonna find out major pieces of information as we go,” Schowalter said.
Thus, the diamond-cutter in the car analogy.
Dealing with multiple crisis
Schowalter is familiar with budget challenges. He served as Gov. Mark Dayton’s MMB commissioner and helped manage the state through the end of the Great Recession, a time when the state faced a $6.2 billion deficit. Before being appointed to that job by Dayton, he had worked as MMB’s budget director. He was working at HealthPartners when Gov. Tim Walz brought him back to MMB in August, after then-Commissioner Myron Frans resigned.
Schowalter recalled Wednesday that when he was contacted by Walz, the task didn’t seem that bad, especially given his experience with Dayton. “Sitting in my basement it seemed like sure, that seems like a great idea,” he said of taking the job. “Sure, there’s some issues we might have about revenues, I know there’s a recession — I’ve been through one of those. From the basement it didn’t seem that unfamiliar … until I started.”
Once inside the administration, Schowalter said he was struck by how the state was in the midst of multiple crises at the same time. The first was the monthly special sessions of the Legislature, which transformed dealing with lawmakers from a winter and spring sprint to a year-long effort.
“We’ve been in a constant legislative footing for that period of time,” he said. Add to that the health crisis caused by the novel coronavirus and the scale of the administration’s task in responding to it.
The bigger crisis is the recession and the damage to state revenues. “When the economy tanks as dramatically as it did, and that it will take at least three quarters to get back to the same place that we were before, there is going to be a budget impact,” Schowalter said. “This isn’t just about the budget. It’s really about the deficit as it’s linked to the health care crisis, as it’s linked to ongoing conversations between the executive branch and the legislative branch.”
Minnesota will enter the 2021 legislative session as it is ending the 2020 session, with a DFL governor and House and a GOP Senate. While that suggests more partisan conflict, Schowalter praised the Legislature for reaching a deal last month on a bonding bill, some tax reductions and some relatively minor spending increases.
“Just remember, even staring in the face of economic distress and revenue shortfalls, the Legislature and the governor came together to put together a package a month before an election that included a lot of good policy, a lot of things that were important to both sides,” he said.
Getting more help from Congress is critical
As deep as the holes in revenue are, Minnesota is in better shape than many other states. A $2.4 billion rainy day account is helping cushion the blow. And the economic impacts on the Minnesota economy are significantly different — and lesser — than on others states. Just this week the state reported that revenue collections continue to exceed the May forecast update; they are up $212 million in October and up $805 million since the start of the fiscal year July 1 — 12.5 percent above the May forecast.
The biggest question for Walz and legislative budget writers is whether Congress sends more help to the states, and if so, how much. The $2.2 billion in cash sent to Minnesota and its two largest counties in the spring was a big help in softening the blows caused by the pandemic, as were the $600 a month in extra unemployment insurance (since expired), the $1,200 checks to most households and the payroll protection loans to businesses.
“The bottom line is that we actually haven’t seen the impact of the economic recession yet,” Schowalter said.
The impacts that have been seen have fallen disproportionately on certain sectors of the economy — especially hospitality — and the lower-income workers that staff those sectors. Larger corporations and businesses, finance, health care and even retail has not been damaged as much.
“Are we overselling the impact of this? No,” he said. “It’s just not showing up in the same way it has before, and that from your basement, the impact of understanding what’s going on out there is feeling a little bit muted. It is hard to see some of those impacts because of the federal help that’s come through already, because of the allocation of pain.”
Getting more help from Congress could be critical in getting to the end of the fiscal crisis, he said. The alternative for states and local governments is program cuts and layoffs, both of which could delay a recovery. Some time can be bought by shifting money around within the state budget and delaying certain payments, such as the basic education allocation. Those, however, leave the state vulnerable if the downturn lasts longer than expected and the payments become due before the recovery begins.
When asked if there are differences between how the budget crisis was solved in 2010 and how it might be solved next year, Schowalter noted that there are a finite number of options available. “There’s no new way to balance a budget: more revenues, less spending, shifts or reserves,” he said. “Those components are always the same though people might have slightly different preferences than they did before.”
The difference this time is where the impact is falling. “A decade ago everyone saw or felt some impacts,” he said.
Another difference is that this time there are no fundamental economic reasons for the poor economy. The causes of the Great Recession — the housing crash and credit crisis — took time to recover.
This time, he said: “It’s about the pandemic. So how do you get through the pandemic. That becomes your imperative. The playbook is the same but the question is what are you applying it to? Right now it is applying it minimizing impact, getting people better, stabilizing normal activities so that you can have the normal debate about taxes and spending.”