How Minnesota went from projecting a surplus to a deficit to a surplus again — over the course of 10 months

Welcome to the world of economic forecasting in the midst of a global pandemic.

Tuesday’s update of Minnesota’s projections of tax revenue and spending for the final seven months was seen as good news. Having $641 million extra on hand instead of being $2.42 billion in the hole will have that effect. “Minnesota’s forecast is significantly improved even as COVID-19 impacts remain,” said Minnesota Management and Budget Commissioner Jim Schowalter. “Due to improved economic conditions, the projected deficit anticipated last May has been eliminated and we now project a $641 million surplus for the current fiscal period.”

That fiscal period runs from July of 2019 to June of 2021 and is budgeted to cost $48.8 billion, or about $2 billion each month.

A few weeks ago, policymakers were wondering how much of the state’s sizable rainy day savings account would have to be used to get through this budget. Now, the surplus means that the fund won’t have to be tapped at all. At least not yet.

“If our forecast holds, we’ll still be able to use it as a buffer for projected shortfalls in the next biennium or to provide more services to Minnesotans affected by both health and economic crises caused by COVID-19,” Schowalter said.

Sure, it’s not the $1.51 billion that was projected in February, a time when the novel coronavirus was but a glimmer on the fiscal horizon; when then-Commissioner of Management and Budget Myron Frans called the effects of COVID-19 “a dynamic situation that changes daily,” and noting that all forecasts have unknowns. “These numbers always have an asterisk on them.”

Normally, the state produces two economic forecasts each year: one in November, which is used by the governor to draft their budget requests to the Legislature; and one in February, which is used to guide the writing of the budget. 

Like lots of things, that practice was altered by the pandemic, and a special forecast was prepared in May to get a better picture of the economic fallout from COVID-19. Using hastily gathered national economic data and a batch of best guesses as to how deep the pandemic would cut into state revenues, the resulting forecast projected the state would end its current two-year budget period in a deep hole. A few weeks later, state economists said the hole would grow even deeper during the 2021-23 budget period. 

But forecasts are estimates of the future, not money in the bank, and it’s clear now that the May forecast was overly pessimistic. Minnesota’s economy never performed as poorly as was predicted then, something that started becoming obvious almost immediately, when each month’s tax collections exceeded the amounts projected.

Instead, the May forecast made Tuesday’s numbers a cause for celebration, with some notes of caution. Senate Minority Leader Susan Kent, DFL-Woodbury, for one, called the new forecast a “cautiously hopeful picture” of the economy. And other lawmakers focused on the projection for the next budget period, which predicts a $1.27 billion deficit, down from the $4.7 billion hole for the next budget that was announced in July.

Why the May forecast was so wrong

The state economic forecast starts with a global and national estimate produced by its macroeconomic modeler, IHSMarkit. It loads those numbers into its computers and adds state-specific economic data to produce forecasts. In May, IHSMarkit projected that the U.S. economy would decline 5.4 percent this year. Now it thinks it will decline 3.6 percent. 

IHSMarkit now expects the national economy to get back to pre-recession levels by early 2022 and the economy to return to full employment in 2024. The national forecaster bases these estimates on two important assumptions: that a COVID-19 vaccine will be broadly available by mid-year, and that Congress will not pass additional relief. If the vaccine takes longer, the forecast could turn out to be too optimistic; if additional relief is passed, it could be too pessimistic.

The improvement in the forecast is due not just to higher-than-expected tax collections, however. A few areas of state spending have also been reduced, specifically per-student allotments to school districts. The was due to a 12,600 reduction in student enrollment and lower than expected use of medical assistance. 

Kalambokidis echoed the point. “We learned a lot between May and now and we’ll learn more between now and the February forecast,” she said. 

While the overall economic picture was brighter, Schowalter tried to show that the reason for that is because the pandemic hasn’t affected everyone the same. Larger businesses and higher income taxpayers didn’t suffer as much as lower-income workers, who make up the bulk of the 107,000 workers have left the labor force and who are most affected by restrictions like bar and restaurant closures.

“Clearly the impacts of this recession and the impacts of COVID-19 are really concentrated,” Schowalter said. “Some sectors, and particularly some employees and some families are particularly hard hit.”

Lawmakers want to send checks to bars, restaurants and gyms by the end of 2020

It is those disparate impacts that is now driving a bipartisan drive at the state Capitol to spend some of the surplus on a COVID-19 relief package aimed at helping businesses closed last month: bars, restaurants, health clubs and entertainment venues. 

Among the remedies being discussed: direct cash payments to businesses as well as extending unemployment benefits by 13 weeks for those who have used up both regular state benefits and federal CARES Act extended benefits.

DFLers are also proposing tapping federal dollars to give $500 one-time payments to families receiving support from the state’s welfare program, the Minnesota Family Investment Program. “We need a package,” Walz said. “I think what this forecast gives us, it gives us more certainty, which is a hard thing to come by in COVID.” 

He described any state relief plan as “a bridge path” to a time when a COVID-19 vaccine is broadly available and perhaps when additional federal help is approved.

House Speaker Melissa Hortman said this week would be spent creating an agreement in concept, while next week would be used to iron out details and the following week could see passage of the legislation. House Majority Leader Ryan Winkler, DFL-Golden Valley, said that timeline would still allow checks to businesses to go out before the end of 2020.

And House Minority Leader Kurt Daudt, R-Crown, stopped short of predicting a relief package would pass. “There is no certainty in anything” the Legislature does, he said. “I am 100 percent confident that we can. Whether we will or not remains to be seen.”