Deficit? What deficit?

Minnesota’s economist released the official November forecast of state revenue and spending on Tuesday, and it offered better news for a governor and state Legislature seeking ways to help businesses and individuals hurt by a second round of pandemic-related closures.

What had been a $2.42 billion deficit when Minnesota Management and Budget, the agency that oversees the state’s finances, last took a look at the economic impacts of COVID-19 has turned into a $641 million surplus. That’s on a base two-year budget of $48.4 billion.

“Minnesota’s economic and budget outlook have improved since May, when we released a budget projection just as the COVID-19 pandemic was taking hold,” MMB reported Tuesday. “With this forecast, higher general fund revenues and lower expected spending result in a projected surplus of $641 million for the fiscal years 2020-21 biennium. The improved budget outlook continues into fiscal years 2022-23, but a $1.273 billion budgetary shortfall remains for that biennium.”

That look into the two-year budget that begins July 1, 2021 is a vast improvement over the summertime-estimate of a $4.7 billion deficit. And it is well below the state’s current rainy day savings account of $2.36 billion.

Another way to look at Tuesday’s relatively positive Minnesota revenue news is to skip the May forecast, which was an educated guess at best. Compared to the February forecast, the state has gone from $1.51 billion surplus to $641 million surplus — a loss of $870 million. And the 2021-23 budget has gone from balanced to a $1.273 billion deficit. So, the recession is projected to reduce state tax revenues by close to $2.15 billion.

The state will release more detail on the economic forecast later Tuesday. That will be followed by reaction from Gov. Tim Walz and legislative leaders of both parties.

Fourth budget picture in 12 months

Tuesday’s official forecast of the state’s revenue and budget picture is the fourth in 12 months, and it reflects another wild swing in the numbers.

One year ago, state economists estimated the current two year budget would end with $1.33 billion in surplus, based on a budget of $48.3 billion. That surplus jumped to $1.51 billion in February, even though the threat of a pandemic was noted in the forecast as something to be concerned about.

In May, the state office of Management and Budget took a stab at updating the February numbers using more-limited data and best-guessing the fiscal impacts of shutdowns that had just begun. It was then that the state said the $1.51 billion surplus had transformed into a $2.42 billion deficit.

Since the start of the state’s fiscal year on July 1, however, tax collections have been better than estimated — $805 million better. Those numbers, which account for money in the bank versus forecast revenue, fed speculation that the forecast released today would be an improvement. 

Lawmakers looking to help businesses

Usually, the so-called November forecast in even-numbered years is the starting point for political sparring, as it comes prior to lawmakers drafting the two-year state budget the following spring. This year, however, it is being used to support new spending to help businesses harmed by the second round of closures ordered last month.

Monday, Walz said there are ongoing negotiations between his staff and legislative leaders about a COVID-19 relief package for businesses hit by the second round of closures and restrictions.

Last week, both legislative Republicans and DFLers released plans to get financial help to businesses like restaurants and gyms that were ordered closed to limit exposures.

“I want to thank the legislators, they worked over this weekend. Different ideas are now being vetted out as what’s acceptable. This is pretty normal procedure,” Walz said Monday. “This process will accelerate itself after tomorrow’s budget forecast numbers come out. That will give everyone a much better starting point for where we’re at fiscally and what we can do in this process.

“I’ve said, once they’re ready and once we have an agreement I’ll call them back and we’ll get this done.” 

Walz said such a session could possibly happen as soon as this week.

Disparate impact

The more-robust tax collections in July, August, September and October suggested an improved November forecast. That it was a surplus was a surprise, however.

The explanation in October for better-than-expected tax collections was that the pandemic recession was hitting Minnesotans differently — and disparately. Those in service jobs most impacted by shutdowns were doing poorly, especially when enhanced unemployment payments expired in July. But many others did not see income declines.

“If someone said tomorrow that the budget deficit was not going to be there, I could believe that. I don’t believe the numbers have been cooked,” said John Phelan, an economist with the conservative research group Center of the American Experiment. “When I say it’s incredible, I mean if I could put myself back to March or April or May, if you’d have told me then that we were going to emerge this year without a budget deficit, I would have wondered what you were drinking.”

The Center called on any deficits to be resolved without tax increases, arguing that state taxes are already high in comparison to other states. And Phelan said he thought there were still grounds for tax cuts even if the deficit isn’t as deep as forecast in the spring.

But the Minnesota Budget Project, an arm of the Minnesota Council of Nonprofits, said the impacts of the recession not only fell more harshly on lower income residents but that those impacts were softened by state and federal government spending that has since ended, or will end by Dec. 31.

“Policymakers will need to continue to fund many of the critical supports and public services for the workers, families and children, and others who have been harmed by the pandemic and subsequent recession,” the project said Monday.

A challenging year for forecasters 

This year has been a challenge for state economists. At the time of the February forecast, the document used by the Legislature to draft budget and tax changes, COVID-19 wasn’t seen as a threat large enough to impact the numbers. Then-Commissioner of Minnesota Management and Budget Myron Frans called coronavirus “a dynamic situation that changes daily” but said all forecasts have unknowns. “These numbers always have an asterisk on them.”

But the state was considered to be well-placed to weather a downturn, It had a $2.36 billion rainy day savings account — the largest permitted under state law. It also carries a $350 million reserve fund for less-severe ups and downs in tax collections and spending.

Those savings, however, would have been overwhelmed by the May deficit projection. And that is just for the current two-year budget. The state estimated that the recession would also put the next two-year budget period, beginning July 1, 2021, in a $4.7 billion hole.