Minnesotans are spending more than predicted and state government is spending less, leading to a financial about-face Tuesday as economists predicted a state budget deficit had flipped to a $641 million surplus.
State leaders went from figuring out how to patch a hole in the current budget to expecting some extra dollars, which could be used for priorities like COVID-19 relief. Tuesday's forecast also looks ahead to the next two-year budget cycle, which starts July 1. Costs are predicted to exceed revenue in coming years, creating a potential $1.27 billion gap in the next budget. However, that hole is smaller than anticipated this spring.
The new numbers set an easier path for Gov. Tim Walz and legislators as they shape that budget for 2022 and 2023. The forecast will be the basis for Walz's budget proposal, which he debuts in January and hashes out with lawmakers through the winter and spring.
Legislators have also been waiting for the latest financial prediction as they negotiate a COVID-19 aid package. Walz said Monday he hopes work on a deal will accelerate after the forecast.
Economists painted a grim picture during the last forecast in May, as coronavirus cases climbed to 7,851. They expected the current budget, which ends June 30, would have a $2.4 billion deficit. And in July officials predicted a $4.7 billion gap for the following two years. The pandemic has raged on since then, battering many Minnesotans' pocketbooks and infecting more than 318,000 people.
But higher than expected sales tax receipts and business investments have cushioned the blow to state finances. A drop in state spending also contributed to the potential surplus and better outlook in the next budget. The forecast anticipates state spending for the current budget will be $1 billion less than previously projected and $409 million less in 2022 and 2023. Lower than expected health care spending and a decrease in estimated student counts are a couple of the factors that changed the expenditure prediction.
State economist Laura Kalambokidis recently said other states with sales taxes have seen better-than-expected revenue as well, in part because additional federal unemployment insurance payments allowed people to keep buying things.
The uneven financial impact of the coronavirus also affected the numbers, Kalambokidis said. The state has 184,000 fewer jobs than in February, according the forecast. People who filed for unemployment insurance, particularly during the spring and summer, were more likely to have held lower-wage jobs, she said.
"You would have expected more of a hit to consumer spending given the level of unemployment, but because the burden was not borne equally — it was borne more by people with lower incomes — then spending did not decline as much as we anticipated," she said.
However, Minnesota Management and Budget Commissioner Jim Schowalter has warned that a list of variables could shift Tuesday's forecast, from the timing of coronavirus vaccines to the possibility of another round of federal assistance for states.
Minnesota's full reserves put the state in a relatively strong position to weather the uncertainty and handle a potential gap in the next two-year budget cycle. The state has saved roughly $2.4 billion to help navigate economic downturns.
As for the expected surplus in the current budget, legislators and advocacy groups quickly suggested some uses Tuesday.
"Today's budget forecast makes one thing clear — we are in a significantly stronger financial position than we thought we would be last spring. It's time to support the front-line workers, families in need, and the small businesses hit hardest by #COVID," tweeted House Majority Leader Ryan Winkler, DFL-Golden Valley.
Minnesota Chamber of Commerce President Doug Loon said in a statement the state needs to focus on businesses and economic relief.
"The good news of this forecast means that the legislature can take immediate steps to help stabilize small and medium-sized businesses and jump-start economic recovery throughout the state," Loon said.
This is a developing story. Check back for updates.
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State economic forecast shows $641 million surplus for current budget - Minneapolis Star Tribune
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