Minnesota’s budgetary red ink has evaporated with a $1.57 billion surplus now projected in the next biennium, setting the stage for a political clash over taxes and spending needed to aid the state’s COVID-19 recovery.
The rosier
On Friday, the February forecast showed a dramatic turnaround in the state’s economic prospects. Minnesota Management and Budget now expects more available revenue and reduced spending in the current biennium that will be carried over into the next budget cycle.
Revised estimates in the next budget cycle and the previously approved use of budget reserves drive the surplus up to $1.57 billion. The revenue and economic projections don’t assume passage of President Biden’s $1.9 trillion relief package approved by the House last week.
The state will carry over $546 million from the current biennium. Revenue for the next budget cycle is now forecast at $50.9 billion. That’s $1.4 billion or 2.9% higher than the November projection as estimates for all major tax sources — personal and corporate income and sales tax — were raised and spending is estimated at $50.7 billion, a $456 million decrease. Overall, the forecast represents a $2.4 billion positive change from November, when you count this year's surplus, projected higher revenues and the previously approved reserve use.
The state’s rainy day reserve will remain stable at $1.9 billion and the cash flow account at $350 million, but the stadium reserve will drop slightly to $201 million from $230 million.
“I feel like we’ve been on a year-long roller coaster,” MMB Commissioner Jim Schowalter said during a Friday news conference.
Last year at this time, the state forecast a surplus, but by summer Minnesota issued a grim warning of a projected $7 billion pandemic-driven deficit through fiscal 2023. The formal November forecast offered better news: a $641 million surplus in the current biennium and a $1.27 billion hole to plug in the next two-year budget.
Federal relief from December bolstered the numbers, along with the Biden administration’s decision to extend federal emergency and higher Medicaid reimbursement levels through at least calendar year 2021.
State officials cautioned against reading too much into the new projections. “Even though this is really good news, absolutely good news for the state’s fiscal health … the bulk of this money is really from one-time resources so we will have to be careful and manage appropriately,” Schowalter said.
And while the numbers look much better than
The budget team will now prepare amendments but Walz, a member of the state’s Democratic-Farmer-Labor Party, faces a fight over how to earmark the newly available funds and whether any of his $1.6 billion of proposed tax hikes are still needed. The GOP holds a Senate majority and the DFLers hold a House majority.
Walz said he is willing to compromise, but also signaled new spending was needed. “State projections aren’t the same as household budgets. They don’t reflect the hardship that many Minnesotans have endured over the past 12 months,” he said. “The good news is we are in a position to help as many Minnesotans as possible and have a fiscally sound budget.”
GOP members of the House and Senate said the state does not need to raise taxes and Senate Republicans intend to press to exclude from state taxes income from loans businesses took out with the federal government.
“That is an amazing turnaround,” said Senate Majority Leader Paul Gazelka, R-East Gull Lake, said in a video statement. “What we for sure won’t do is raise any of the taxes the governor proposed. There’s no reason to do that with a $1.6 billion surplus.”
Walz’s proposed budget relies on a corporate tax rate hike for large, profitable companies and an estate tax increase and a capital gains tax hike. The state would cut income taxes for some by expanding the lowest tier of the income tax bracket. Walz also originally proposed using reserves, but the next forecast leaves reserves at current levels.
Walz also proposed a $500 million bonding bill for capital projects. The state typically passes a larger package in the year after adopting an operating budget for the next biennium and a smaller package in tandem with the operating budget. Walz and lawmakers settled on a $1.9 billion package last year. The new proposal relies on $240 million of general obligation bonds and $250 million of appropriation bonds. A three-fifths majority vote is needed to approve new borrowing and GOP members have said they’d consider only a smaller package.
Ahead of a $1.2 billion August bond sale, Fitch Ratings affirmed the state’s AAA GO rating and Moody’s Investors Service affirmed its Aa1 rating. Both assign a stable outlook. S&P Global Ratings affirmed the AAA rating but moved the outlook to negative from stable saying it believed the state would “likely significantly rely on one-time measures and reserves, rather than structural adjustments, to address its structural deficit.”
