DFL Gov. Tim Walz reacts Thursday to the new forecast showing a projected $1.5 billion budget surplus while Myron Frans, Minnesota Management and Budget commissioner looks on. Photo by Ricardo Lopez/Minnesota Reformer
Minnesota’s projected budget surplus grew modestly, state budget officials said Thursday, swelling to $1.5 billion and immediately touching off fresh debate at the Capitol over legislative spending priorities.
But looming over the forecast presentation was the unpredictable impact of the spreading coronavirus on the global economy. State legislative leaders said Thursday they will work to quickly set aside funding for the state’s response to the epidemic that has spread to dozens of countries.
Here are key takeaways, including Minnesota’s response to the outbreak, from Thursday.
1) Coronavirus impact is a big risk to Minnesota’s economy
Because the economic forecast had been prepared nearly three weeks ago, the report did not include any estimates on how the coronavirus would affect Minnesota’s budget outlook. State Economist Laura Kalambokidis acknowledged the limitations of the report, saying that the projections could shift because of the rapidly evolving outbreak.
“Every day brings new understanding of the public health effects of the disease and the economic impacts remain uncertain. If the impact of the outbreak becomes more prolonged or widespread… U.S. economic growth will be slower than forecast.”
Already Wall Street is reeling, but Kalambokidis said demand for American goods, including agricultural commodities, could be dampened; manufacturers would need to adapt to supply-chain disruptions, and consumer confidence could fall.
DFL Gov. Tim Walz said the state is preparing for the potential that the virus spreads more widely in the country, but said he would remain focused on his legislative priorities that he said would stimulate the economy. “We’re going to control the things we can control,” he said, adding that “We’re watching it… we need to have the resources to direct it.”
Republican leaders largely agreed. State Sen. Julie Rosen, R-Vernon Center, said the Minnesota Senate is prepared to quickly consider a bill by State Sen. Jerry Relph, R-St. Cloud, that would appropriate $5 million for the state’s response to the virus.
“We can be very nimble,” Rosen said. “If we have to spend that money immediately for something like the disaster account, we can take it to the floor right away.”
2. As top trading partner, China factors heavily
Canada, China and Mexico are the largest export markets for Minnesota, with China making up $2.8 billion of the $10 billion in exports to the three countries. Trade uncertainty over U.S. tariffs on Chinese goods have been eased following a trade agreement reached late last year, but Minnesota exports to China nonetheless fell last year compared with the year before: 13% in the first quarter of 2019, 3% in the second and third quarters. If the coronavirus spreads, trade could be further damaged..
3. Minnesota’s surplus might not be so big, after all
Minnesota Management and Budget Commissioner Myron Frans renewed his call for legislators to undo an 18-year-old state law that bars the forecast from including the cost of inflation in spending calculations.
“By not factoring in inflation, the spending balance in the next biennium does not include the true cost of maintaining the current level of existing services for Minnesotans,” Frans said, citing, $1.1 billion in anticipated inflationary costs.
Earlier this week, Minnesota policymakers debated the merits of changing the law.
“I’m kind of tired of hearing we have this huge surplus when we don’t account for inflation, and I think it will change a lot of our discussions here at the Capitol if we were more responsible,” said DFL Rep. Jennifer Schultz, author of a bill to require that the forecast account for inflation in spending, during a recent committee hearing.
Publishing inflationary costs could create a significant shift in public perceptions of Minnesota’s financial situation. If the state budget outlook stops showing such large surpluses, the public’s demand for tax cuts might be tamped down, while Minnesotans would also get a different picture of the cost of government.
Some Republicans worried the change would increase government spending. Rep. Tony Albright, R-Prior Lake, said during a hearing earlier this week that the growth of state expenditures already outpaces taxpayers’ incomes and that including the cost of inflation would create higher base spending levels.
4. As enrollment falls, so will state spending on education
The forecast projects the state will spend about $48.37 billion to fund existing programs during this budget cycle, a slight decline from the last forecast. The change was driven by a drop in projected education spending, according to the forecast.
Funding existing programs will cost the state nearly $20 billion during this budget cycle, about $99 million less than predicted in the November 2019 forecast. The state anticipates that growth in its student population will slow, following lower-than-expected enrollment for the 2018-19 school year.
5. Differences in DFL/GOP approaches
State DFL leaders urged caution given the economic headwinds facing the country, calling for mostly one-time spending decisions.
“We need to make investments in education, health care, and families’ economic security,” House Speaker Melissa Hortman, DFL-Brooklyn Park, said in a statement. “With a potential economic slowdown on the horizon, DFLers think it’s important to make investments in the areas that will build a better future for all Minnesotans.”
Republicans in a press conference said the larger surplus means the state should cut taxes, calling again for fully exempting Social Security retirement income from taxes. “It’s a little bit more than where it was,” Gazelka said of the surplus. “We should stay the course.”
6. Farm income is up, but much of it is government aid
The trade dispute with China and other economic pressures have hit farmers hard, but thanks to U.S. Department of Agriculture largesse, farm income nonetheless is up.
“According to the most recent USDA farm income projections, released in early February 2020, national net farm income, a key indicator of U.S. well-being in farming households, is forecast to be up $9.8 billion (11.7 percent) in 2019,” the budget forecast noted. “This increase is largely the result of a 73 percent increase in government payments to the agricultural sector.
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