Minnesota faces sudden $2.4 billion budget deficit in COVID-19 fallout

By: - May 5, 2020 10:42 am

Photo courtesy of Minnesota History Center.

Minnesota budget officials announced a $2.4 billion deficit Tuesday, a stunning reversal of the state’s fiscal picture from two months ago before COVID-19 sent shockwaves through the global economy.

Minnesota Management and Budget Commissioner Myron Frans, MMB Economist Laura Kalambokidis and Budget Director Britta Reitan presented a grim and expedited accounting of the massive hit to Minnesota’s finances, giving state legislators an overview of how the budget picture changed by nearly $4 billion since late February. 

A surge in unemployment and an uncertain economic future has caused a drop in consumer spending, which typically comprises roughly two-thirds of economic activity. The state’s Department of Employment and Economic Development now reports nearly 600,000 Minnesotans have filed for unemployment insurance since the start of the pandemic in mid-March. 

The budget forecast sets the stage for the final two weeks of the legislative session, which has already been complicated by the jarring transition of converting to virtual committee hearings amid curtailed operations at the Capitol. The forecast now unlocks a nearly $2.4 billion budget reserve, created in 2014 to help the state weather an economic downturn and potentially stave off deep cuts to government services. 

Hard decisions

“It’s time for us to make hard decisions, but to be thoughtful in how we do that,” Gov. Tim Walz said Tuesday. “Over the coming weeks, this data will help drive some of the decisions we need to make.” 

Lawmakers will have some financial cushion. In addition to the budget reserve, the state also has access to $350 million in a cash-flow account for a total rainy day fund of $2.7 billion.

Leaders from all four caucuses immediately outlined their priorities in light of the vastly different economic outlook, with Senate Republicans again calling for Walz to immediately begin easing his stay-at-home order, currently in effect until May 18. Small business owners have even sued Minnesota, saying its stay-at-home order unfairly favors big-box retailers over small retail operations.  

Senate Majority Leader Paul Gazelka, R-East Gull Lake, also renewed his call for budget officials to renegotiate state labor contracts with several unions, calling it “the next most responsible move” after legislative salary freezes. 

Government workers had previously won salary increases in many of their contracts, which Republicans have recently called unfair to approve amid widespread economic pain. “The next most responsible move for state government is to renegotiate the second year of state employee contracts so thousands of state workers won’t face layoffs from budget shortfalls in the 2021 budget,” Gazelka said. 

House Speaker Melissa Hortman, DFL-Brooklyn Park, said the state’s budget reserve should help the state endure the downturn, as well as provide enough to extend additional financial assistance to those affected by COVID-19. 

“Investments are needed to make Minnesotans secure in their housing, help small businesses, facilitate distance learning and telemedicine, and to ensure we have the workforce we need to provide care for the elderly and people with disabilities,” Hortman said in a statement. “The federal assistance allows us to make these needed investments, while our state’s savings will cover our expected dip in revenue.”

In February, Senate Republicans and House DFLers had ambitious plans for a projected $1.5 billion budget surplus, unveiled on Feb. 27 just eight days before Minnesota would learn of its first coronavirus case

State budget officials now say state revenues are expected to be $3.61 billion lower than previously expected. Spending, meanwhile, is expected to be $391 million higher, including new spending by the Legislature as part of its COVID-19 response, which totaled more than $500 million.

Frans said some of the $2 billion Minnesota is receiving in federal CARES Act assistance will pay for the state’s COVID-19 response, but said it cannot be used to help Minnesota shore up its budget. Congress has stalled on another COVID-19 aid package that would provide state and local governments with additional financial assistance. 

Frans, budget chief to two Minnesota governors, had been warning lawmakers of the worsening fiscal picture, telling legislators in recent committee hearings that tax collections were coming in under projections from the February forecast.

Local governments are bracing themselves for the economic fallout, as well. 

“As we continue to deal with the immediate and long-term effects of the pandemic, there is deep anxiety among city officials about the potential for lost revenue from reduced property tax collections, fees and local taxes,” said Audrey Nelsen, president of the Coalition of Greater Minnesota Cities and a Willmar City Council member. 

“With city budgets stretched thin, it is vital that the state makes its regularly scheduled (local government aid) payments in July and December,” Nelsen said.

Minnesota’s economic forecast fcomes with great uncertainty, warned Kalambokidis, the state economist. Much about COVID-19 remains unknown, including how its spread will progress or whether a sudden surge in cases could further depress the national economy. Moreover, state revenue projections will not become clearer until later this summer, partly the result of tax payment deferrals approved by state lawmakers to help families and businesses during the pandemic.

“Sales tax payment delays that have been allowed during the COVID-19 crisis mean that we have little information about how deteriorating economic conditions are already affecting state revenues,” the forecast says. “This adds to uncertainty about the sales tax projection.”

The revised budget outlook covers the remainder of the current two-year budget cycle, which has 14 months remaining and ends June 30 of next year. Prognosticating beyond that “was not possible,” the report says.

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Ricardo Lopez
Ricardo Lopez

Ricardo Lopez is the senior political reporter for the Reformer. Ricardo is not new to Minnesota politics, previously reporting on the Dayton administration and statehouse for The Star Tribune from 2014 to 2017, and the Republican National Convention in 2016. Previously, he was a staff writer at The Los Angeles Times covering the California economy. He's a Las Vegas native who has adopted Minnesota as his home state. In his spare time, he likes to run, cook and volunteer with Save-a-Bull, a Minneapolis dog rescue group.