From deficit to budget surplus: 6 things to know about Minnesota’s financial picture

Minnesota governor Tim Walz speaks in the State Capitol building in St. Paul Thursday, September 17, 2020. Photo by Nicole Neri/Minnesota Reformer

The quick turnaround of the Minnesota economy, as well as reduced government spending, has helped the state swing from a deficit to a $1.6 billion budget surplus, the Minnesota Management and Budget office said Friday. 

The updated budget and economic forecast now sets the stage for lawmakers to negotiate a new two-year budget that will fund everything from schools, health and human services and the state’s COVID-19 recovery. 

DFL Gov. Tim Walz has no plans to adjust his proposed $52.4 billion budget proposal, he said Friday. 

Meanwhile, Republican and Democratic-Farmer-Labor legislators are on divergent paths for how to best spend the surplus. Republicans are standing firm against any tax increases, as Walz has called for, and Democrats meanwhile say the surplus should be spent to help the lower-wage workers in industries hardest hit by the pandemic. 

Here are six things to know about the latest budget forecast: 

Economy has improved, albeit unevenly

The economic forecast notes the “K-shaped recovery,” meaning that some sectors and workers have recovered more quickly than others. High-income workers faced the smallest drop in employment last April and May, losses largely recovered by June. Low-income workers, in comparison, experienced a dramatic loss of jobs, gaining back some by early August, but lost jobs again in the fall. Low-wage workers are still experiencing higher joblessness compared with before the pandemic.  

Jobs in bars, restaurants and other hospitality establishments have suffered the most. 

“Employment in the leisure and hospitality industry fell from 16.9 million to 8.7 million in March and April, bottoming out at just over half of its pre-pandemic workforce,” the forecast says. “At the end of January, leisure and hospitality employment was still 23% lower than it was in February, while employment in all other sectors was only 4.4% lower.”

As of December, Minnesota had 248,000, or 8%, fewer jobs than in February 2020. 

Minnesota is spending less on schools and health and human services

The pandemic has caused a large drop in school enrollment as parents have pulled their kids from public schools, electing to educate them at home  or enroll in private schools. Spending on education is forecasted to be $20.4 billion, $165 million less than the November forecast, in the upcoming biennium.

Meanwhile, health and human services spending is also reduced because of federal aid that provides matching federal funds for medical assistance through the end of the year.

GOP immediately claims tax increases are dead-on-arrival

Senate and House Republicans, already opposed to a series of tax increases Walz proposed last month, have shut the door on efforts to raise revenue. 

“That’s not going to happen at all,” said state Rep. Patrick Garofalo, R-Farmington. 

Senate Majority Leader Paul Gazelka, R-East Gull Lake, said in a statement that Republicans would focus on tax cuts, touting a proposal to not tax Paycheck Protection Program loans issued to businesses.  

Senate Finance Chair Julie Rosen, R-Fairmount, said in a statement that Republicans intended to continue reviewing state spending, having previously set a 5% across-the-board cuts to state agencies. 

“I’ve got two priorities for the budget: first, we will be looking into government spending, government accountability, and seeing where this money is going,” she said. “Second, Minnesota workers and small business owners are still struggling. Let’s get them some targeted tax relief.” 

Forecast assumes widespread vaccination by fall

Minnesota Management and Budget Commissioner Jim Schowalter struck a subdued and cautious tone on the surplus news, saying that while the state’s budget picture has improved, it is not yet back on track. “Minnesota isn’t back to where it was before COVID-19,” he said. The recovery has been uneven. Much of the improvement, he said, has been driven by federal pandemic relief. 

Still, he struck an optimistic tone. The economic forecast presumes widespread vaccination distribution efforts will continue. “We have weathered a tumultuous year,” Schowalter said. “But brighter days are ahead.”

Walz strikes an upbeat tone, defends handling of Minnesota pandemic response

Walz on Friday said the budget forecast showed “our fundamentals are strong.” He also took the opportunity to defend his handling of the pandemic over the past year, saying the forecast shows it was a “false” choice to choose to save lives and protect the state’s economy during the pandemic. 

As early as Easter, former President Donald Trump had called for the economy to fully reopen, often lambasting governors like Walz who had partially closed some industries before letting some businesses to re-open at reduced capacities. 

“You can protect lives, follow the science, and protect a very diverse and robust economy like Minnesota’s,” he said. 

Walz did not say he was prepared to take off the table his tax plan, saying he was open to further discussing them with legislators. 

DFL legislative leaders back raising revenue

House Speaker Melissa Hortman, DFL-Brooklyn Park, said in a statement that while the surplus was positive, “it’s important to recognize that our budget doesn’t currently meet the needs of all Minnesotans.”

She added: “We must pull together and make the investments all Minnesotans need to recover from the pandemic and thrive once it’s over.”

Senate Minority Leader Susan Kent, DFL-Woodbury, reiterated the call for increasing taxes on the state’s wealthiest. “Our state budget reflects our shared values, and we must ensure that we support those who have borne the greatest burden,” she said. “To do this, we need to make investments so that Minnesota can recover from the pandemic, address the growing disparities in our state, and build for a strong future for all. This may require additional funding by asking the wealthiest and most profitable of Minnesotans to pay their fair share.”