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Short-term budget picture brightens

Long-term deficit remains

 

By Brian Bakst

Minnesota got a dose of mixed budget news Tuesday with finance officials predicting a small surplus will accrue by next summer but a deficit will have to be repaired for the two years that follow.

The improved outlook — a $641 million surplus through June instead of a shortfall four times as big that was projected back in May — could lead to a quicker deal on a relief package for businesses and workers coping with fallout from COVID-19 and related restrictions.

“Someone told me this morning they had forgotten you could get good news in 2020,” Gov. Tim Walz said. “The reason this is good is because of the resiliency of Minnesotans.”

For the next two-year budget, which lawmakers must approve in 2021, a $1.273 billion deficit is predicted by the Department of Minnesota Management and Budget. But that’s not a given because federal help is possible and widespread vaccine distribution could boost consumer spending by the middle of next year.

“Today’s budget forecast makes one thing clear — we are in a significantly stronger financial position than we thought we would be last spring,” House Majority Leader Ryan Winkler, DFL-Golden Valley, wrote on Twitter.

He called on lawmakers to respond to that improved budget picture by supporting “front-line workers, families in need, and the small businesses hit hardest” by COVID-19. Walz has not said if he’ll extend a “pause” on some in-person hospitality businesses — restaurants, fitness centers, bowling alleys and the like — beyond Dec. 18. But he said that’s possible if the coronavirus spread doesn’t considerably slow and pressure on hospitals isn’t eased.

Business leaders said relief is critical.

“We’re laser-focused on speeding relief to Minnesota businesses and our economy as a whole,” Doug Loon, president of the Minnesota Chamber of Commerce, said in a statement.

“The good news of this forecast means that the legislature can take immediate steps to help stabilize small and medium-sized businesses and jumpstart economic recovery throughout the state,” Loon added.

Republicans said they were working with their DFL counterparts on a plan that could come up in a December special session.

House Minority Leader Kurt Daudt, R-Zimmerman, said it should be geared toward those that have made the biggest sacrifices, with closed or disrupted businesses to slow the virus spread.

“Their hard work and sacrifices in the face of an extremely difficult year has helped stabilize the state budget,” Daudt said. “The surplus belongs to them, and should be used to help the businesses and employees who were once again forced to closed.”

On Monday, Walz said it was still possible that a special session would happen this week if there’s a deal struck. On Tuesday, he said one could happen in the “next week or so” if agreement on an aid package, which he guessed could fall between $300 million and $600 million.

There are different proposals on the table — from loans to grants to tax breaks. Some leading lawmakers were waiting on the forecast before committing to anything. This report got moved up two days to keep negotiations moving.

“The different ideas are being vetted out,” Walz said. “We’re at the point now we’re trying to meld them all together.”

‘Incredibly difficult  to pin down’

The new economic forecast is just the latest turn in a roller coaster year of budget estimates. The COVID-19 pandemic has made it exceedingly difficult to predict the state’s finances.

“It will not be the simplest of forecasts,” Minnesota Management and Budget Commissioner Jim Schowalter said ahead of the full report’s release.

In a preview, the agency said economic challenges persist.

“Minnesota has 184,000 fewer jobs than in February and, while the economic downturn has affected all Minnesotans, unemployment has disproportionately impacted lower wage workers,” officials wrote.

It has been several months since the state finance team has taken a hard look at both spending patterns and tax collections. In February, Minnesota’s treasury was in solid shape and a $1.5 billion surplus was estimated for the current two-year budget.

That report was released within weeks of the coronavirus hitting the U.S. in a significant way, leading to business shutdowns and other restrictions in Minnesota. By May, that surplus had evaporated and a nearly $2.5 billion deficit was projected to amass by June 2021. The outlook was even worse two years further down the track.

Schowalter, who recently took the finance post under Gov. Tim Walz but who held the job for many years under the last administration, said the pandemic has been economically volatile.

“It’s been incredibly difficult to pin down where Minnesota is at because this pandemic, this COVID-19 is unlike anything we’ve seen before,” he said.

“Usually when you do a forecast, you base it on prior experience, prior understanding of how things work. We don’t know how a pandemic is going to affect the economy, how it’s going to affect people’s decisions and what’s going to happen in the future,” he added.

In five of the six months since the dire May report, Minnesota’s tax collections have outstripped expectations — sometimes by a lot. Just for this fiscal year, which began in July, there’s been $800 million that’s come in more than projected.

Sales taxes are stronger than officials thought they would be as people use disposable income to buy couches, tables, televisions and other durable goods rather than spending it on services, dining out, hotel stays and event tickets.

State spending has dropped beneath expectations by about $1.1 billion. Some of that is because the federal government has assumed a greater share of Medicaid costs.

But some is attributable to lower state spending on schools due to thousands of children who aren’t in the public school system. State officials estimate that there are about 8,300 children who departed for private school, who are learning through a home school environment or who delayed the start of kindergarten. Some but all of them could re-enroll in public school once the pandemic threat passes.