Minnesota’s November budget forecast shows deficits amid high uncertainty

Clark Goldenrod and Nan Madden
Dec 05, 2017

Predicting the future is a tricky business, especially in uncertain times. But nonetheless today’s state budget and economic forecast is important because it marks the first comprehensive look at Minnesota’s budget landscape that incorporates the budget passed in the 2017 Legislative Session. State policymakers used almost the entire projected $1.7 billion surplus when putting together the FY 2018-19 budget. The largest piece of the surplus went to the $648 million tax bill, followed by additional investments in K-12 education, transportation, and higher education. Using nearly all of the projected surplus left our state much more vulnerable to even slight changes in budget or economic projections, as these forecast figures bear out.

The November Budget and Economic Forecast released by Minnesota Management and Budget compares what the state would be expected to spend on schools, roads, and other public services under existing laws and current projections for economic growth, how much revenue the state would expect to bring in, and whether those numbers line up. The forecast does not include the likely economic or state budget impact of broad policy changes being considered in Washington, including the proposed tax and health legislation or likely future cuts to federal funding.

Here are our top takeaways after a quick review of the forecast:

  1. The forecast projects a $188 million deficit for FY 2018-19. That’s less than 1 percent of the total two-year budget, which runs through June 30, 2019. Assuming that the Legislature’s funding is restored would add another $114 million for a total deficit of $302 million.
  2. The November forecast also projects future deficits. Today’s report shows a $586 million negative balance for the upcoming FY 2020-21 biennium.
  3. The future balances do not take into account what it takes to maintain current levels of services. Keeping up with inflationary costs on our current commitments would cost another $1.3 billion in FY 2020-21. In other words, these projections are built on the assumption of flat funding for many areas of the budget.
  4. The forecast expects weaker economic growth than projected in the February 2017 forecast. The national economy is still expected to grow over the next several years, and as a result boost wages and salaries. But in today’s forecast, national GDP growth is expected to be slower: 2.2 percent for 2017 rather than the 2.3 percent expected in February, and 0.1 to 0.2 percentage points less each year in 2018, 2019, and 2021. That results in lower projected state revenues.
  5. There’s more uncertainty than usual. Because of the high level of uncertainty about federal tax and budget decisions – and because of the above-average length of the current economic recovery – this forecast has more uncertainty than usual. IHS Markit, Minnesota’s economic consultants, assigns a 65 percent probability to their baseline economic forecast, a 20 percent probability to a more pessimistic scenario, and a 15 percent probability to a more optimistic scenario.

There are always some unknowns in any forecast, but given the high number of them this year, Governor Mark Dayton said he will wait to produce his supplemental budget proposal until after the February 2018 Forecast.

The state’s budget picture could improve – for example, if federal policymakers finally reauthorize funding for the Children’s Health Insurance Program (CHIP). But we can’t take our eyes off the serious threats posed by federal proposals to fundamentally weaken the federal-state partnership and step back from commitments to the safety net. These would result in a large loss of funding to the state and to essential federal services that Minnesotans count on.

Some noted today that tapping into the state’s budget reserve would be one way to address any minor shortfalls. We shouldn’t be too quick to go there. This shortfall is nothing compared to the multi-billion dollar deficits the state has faced during economic downturns. Given the length of the current economic recovery, it’s likely that the next recession isn’t too far away.

State policymakers may not be able to control the decisions that come out of Washington or the course of the national economy. But their priority should be to put the state in a strong position to respond to federal changes and to support Minnesotans most likely to struggle in an economic slowdown.

Getting ready for what’s ahead is more important than ever to make Minnesota a state where everyone can thrive.

-Clark Goldenrod and Nan Madden