Minnesota isn’t sustainably bringing in enough revenues to fund its current commitments, which is showing up in a projected $1.3 billion state budget deficit for the upcoming FY 2022-23 budget cycle and a $552 million structural deficit for FY 2024-25, according to the latest November budget and economic forecast. However, the budget outlook is improved compared to what was projected back in May (we’ll talk about what those numbers don’t take into account in a moment).
We at the Minnesota Budget Project dove in and read all 97 pages of the forecast to find out what’s behind the new numbers, what it tells us about the current financial picture, and the implications for Minnesota’s ability to rise to the challenges before us.
One reason for improvement: the drop in state revenues is big, but not as big
New understanding of the unequal effects of the recession means state revenues are not predicted to drop as much as previously expected. In May, forecasters anticipated that economic disruption would be felt across a broad spectrum of workers .
However, it’s becoming clearer that this downturn may be the most unequal recession in modern history. Lower-income Minnesotans have disproportionately lost their jobs, while high-income people are largely working. Over one-third of initial unemployment claims during the pandemic have come from the 20 percent of workers in the lowest paid occupations, and over half were from lower paid occupations. In contrast, only 15 percent of new unemployment claims have come from the 20 percent highest paid occupations. In the November forecast, this has resulted in a smaller decline in overall wage and salary income than if the impact had been more evenly felt – and thus a smaller decline in state income taxes and other revenues tied to income levels.
In addition, forecasters are learning how people are changing their buying habits. Consumers have reduced their spending on services – which are largely not subject to the sales tax – and increased their spending on goods, which are generally taxable. So forecasters are no longer predicting a large drop in sales tax revenues.
Another reason for improvement in the forecast: projected state spending is lower than in May
The forecast has reduced its estimates for spending in the two biggest areas of our state budget – E-12 education and health and human services.
One important good reason: increased federal dollars for Medicaid. States and the federal government share responsibility for funding affordable health care coverage through Medicaid (also called Medical Assistance).
The federal government’s share of funding, the federal matching percentage or FMAP, was boosted by 6.2 percent earlier in 2020 as part of the Families First Coronavirus Act and the CARES Act. The increased federal contribution ensures that essential health care access will remain in place throughout the public health emergency, and allows the state to reduce its share of funding at a time when its revenues are dropping. State experts now expect that the increased federal funding will be in place through the first half of 2021, resulting in $337 million in state general fund savings.
But the forecast also showed lower spending due to Minnesotans not getting the health care they need. Minnesotans are avoiding regular check-ups, preventative care, and crisis care due to the pandemic. That has resulted in lower than anticipated health care use and consequently accounts for $293 million reduction in projected spending in the current biennium and $190 million in the next, compared to May’s estimates. This is concerning, because we know that preventative and regular care is essential to keeping Minnesotans as healthy as possible. Health care providers have reported anecdotal evidence of worsening health outcomes because people didn’t get the care they needed in emergency situations, like strokes and heart attacks. State experts don’t expect health care visits to return to typical pre-COVID levels until FY 2024.
E-12 Education also is seeing a reduction in projected spending compared to May: $118 million in the current biennium and $154 million in FY 2022-23. This is largely because fewer students than previously expected are enrolled in public schools, likely due to families either delaying their children’s start in kindergarten, or opting for homeschool or private school options during the pandemic. As with health care services, forecasters expect the number of pupils to increase over time post-pandemic.
The forecast isn’t a measure of whether we have what we need to respond to the pandemic and build a more equitable recovery
It’s important to remember exactly what the forecast is telling us – and what it doesn’t. The forecast projects surpluses or deficits based off of the state’s current budget commitments. And when we’re looking into the next and future budget cycle, the official surplus or deficit projections don’t include what it would cost for most of our current services to keep up with the cost of inflation, changes in caseloads, or other measures of need. The exceptions are called “forecasted” programs, like the education funding formula that grows with the student population (but not the inflationary costs of serving them) and certain health care programs. Adding in an estimate of inflation to the spending side means a $2.6 billion shortfall in FY 2022-23 and $3.5 billion in FY 2024-25.
The November forecast is largely based on the budget that policymakers passed in May 2019, which was a pre-pandemic era where we couldn’t imagine that we’d see record-breaking unemployment claims and economic hardship, all while making some radical shifts in our lives to contain the spread of a deadly virus. But even before the pandemic, the state wasn’t fully investing in what is needed for everyone to thrive. Minnesota was confronting waiting lists for child care assistance, hundreds of thousands of Minnesotans without health insurance, and incredible gaps in opportunity and economic well-being based on whether people were Black, Brown, or white.
What this all means for what comes next
Our deep dive into the forecast shows us that Minnesota faces a serious revenue shortfall, even after taking into account some of the improvements in the state’s economic and budget picture since May. Some of these improvements reflect positive policy action – like the federal government increasing its share of funding and making sure Minnesotans can continue to afford health care. Some of the improvement in the numbers reflect a better understanding of the economic impact of COVID and the way that hardship is falling especially on those with the least resources to get through. And finally, we are reminded that the measured revenue shortfalls don’t take into account the real impact of inflation, or the need to take more action to bring the pandemic under control and secure the health and economic well-being of all Minnesotans.
What it adds up to for us is that the state clearly needs more revenues to respond to the great challenges communities all across our state are facing. It makes sense to enact progressive tax increases that ask those who are doing well in today’s economy to contribute more toward making the investments so that all are able to seek the health care they need, so our elders are cared for with dignity, so our children can see their futures in the eyes of their teachers, and all of our neighbors feel safe as they live and work in their communities.
Through deliberate choices, we can ensure that all of us, including Black, Indigenous, and people of color (BIPOC) Minnesotans, share in our state’s abundance.