Minnesota’s November budget forecast shows good news for right now, but the future’s looking iffy

Today’s forecasted surplus gives policymakers an opportunity to build toward shared prosperity that reaches Minnesotans across the state, whether in the Twin Cities or Greater Minnesota, or whether black, white, or brown.

Minnesota Management and Budget released the state’s November Budget and Economic Forecast. The November forecast estimates what the state would spend on schools, roads, and other public services under existing laws and current economic projections, and compares it to how much revenue the state would expect to bring in. This forecast is our first full look at Minnesota’s budget landscape since the end of the 2018 Legislative Session, and sets the stage for budget and tax decisions in 2019.

Many budget decisions made over the past eight years put Minnesota in a better financial position: balancing the books, crafting a more equitable tax system, and making investments in those Minnesotans who face the greatest barriers to thriving in today’s economy. Governor-elect Tim Walz and the 2019 Legislature should build on this momentum as they respond to the major fiscal issues of the upcoming session, including the scheduled expiration of the health care provider tax and updating the state’s tax code.

Here are our top takeaways from the forecast:

1. With a surplus in the current biennium, the state was able to contribute to Minnesota’s budget reserve. One-third of the FY 2018-19 surplus plus other statutory allocations totaling $491 million were automatically transferred to the state’s budget reserve.
2. The forecast projects a $1.5 billion surplus for the upcoming FY 2020-21 biennium. This includes the positive balance for FY 2018-19. Policymakers’ primary task in the upcoming legislative session will be to set a budget for the FY 2020-21 biennium, which starts on July 1, 2019.
3. The November forecast also projects a future structural balance. Today’s report shows a $456 million positive balance for the upcoming FY 2022-23 biennium. However…
4. The future balances do not take into account what it takes to maintain current levels of state services. Keeping up with inflationary costs on Minnesota’s current commitments would cost another $1.2 billion in FY 2020-21 and $2.9 billion in FY 2022-23. In other words, these projections are built on the assumption of flat funding for most areas of the budget.
5. The forecast documents start to show the potential impact of letting the provider tax expire. By FY 2023, the Health Care Access Fund will have a deficit of almost $1 billion if the provider tax is allowed to expire.This fund primarily goes to health care for one million Minnesotans.
6. The forecast expects weaker long-term economic growth than projected in the February 2018 forecast. Every forecast includes a best guess at what the national economy will do over the next few years, and today’s report expects the economy to continue growing. But national GDP growth is expected to be more sluggish than earlier anticipated, slowing down substantially to 1.4 percent by 2023.
7. There are a number of sources of uncertainty. IHS Markit, Minnesota’s economic consultant, assigns a 60 percent probability to their baseline economic forecast, a 25 percent probability to a more pessimistic scenario, and a 15 percent probability to a more optimistic scenario.
8. This is one-time good news. The surplus is largely due to temporary, not ongoing, factors. The short-term economic boost from the federal tax bill last year begins to fade late next year, and global economic growth is expected to weaken.

What do these numbers mean for the tax and budget choices that policymakers will be facing during the 2019 Legislative Session?

This economic recovery is only weakly boosting living standards for everyday Minnesotans. In the upcoming session, we expect lawmakers to consider policies such as expanding access to earned safe and sick leave and paid family leave, which make a big difference in family economic security and require only a very modest financial investment from the state.

Policymakers also face key questions about how to maintain funding for essential services. They should take action this session to reverse the scheduled expiration of the health care provider tax, which is a critical source of funding for health care for more than one million Minnesotans, as well as investments in healthier communities. Allowing the provider tax to expire would leave a $680 million annual revenue shortfall. Policymakers are also likely to consider increasing the gas tax – which has lost about one-third of its buying power since 2000 – and other ways of meeting the state’s transportation and transit needs.

And, policymakers will again take up the challenge of maintaining Minnesota’s values in our tax code in the wake of a federal tax bill that violates principles of fairness and fiscal responsibility. Last session, although they were not able to agree to a broader tax package, Minnesota policymakers appeared to reach consensus that the state should update our tax code in ways that protected Minnesotans – including families with children, seniors, and people with disabilities – from the tax increases they would see if the state simply conformed to federal tax law changes. Today’s forecast numbers underscore that Minnesota cannot afford to enact additional permanent tax cuts for profitable corporations and the highest-income households, who got the biggest windfalls from the federal tax bill.

Finally, considering the forecast’s warnings about a weaker future economy, now is still a good time to continue to strengthen our state’s budget reserve. After today’s transfer, the current reserve is about 93 percent of the $2.2 billion recommended by Minnesota Management and Budget. Any additional transfers to the reserve will better enable Minnesotans to get through most recessions that might come our way. This is a responsible way to use one-time funding to better ensure Minnesotans get the supports they need to make it through tough times.