Minnesota’s economic outlook shows improvement in latest projection, large deficit still ahead

Many Minnesotans are struggling due to the effects of the COVID-19 pandemic and as the state tries to help, it is facing its own financial challenges.

A new forecast shows how much the pandemic has impacted the state’s budget, but it shows a significantly better outlook than a few months ago.

Minnesota Management and Budget said the forecast takes into account higher general fund revenues than expected and lower spending, resulting in a surplus of about $641 million for the 2020-21 fiscal year biennium. In May, MMB projected a a possible $2.42 billion deficit for the current budget cycle.

This slide illustrates how much improvement in the economy has driven a big increase in expected revenue. Sales tax and income tax collections have gone up with consumer spending and more people returning to workforce. pic.twitter.com/Crzfliiwho

— Tom Hauser (@thauserkstp) December 1, 2020

While the improved outlook continues into the 2022-23 year, a projected $1.273 billion budget shortfall remains. However, that’s down from the $4.7 billion shortfall projection in July.

Here’s a breakdown of how the budget forecast has changed for the 2020-21 and 2022-23 budget cycles. pic.twitter.com/2Uo9B3eNiy

— Tom Hauser (@thauserkstp) December 1, 2020

MMB Commissioner Jim Schowalter called the state’s forecast "significantly improved," and said it doesn’t factor in using any of the state’s reserve fund.

"We’ve made smart decisions preparing for an economic downturn and ensuring that our tax policy is able to withstand the unexpected," Schowalter said while releasing the budget forecast from his basement home office. "Our rainy day fund is still at the highest level in our state’s history." That fund is currently nearly $2.4 billion.

The higher revenues are due to higher consumer spending than initially forecast and increased spending on taxable goods, which has increased the state’s tax revenue.

Minnesota State Economist Laura Kalambokidis said the state’s economic situation will be critically impacted by when the vaccine arrives and how soon restrictions are lifted, but the forecast assumes the state and federal emergency will remain in place until the end of June 2021 with the current projections of a vaccine being more widely available around that time, too.

However, as the pandemic continues, MMB said economic challenges will also continue.

The state has 184,000 fewer jobs now compared to before the pandemic started, with lower wage workers being disproportionately impacted.

Kalambokidis noted that Minnesota’s current four-week restrictions are factored into the forecast but it’s possible those restrictions are extended, which isn’t factored into the forecast. Who an extension of restrictions would impact, how long an extension would last and the COVID-19 situation surrounding the restrictions would determine the financial impact on the economy and budget.

Relief for Minnesotans

Currently, state lawmakers are debating as many as five different legislative package ideas for economic relief. One is from Gov. Tim Walz and one from each of the two parties in the House and Senate.

However, lawmakers have been waiting for the latest budget forecast before getting to final negotiations Governor Walz.

"Someone told me this morning they had forgotten that you can get good news in 2020," the governor said in response to the budget forecast. "I’m cautiously optimistic about this."

Walz said he is hoping the numbers will accelerate preparations for a special session, which he says he wants to call as soon as possible to help businesses and workers affected by the recent tightening of restrictions.

"This improved economic outlook means we can, and we must, act immediately on COVID-19 relief. We must do everything we can to keep small businesses afloat and support the working families who are bearing the brunt of this crisis," Walz said.

Walz, House Republicans release separate economic relief plans to help small businesses, workers

Walz’s plan includes $500 emergency payments for struggling families, extending unemployment benefits by 13 weeks, halting evictions for small businesses, and stopping regulatory fees for bars, restaurants, and brewpubs. The House GOP plan includes borrowing $400 million from our rainy day fund, a three-month tax holiday for businesses, increasing the cap on to-go alcohol, and reopening gyms.

Walz said targeting those struggling the most is the most important part of the relief package and both parties and chambers are working together to finalize the legislation. While he said it’s unclear how big the relief package could be, Walz said the new forecast shows Minnesota is in a good position to pass a large relief package of around $300 million.

The governor also encouraged Congress to pass another stimulus plan. Kalambokidis noted that a new federal stimulus isn’t factored into the forecast but a new stimulus would increase U.S. GDP by a projected 1.5%, which would also help the state’s economy.

What to make of the new forecast

While Walz and Schowalter called the newest forecast good news, it’s important to note that MMB has only had six months to make the newest projections during the pandemic compared to the normal forecast each February. The last forecast, which was in May, was based on trends from the very beginning of the pandemic. MMB officials said while six months isn’t a lot to go off of, they’ve learned a lot during the pandemic and Minnesotans shouldn’t be concerned that the forecast is incorrect.

"This is unprecedented, this is unusual and I think the best thing we can do is continue to learn," Schowalter said.

"This year has brought things that nobody would have anticipated," he added, but noted that state leaders "can continue to learn" and make the best possible decisions off that new information they’ve had over the past six months. Kalambokidis added that skeptical Minnesotans can at least "trust the process" that is used to calculate the forecasts and can track the state’s financial health progression over those released this year and the new one when it is released in February.

Moving forward

Walz credited Minnesota’s past governors for its strong financial position going into the pandemic, largely due the state’s reserve fund. He also credited Minnesotans’ resiliency and their efforts to support small businesses, comply with restrictions and businesses’ willingness to work through the restrictions even though they’ve been impacted so harshly.

"We’re right in the heart of the worst part of this pandemic," Walz said, noting that there’s still a little ways to go. However, he said we’re nearing the end of it and can already start doing things like planning to help children, who lost out on valuable school time during the pandemic.

Walz said he’s open to "getting creative" with school and even possibly going through the summer if it could help kids.

MMB’s forecast noted that about 12,000 fewer students were listed in schools than before the pandemic, which could be for a variety of reasons but could also mean 12,000 kids dropped out of school. Walz said the pandemic has hurt students’ education and he’d consider adding teachers to the list of those who need to get a COVID-19 vaccine first so that in-person school can resume.

Some other notes from Tuesday’s press conference included:

• Walz was noncommittal on extending the current restrictions through Christmas and said they’ll continue to look at the most recent data. However, he said it’s unlikely that things will change enough to lift the restrictions in just four weeks. He said hospitals are at the highest capacity they’ve been at, the state’s case positivity rate is at the highest it’s been and deaths are climbing higher than they’ve been. If that changes, Minnesota will change with it.
• Walz said the state’s morgue building that it purchased was requested by state medical examiners and others in the medical industry, and it was insurance for the state. While he said he takes responsibility for it and is happy if the state isn’t going to need it. He added that it will "most likely" be paid for by federal funds, as other states did the same thing.
• On the state’s lowering unemployment rate, Kalambokidis said part of that is people leaving the workforce. MMB officials don’t know why people are leaving the workforce and it could be temporary, so they don’t want Minnesotans to get complacent and think everything is fine simply because the unemployment rate is trending down. She said the rate could shoot back up if people re-enter the workforce and cautioned that the unemployment rate doesn’t tell the full picture of the state’s economy.