State’s budget forecast better than expected

This week, the state released its first official state budget forecast since the start of the pandemic. It was a surprise when it was announced that the state has a projected $641 million surplus for the remainder of the current biennium, which ends June 30, 2021.

As the pandemic took hold in Minnesota, when many businesses were forced to close or operate at reduced capacity, and the state’s unemployment rate increased to 9.9 percent, the state prepared an unofficial budget projection that showed an anticipated $2.4 billion deficit for the current biennium. Since then, revenues have come in higher than anticipated and state spending has been lower than expected. For example, sales taxes are forecasted to be $808 million (7.6%) more than was originally calculated. On the expense side, state spending on health and human services is down $919 million largely due to the federal government covering more healthcare costs tied the pandemic emergency orders. Spending on K-12 is down $118 million in large part due to students enrolling in private schools or homeschooling or families delaying kindergarten enrollment.

Underlying the positive news of the budget surplus is the reality of the state’s unemployment. The state lost 388,000 jobs in March and April. As restrictions were lifted, it gained almost half of those jobs back.
Part of the reason we have a budget surplus is that the majority of the workers who lost their jobs during the early days of the pandemic were lower wage workers. As a result, the lost revenue impact on the state’s budget due to the unemployment spike was limited since these workers have no or limited state income tax liabilities due to their low wages. Had the unemployment been more evenly distributed across income ranges, the impact on state revenue would have been much greater.
Looking to the next biennium, the forecast projects a nearly $1.3 billion deficit for FY2022-2023, down from an anticipated shortfall of $4.5 billion from May. During the upcoming legislative session, the legislature will be tasked with developing a budget that addresses the projected deficit. The big unknown in all of this is what may come out of Washington, D.C. in the coming weeks and months. If Congress passes another stimulus bill, it will likely contain aid for states. Any aid would likely have a positive impact on the state’s budget deficit.