The forecasted deficit raises concerns as cities develop their 2021 budgets, especially since 2021 local government aid is funded out of the state’s 2022-2023 budget.
The Minnesota Department of Revenue notified cities on July 31 of the 2021 certified local government aid (LGA) distributions. For cities receiving LGA, the certification is a component of the budgeting process leading up to the Sept. 30 deadline for cities to set their preliminary levy and budgets.
This year, the pandemic, the economic downturn, and weakened state budget are all contributing to concern and caution as cities plan their 2021 budgets. Due to the pandemic and related economic slowdown, the state took the unprecedented step of preparing an interim state budget projection in May.
That projection indicated that the state’s budget status went from a $1.5 billion projected surplus in February to a $2.4 billion deficit projection. The May projection did not provide any state budget estimates beyond the end of the current biennium, which ends on June 30, 2021.
However, on July 31, Minnesota Management and Budget (MMB) released a revenue update for the fiscal year (FY) 2022-2023 biennium. The early estimates are stunning, with a projected deficit of $4.7 billion during that two-year upcoming state budget period. The challenge for cities as they develop budgets for the 2021 calendar year is that the 2021 LGA certifications are included in the state’s FY 2022 budget.
Possible cuts this year?
In the short term, the state has a $2.3 billion rainy day fund, which can cover most of the immediate deficit for the remainder of the current biennium, which ends on June 30, 2021. In addition, the state also received $1.8 billion in federal CARES Act/Coronavirus Relief Funding.
After the governor’s action to allocate $841 million to cities and counties, the state will have roughly $1 billion in available funding for qualifying state expenses, although much of that federal allocation has been dedicated to pandemic-related spending.
If the economy and the state’s budget don’t further erode over the next 11 months of the current biennium, and the May budget projection is confirmed in the December state budget forecast, we may not see any immediate cuts in the December 2020 LGA payments.
However, if this December’s forecast indicates that the state’s budget will experience a larger deficit for the remainder of the state’s current biennium, Gov. Walz and possibly the Legislature may be required to address the shortfall. That could include cuts in the December 2020 LGA payments, which will be distributed in late December.
Looking ahead to 2021
Although 2021 LGA certifications have just been announced, those payments, which are scheduled for July 2021 and December 2021, could be impacted by future actions of the Legislature and/or the governor. With the new projection of a $4.7 billion budget shortfall for the next biennium, the Legislature will convene next January with the challenge of developing a balanced state budget under a weakened economy.
In addition, the state will likely be depleting the state’s budget reserve in the coming months, leaving the state with essentially no cushion for further negative economic impacts.
The next forecast is scheduled for early December unless circumstances require otherwise. That forecast will reflect any further changes in the economy and the state’s budget.
Will Congress intervene?
Congress is still debating the details of a new pandemic response package and whether to provide additional assistance to states and local governments. Federal funding in the coming months could buffer the impact on our state and cities; however, those discussions are ongoing, and any additional assistance is speculative at best.
One evolving idea in Congress is to allow states and local governments to use the existing Coronavirus Relief Funds authorized by the CARES Act for a broader array of impacts, including “lost revenues,” which is not an allowable use under the original language.
While the flexibility could be crucial should the next forecast project an even larger state deficit along with mounting fiscal challenges for many cities, the League of Minnesota Cities and the National League of Cities continue to push for additional flexible funding for cities of all sizes.