State budget stability is encouraging news as cities finalize their 2022 budgets.
The November state Budget and Economic Forecast released by Minnesota Management and Budget on Dec. 7 revealed a historic state budget surplus. The state is projected to end the current 2022-2023 biennium with a positive budgetary balance of $7.75 billion, a further improvement over the $127.3 million projection at the end of the 2021 first special session.
The updated state budget forecast is good news for city officials as they finalize their 2022 budgets and property tax levies.
What the budgetary balance includes
The $7.75 billion figure is the remaining budgetary balance projected to be available on June 30, 2023, after fulfilling a number of statutory requirements, including:
- Increasing the state’s budget reserve by $869.8 million to the new statutory target of $2.66 billion.
- Eliminating an accounting maneuver that required larger retailers to remit June sales tax receipts early, which reduces sales tax receipts for the biennium by $359 million.
- Transferring $4 million to the 21st Century Mineral Fund.
- Dedicating certain tax revenues to the stadium reserve totaling $111.4 million.
The forecast for fiscal year (FY) 2022-2023 includes $633 million in federal American Rescue Plan Act (ARPA) revenues received by the state that have been marked as “revenue replacement” funds. However, the forecast does not include more than $1 billion in federal ARPA funds that have not been allocated by the state, some of which could be used during the current FY 2022-2023 biennium.
Higher tax revenues, lower spending
For the current 2022-2023 biennium, all major tax sources — including individual income tax, general sales tax, and corporate franchise tax — are projected to be higher than previously forecasted last February by $5.1 billion. In addition, overall projections for state spending have also been reduced for the current biennium by $364 million, led by reductions in E-12, health and human services, debt service, and property tax aids and credits.
The strong budget news continues into the 2024-2025 biennium. The forecast suggests that the positive budgetary balance through that biennium will be $13.5 billion. However, more than 50% of that surplus is a carryforward from the current 2022-2023 biennium, which could be impacted by changes in the economy or budget changes enacted by the Legislature.
The good news in the forecast is somewhat clouded by several factors, including the ongoing uncertainty about the trajectory of the pandemic and potential related economic impacts.
In addition, although the forecast acknowledges the recent increase in inflation, it does not automatically adjust for inflationary pressures, which could impact state spending into the future. Also, the general fund forecast does not reflect the more than $1.1 billion in state unemployment insurance liability owed to the federal government.
Using the surplus
Although the Legislature and governor enacted a state biennial budget during the 2021 first special session, the massive projected positive budgetary balance will certainly yield proposals by the Legislature and governor for expanded or new state programs and for tax reductions. Expect the 2022 legislative session, which begins on Jan. 31, to include ample discussion of uses for the projected budgetary balance. The next state budget forecast will be released around March 1, 2022.