State Budget Outlook Severely Weakened by Pandemic

May 11, 2020

With the severe downturn in the economy and state budget, cities should prepare for reduced revenues.

With the rapid decline in economic activity due to the pandemic response, Minnesota Management and Budget (MMB) released an updated state budget projection showing a dramatic shift in the outlook for the remaining 14 months in the current biennium.

According to the projection, the state’s budget will swing from the February forecast of a $1.511 billion budget sufficiency to a $2.426 billion shortfall now. The swing in the projection is largely due to a $3.611 billion reduction in state tax collections and a $391 million increase in spending, including new COVID-related appropriations enacted since February.

The updated budget projection allows the governor to tap the state budget reserve to offset the newly projected budget deficit. The budget reserve currently stands at $2.359 billion, the highest level ever.

—Access the MMB Interim Budget Projection

Budget agreement needed

With only one week remaining before the Legislature must adjourn, legislators will begin considering actions to offset the deficit and how much of the state budget reserve to use. In addition, Gov. Tim Walz is expected to release a set of interim budget recommendations to begin addressing the projected deficit. If a budget agreement isn’t forthcoming prior to the adjournment of the regular session, the Legislature will almost certainly be called into special session.

Although the newly projected state deficit could largely be covered by the current state budget reserve and possibly the use of a portion of the $1.8 billion in federal CARES Act funding, the budget projection only covers the remaining 14 months of the current biennium. In November, the state budget forecast will again be updated for the remaining seven months of the current biennium.

If the November forecast shows a further increase in the projected deficit for the remainder of the current biennium, which ends on June 30, 2021, and the budget reserve has largely been depleted, the governor and Legislature will be forced to take immediate actions to balance the state’s budget.

Reduced city revenues likely

Given these extraordinary circumstances, cities should begin thinking about contingency plans for delayed property tax receipts, reduced special tax and fee revenues, and possible local government aid (LGA) reductions over the next year or perhaps even longer.

In terms of state programs, including LGA, it is unclear whether the Legislature and governor will impose immediate reductions in the 2020 distributions that are scheduled for July and December. The League is not aware of any discussions on this action, but cities should pay close attention to ongoing and future discussions on the state budget deficit.

Federal aid may reach cities

One thing the Legislature and governor are discussing is an allocation of the federal Coronavirus Aid, Relief, & Economic Security (CARES) Act funding to cities, counties, and townships. According to MMB Commissioner Myron Frans, up to $667 million of the state’s share of CARES Act funding could be distributed to local units of government.

Sen. Julie Rosen (R-Vernon Center), chair of the Senate Finance Committee, has introduced a bill and an amendment that would allocate those funds. The House and governor are also developing plans to distribute CARES Act funds. However, under federal law, those funds are restricted to certain uses (see related article).

Looking ahead

The November forecast will provide the Legislature and governor with the first updated budget estimates for the state’s 2022-2023 biennium.

When the current budget was set in 2019, the state’s budget reserve was already scheduled to be reduced by $491 million at the beginning of the biennium to balance the state’s budget. This will likely add to the challenges for the next state budget.

The duration of the pandemic and the timing of the economic recovery will impact the longer-term state budget outlook.