The immediate shortfall is erased, and the 2022-2023 deficit is reduced, which is good news for cities as they finalize their budgets, but the pandemic is still creating uncertainty.
The November state budget forecast was released last week, and the news was positive. According to Minnesota Management and Budget, the state will end the current 2020-2021 biennium next June 30 with a positive budgetary balance of $636 million, a significant improvement from the $2.4 billion shortfall projected in May in a special state budget projection.
For the upcoming 2022-2023 biennium, the state is now projected to face a much smaller budgetary shortfall of $638 million, down from nearly a $5 billion shortfall projected in the May update.
When the Legislature convenes in January, members will begin the process of crafting a state budget that will address that shortfall. However, the final state budget will be based on an updated forecast that will be prepared around March 1.
Individual income tax collections are now higher than projected in May, and consumer spending on taxable goods has increased sales tax collections above previous estimates, which will also benefit many cities with local sales taxes.
The updated state budget forecast is good news as cities finalize their 2021 budgets and property tax levies. The May budget projection had raised concerns among city officials about the possible impact on state programs that affect cities, including local government aid distributions later this month and in 2021.
The projected $638 million shortfall for the upcoming biennium is somewhat masked by other budget considerations. The figure assumes the Legislature does not use any of the immediate $636 million surplus to address additional pandemic-related needs.
Gov. Tim Walz and legislative leaders are currently developing a package of assistance to address impacts of the pandemic and related business restrictions. Additional pandemic-related spending that might be enacted in an upcoming special session or early in the 2021 session would increase the long-term deficit.
Also, when the Legislature enacted the state budget in 2019, it included a provision to draw down the state’s rainy-day fund by $491 million. Had that drawdown not been included in the last state budget, the deficit for the upcoming 2022-2023 biennium would have been $1.124 billion.
The forecast report includes ample concern about uncertainty due to the pandemic, and also notes that the forecast does not include inflationary estimates for most areas of the state budget, which could add as much as $1.3 billion in spending pressure to the fiscal year 2022-2023 biennial budget.
The governor is required to submit a set of state budget recommendations to the Legislature by the fourth Tuesday in January, and that initial set of recommendations will be based on this budget forecast.
Around March 1, the state budget forecast will be updated, at which time the governor may revise his recommendations, and the Legislature will begin the process of crafting a biennial state budget.