Economic outlook dims as a recession appears more likely.
As cities finalize their 2023 budgets, there is good news and notes of concern about the national and state economies.
Revenue and Economic Update published
Last week, Minnesota Management and Budget (MMB) published its quarterly Revenue and Economic Update. The report included short-term positive news with continued strong state tax collections. However, that news was tempered by an updated economic outlook from the state’s economic advisory firm released earlier this month that includes a likely recession lasting three quarters.
According to the report, Minnesota’s net general fund revenues for the first quarter of fiscal year 2023 (July, August, and September 2022) are now estimated to total $7.024 billion, which is $289 million, or 4.3% more than forecast in the last full state budget forecast released in February 2022. Net revenue exceeded the projection for all major tax types — individual income tax, general sales tax, corporate franchise tax — and the broad category of “other revenue,” which includes liquor taxes, tobacco taxes, deed and mortgage taxes and a number of other revenue sources.
In addition to the quarterly revenue figures, the report also notes that the state ended the first year of the biennium on June 30, 2022, with general fund receipts that were $2.9 billion more than projected in the February forecast. which already included a projected state budget surplus for the fiscal year 2022-23 biennium of $9.25 billion. Although the 2022 legislature considered tax cuts and additional supplemental spending that could have used a substantial portion of that projected surplus, the final legislative actions used only about $2.2 billion of that surplus, leaving $7 billion on the bottom line.
Although the roughly $3.2 billion in higher-than-expected revenue collections since the February forecast suggest the surplus could be approaching $10 billion, these reports only look at actual collections compared to forecast, and do not look ahead at a possible near-term recession, which would impact future revenue collections, or at any of the state spending obligations, which could increase should a recession materialize.
The next full state budget forecast, which will consider all economic and expenditure forecasts, will be released around Dec. 1.
Budget Reserve Report released
MMB also released its Budget Reserve Report, which assesses the necessary level of a state budget reserve in order to adequately manage risks in Minnesota’s general fund tax revenue system, which is heavily reliant on economically sensitive income and sales tax revenues. According to the report, MMB recommends a general fund budget reserve target of 4.8% of the current biennium’s general fund non-dedicated revenues, which would suggest the reserve should be funded at $2.699 billion for the 2022-23 biennium. Currently, Minnesota’s projected fiscal year 2022-23 budget reserve is $2.656 billion.