State Announces Budget Forecast Turnaround

A $329 million state budget surplus is projected for the remaining 16 months of the state’s 2018-2019 biennium.
(Published Mar 5, 2018)

Legislators and Gov. Dayton now have a little budgetary breathing room as they consider policy and budget initiatives for the balance of the current biennium.

According to the February 2018 Budget and Economic Forecast, released on Feb. 28, the state is now expected to end the current fiscal year (FY) 2018-2019 biennium with a positive budgetary balance of $329 million.

The new report is more than a $500 million turnaround since November, when a $188 million deficit was forecast for this biennium. The new report is based on updated information on the economy, as well as congressional actions on taxes and the federal budget.

Increased state revenues
Roughly two-thirds of the improvement in the state budget forecast is due to increased revenues. According to the forecast, revenues for the biennium are up $353 million compared to November budget forecast.

Collection revenue from all the major tax sources showed improvement over the November forecast, with personal income taxes up by an estimated $25 million, corporate income taxes up by $131 million, and sales taxes up by $119 million.

The revenue forecast reflects increased U.S. economic growth due to a number of factors, including the effects of portions of the federal Tax Cuts and Jobs Act (TCJA) on business and individual income tax revenues, as well as the short-term stimulus from federal tax law changes. The income tax effects will occur regardless of state conformity legislation

Lower spending
Spending for the biennium is projected to be $167 million lower than November estimates, even with the recently approved bill that appropriates a net of roughly $114 million to fund the Legislature for the biennium. Federal reauthorization of appropriations for the Children’s Health Insurance Program is the most significant driver of the lower overall expenditure forecast, resulting in a reduction of state expenditures of $225 million compared to the November budget forecast.

Long-term forecast also improves
The improved budget outlook extends to the FY 2020-2021 biennium. Planning estimates for the next biennium reflect a modest structural balance of $313 million, which is up from an initial projected deficit of $337 million that was reported in the November forecast.

However, by law, the planning forecast does not include estimates of inflation on most state expenditures. According to the report, inflation pressures could add as much as $1.2 billion in expenditure costs.

Forecast uncertainties highlighted
Although the forecast is positive, it includes several caveats about the economy and future congressional actions that add future uncertainty. Congressional passage of the TCJA addressed one of the major uncertainties in the November forecast. However, the baseline economic projections for the February forecast were updated prior to the passage by Congress of the federal Bipartisan Budget Act, which raised discretionary spending caps over the next two years and avoided a federal government shutdown but added future uncertainty when budget caps are scheduled to return.

In addition, although President Trump and Congress have discussed a major federal spending and infrastructure bill, the details remain unclear and, therefore, it is not yet possible to estimate the potential effects of major infrastructure legislation on economic activity and the federal deficit.

The report also cautions that taxpayer response to the complex TCJA are difficult to predict, and the forecast raises questions about the economic impact of the fiscal stimulus of the TCJA given that the nation’s economy is in the ninth year of slow economic expansion.

Minnesota’s economy is solid
Despite the economic and policy uncertainties mentioned above, the forecast stresses that the fundamentals of Minnesota’s economy are strong, and the state’s steady economic performance continues. The state’s employers continue to add jobs driving the Minnesota unemployment rate well below the national rate.

In December, Minnesota’s seasonally adjusted unemployment rate fell to 3.1 percent, 1 percentage point below the national rate, and 0.9 percentage points lower than the state’s rate a year ago, which is also the lowest unemployment rate the state has seen in more than 17 years.

Now that they have the most current data, the governor and legislators will proceed with other budget decisions, including supplemental appropriations for emerging state budget priorities, how to address income tax conformity in the wake of TCJA, and a possible capital projects (bonding) bill.

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