Forecast: State Budget Swings from Surplus to Deficit

The League will work to make sure city aids are paid in full, despite a projected $188 million deficit for the current biennium.
(Published Dec 6, 2017)

After a four-year string of positive state general fund budget reports, Minnesota Management and Budget (MMB) announced on Dec. 5 that the state is facing budget deficits into the foreseeable future.

Projections for the remaining 20 months of the current biennium and for the next two-year budget period are down, according to the MMB’s November 2017 Budget and Economic Forecast. A deficit of $188 million is projected for the current biennium, which ends on June 30, 2019, and a larger deficit of $586 million is forecasted for the fiscal year (FY) 2020-2021 biennium.

Possible impact on cities
The budget forecast suggests that the Legislature and Gov. Dayton will have to adjust spending, increase revenues, or tap the state’s $1.6 billion rainy-day fund to address the projected $188 million deficit.

Local government aid and the Small Cities Assistance Account funds that will be paid in calendar year 2018 are paid from the state’s FY 2018-2019 biennium budget. The League will be working in the coming months to ensure that those city aid funds are paid in full.

Current FY 2018-2019 biennium
According to the report, the state will end the current FY 2018-2019 biennium next June 30 with a projected deficit of $188 million, down from the end-of-session estimate of a $163 million sufficiency. The deficit is the result of a combination of increases in projected spending and a reduction in estimated revenues.

Importantly, the current law forecast does not include roughly $114 million in appropriations for the state Legislature due to the governor’s veto of that appropriation at the conclusion of the 2017 session. When that appropriation is reenacted, the current biennium deficit will increase to more than $300 million.

The deficit is caused by several factors. Forecast revenues for the biennium are down $559 million compared to end-of-session estimates, with all major taxes reflecting reduced growth. The largest change is in individual income tax collections, which are expected to be $461 million lower.

On the spending side, state program costs are estimated to be $398 million higher than end-of-session estimates, largely due to a higher forecast for E-12 education spending for special education programs.

The lower revenue growth and higher spending are partially offset by increased resources available from a positive general fund closing balance from the FY 2016-2017 biennium.

FY 2020-2021 biennium
MMB now estimates that the state expenditures will exceed general fund revenues by $586 million into the upcoming biennium. Although that deficit is large, the 2019 Legislature will develop a state budget for that time period and will have to take steps to address that shortfall.

In addition, the forecast does not include increases in state expenditures due to inflationary pressure. When estimated inflationary pressure is considered, it could add as much as $1.3 billion in additional pressure on the state budget deficit.

Next steps
According to MMB Commissioner Myron Frans, the state budget forecast is clouded by several developing issues, including uncertainty about the impacts of pending federal tax reform, the need for congressional action to extend the federal debt ceiling to fund the federal government, and questions about the duration of the current economic expansion.

Commissioner Frans suggested that the governor and Legislature should wait for the February budget forecast before making any decisions about how to address the deficit. The February forecast should provide a clearer picture of the state budget as well as more certainty about how congressional actions may impact the state budget.

The Legislature will reconvene on Feb. 20 and, shortly thereafter, MMB will provide another update to the state budget forecast.

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