State Budget Forecast Projects Healthy Surplus, With Some Caution

State budget stability should reassure city officials as local budgets for calendar year 2019 are finalized.
(Published Dec 17, 2018)

The news was generally positive when the Minnesota Department of Management and Budget (MMB) released the semi-annual state budget forecast on Dec. 6. This state budget stability should reassure city officials as they finalize their 2019 budgets.

—Access the full forecast on the MMB website

The state is projected to end the current 2018-2019 biennium on June 30, 2019, with a positive balance of $720 million. As Governor-Elect Walz and the 2019 Legislature develop a state budget for the upcoming two-year budget cycle, they will have a projected positive budget balance of $1.544 billion for the fiscal year (FY) 2020-2021 biennium.

Current 2018-2019 biennium

The projected $720 million budgetary balance for the remaining seven months of the current biennium is due to a combination of lower-than-expected spending and higher-than-expected revenues. State spending for the current biennium is expected to be $306 million below revised estimates prepared at the end of the 2018 legislative session, while revenues are now projected to be $609 million higher.

Recent monthly revenue collection reports have consistently reflected the higher state revenue collections with most of the increase resulting from higher individual income tax collections. Sales tax collections have actually been below end-of-session estimates. The spending reductions are largely due to reduced health and human services program spending and lower debt service costs.

FY 2020-2021 biennium

For the upcoming biennial budget period, state revenues are projected to be slightly higher (+$190 million) than end-of-session estimates, with state spending expected to be lower (-$489 million). Although the projected positive budget balance for FY 2020-2021 is officially projected to be $1.544 billion, about half of that amount is a carry-forward of the $720 million positive budget balance from the current biennium.

Budget reserve increased

One-third of the forecasted budget surplus for the balance of the current biennium, or $354 million, is automatically transferred to the state budget reserve. In addition, state law requires $90 million in canceled funds appropriated for the health insurance premium subsidy program and $47 million of the surplus in the Minnesota Workers’ Compensation Assigned Risk Plan also be transferred to the state’s general fund budget reserve.

These transfers will increase the state’s general fund budget reserve to $2.075 billion from the current $1.583 billion. The current state budget reserve target established by MMB is $2.222 billion.

Budget cautions

The state budget forecast identifies several downside risks to the state budget. If the recent stock market decline worsens, the resulting erosion of household wealth could cause consumer spending to grow more slowly than expected. In addition, the budget forecast assumes that pending U.S. fiscal policy deadlines are met without disruption to federal spending. Failure to resolve these issues is a source of risk to the forecast.

The forecast also mentions other downside risks including economic disruptions from geopolitical events, escalation of retaliatory tariffs between the U.S. and trading partners, and higher-than-anticipated inflation that could trigger tighter U.S. monetary policy.

The budget forecast also notes that growth in total state general fund revenues is declining over the three biennia included in this forecast. Between FY 2016-2017 and FY 2018-2019, total revenues grow 3.4 percent (per year, annualized). The rate falls to 3.2 percent between FY 2018-2019 and FY 2020-2021, and falls again to 2.5 percent between FY 2020-2021 and the planning estimates for the FY 2022-2023 biennium.

Finally, state law requires the forecast be prepared without consideration of inflationary impacts on most state spending programs. The forecast does provide an estimate of the aggregate impact of inflation, which could increase the level of state spending by an estimated $1.162 billion, which is roughly 75 percent of the projected 2020-2021 surplus.

Next steps

Governor-Elect Walz is required under state law to submit a budget to the Legislature by Feb. 19, 2019. He will use the November budget forecast as a basis for that budget. MMB will release an updated state budget forecast less than two weeks later, and that updated forecast will be the basis for a final state budget for the FY 2020-2021 biennium.

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