The budget news for Minnesota state government has been grim.
In May, the state budget office projected a $2.4 billion deficit for the two-year budget period that ends next July. And last week, the same office released an estimate for what the recession would do to the current forecast for the next two-year budget: an additional $4.7 billion deficit.
That it came so suddenly and was such a reversal from a budget with a $1.5 billion surplus in early spring added to the shock. But despite the suddenness of the COVID-19 recession — and the depth of the hole it has created — there doesn’t appear to be much haste or panic in state government.
Gov. Tim Walz had ordered a few savings: a mostly symbolic pay cut for commissioners, some job losses at prisons and a hiring freeze for jobs not considered essential to pandemic response. Compared to other states, Minnesota hasn’t taken drastic measures, or many measures at all.
A $2.35 billion rainy day fund, hopes for more help from Congress and the awkwardness of getting a deal in a divided Legislature have tilted decision makers toward waiting. And now, election politics suggest there will be no significant action anytime soon, and perhaps not until the new Legislature is sworn in in January.
“We’re in a little better position than a lot of states, probably in the Top 10 for being prepared,” Minnesota Management and Budget commissioner Myron Frans said this week. “The key to a budget reserve is to buy you time.”
Without the reserve, the state’s legal requirement to stay in balance would have meant slashing payments and cutting jobs, Frans said. And there have been some layoffs: at the Minnesota Zoo and at the Department of Corrections. But across state government, widespread job cuts and pay reductions have not been instituted.
In some ways, the state has gone the other way. A proposed supplemental budget last month would have spent much of the savings from the hiring freeze. And in July, over the objections of Republican legislators, a 2.5 percent pay raise for 47,000 state workers kicked in at a cost of $750 million in the next budget.
Frans said the administration has ordered agencies to produce budget cut scenarios of 5 percent and 10 percent. But the cost of agency operations is a relatively small part of state spending compared to school funding and social program grants. The budget reduction scenarios, for example, would save between $50 million and $100 million.
“You can’t solve billion dollar budget problems with agency operating cuts,” he said.
[image_credit]MinnPost photo by Tom Olmscheid[/image_credit][image_caption]Minnesota Management and Budget commissioner Myron Frans: “The key to a budget reserve is to buy you time.”[/image_caption]
Nor is the administration looking to use tax hikes to resolve the deficits. “You don’t tax businesses who don’t have the capacity to be able to pay it and get back on their feet,” Walz told WCCO Radio Friday morning. “We can talk about everything, but the idea that you’re gonna fix it with a tax increase alone is not going to work. And the idea that you’re gonna fix it just by cutting instantly, cuts off your growth for the future.”
And though Walz said there will be additional job cuts, he also said the state has some time to address the deficit: “I don’t think you have to fix this overnight. We need to be smart. We’ve got a couple years to balance this. We’ve done it before.”
A prediction of ‘massive cuts’ for state government
Republicans in the Legislature have complained about the lack of concrete action on state spending, and warned of the long-term impact of the deficit. If the state isn’t going to cut spending, at least it shouldn’t add it, they have said. But they have not presented a detailed budget plan of their own.
Sen. Julie Rosen, a Republican from Vernon Center who chairs the Senate Finance Committee, has been asking Frans to produce a formal revenue and spending update this month. There was an extra update in May, but Rosen said waiting until the next scheduled update in November will not give lawmakers the data they need to react to the recession.
“I don’t think we can wait until November,” Rosen said. “It’s hard to commit to anything without knowing what the numbers are.”
[image_caption]State Sen. Julie Rosen[/image_caption]
State law requires the governor to bargain contracts and the Legislature to approve them. While the House did so, the Senate tried a qualified ratification, saying the raises from last summer would remain but those due this summer would not. Frans decided that action equaled ratification and went ahead with implementing the contracts. Threatened lawsuits from the Senate GOP have not materialized.
Rosen predicted the need for “massive cuts,” but said there doesn’t appear to be a political atmosphere to work through those. “Everyone needs to go to their corner and start figuring out how it’s going to look and make no commitments at this point because there isn’t a lot of trust right now,” she said.
Rosen’s budget counterpart in the House, Ways and Means Committee Chair Lyndon Carlson, DFL-Crystal, said the rainy day account does provide time to make changes. Given how much uncertainty there is about additional federal spending, the depth and length of the recession and its impact on tax collections, the extra time is especially helpful, Carlson said.
And though he won’t be involved in solving the next budget problem — he is retiring after 48 years in the House — Carlson said his experience with past recessions demonstrates that early decisions are better than late ones. “Whether revenue has to be a part of it or whether it can be done just on the spending side or whether we’ll have enough with the state reserves or other reserves, we still don’t know,” Carlson said.
Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, which studies state tax and spending policies from a fiscally conservative viewpoint, says that there was an expectation that lawmakers and Walz would begin tackling the budget when the Legislature met last month.
“When the interim budget projection in May flipped the state from a $1.5 billion surplus to a $2.5 billion deficit, one might have expected budget repair to be a focal point for lawmakers. That was most certainly not the case,” he wrote. “In the context of policing reform, civil unrest, emergency powers, bonding, and COVID aid to local governments, the state budget deficit seemed to be a legislative afterthought.”
[image_credit]MinnPost photo by Peter Callaghan[/image_credit][image_caption]House Speaker Melissa Hortman[/image_caption]
House Speaker Melissa Hortman said her attitude toward the deficit changed with last week’s estimate of the impact of the recession on the next two-year budget cycle. The $2.4 billion deficit forecast in May was equal to the rainy day fund. The $4.7 billion hole for 2022-23 is not.
“I am definitely in the mode of starting the conversation with the Republicans and the administration,” said the Brooklyn Park DFLer. “Are there things we should do now?”
Yet doing anything in an election season is complicated.
“I can tell you right out of the gate almost everything we would do the Republicans would consider off the table,” said Hortman. Both parties would do fund shifts and delayed payments, standard tools for budget holes. “But then it gets difficult. At the moment the political philosophies are so different the question is, should we start attacking this year’s deficit today? I don’t think that’s gonna happen.”
As if on cue, while Hortman was talking, the Senate Victory Fund, the campaign arm of the Senate GOP caucus, announced a Friday press conference. The subject: “Senate Republicans Ask the Question: Who does Minnesota want in control of Senate with a $5 billion deficit?”
Bond sales as a backdrop
All this is background for an annual trip to the bond market that the state will make August 11. That is when Minnesota will ask New York based bond firms to bid on $1.2 billion is state general obligation bonds, a way for the state to borrow money to pay for public construction projects throughout the state.
Missing from that sale will be any new bonds to fund dozens of projects contained in various iterations of the 2020 bonding bill, which would have likely been in the $1.3 billion to $1.4 billion range. For the third-consecutive session, lawmakers could not agree on a bonding package.
Despite the recent downgrades in the state’s own forecasts, Fitch assigned the state its highest credit rating. The other rating agencies had similar reports, and the state expects to get attractive interest rates for a bond issue that will also include the refinancing of previously issued bonds with higher interest rates.
What other states are doing
All states have been hit by the COVID-19 recession. Last month, The Tax Foundation estimated that states have lost $191 billion in expected tax revenue between this budget year and the next. The National Conference of State Legislatures is also keeping a running tally of state revenue reductions that are not pleasant reading for state budget leaders.
The same organization has been compiling a list of the budget cuts decisions made by various states, which include: Arizona cancelling a tax cut on pension income; California cutting $1.75 billion from higher education and $12.5 billion from K-12; Colorado ordering cuts by executive order; Florida implementing a 6 percent across-the-board budget cut; Michigan cutting local government aid; New Jersey “deappropriating” $1.3 billion in spending; Ohio ordering 16,000 state workers to take 10 furlough days; Oregon ordering state agencies to prepare budget plans with 17 percent cuts; and Washington vetoing $445 million from a just-passed budget.
Several of those states have made cuts with promises to repay them should states get additional money from Congress. Yet so far there is no certainty that the latest version of federal pandemic relief will provide money for state and local governments, though negotiations continue.
Democrats have passed the $3 trillion HEROES Act, which includes $500 billion to state and $375 billion to local governments. But Congressional Republicans have been reluctant to provide more money to state and local governments, though there was some support for letting states use money from the March CARES Act to replace lost revenue, something currently prohibited.
This week, there were reports of White House negotiators supporting up to $200 billion for states, which would provide $3.7 billion for Minnesota and its local governments if it’s enacted.
Good thing the bonding bill went nowhere. Time to start cutting. That new pay raise should be clawed back. The private sector was decimated by the lock down but govt employees didn’t suffer at all. Time for job cuts, pay reductions, and many more spending cuts. We can’t afford any more tax hikes. MN is already 4th or 5th highest in taxation.
The bonding bill would have had no effect on the deficit. And the failure to pass the bill will just make the economic recovery tougher.
The budget will be dealt with by a newly elected Legislature as it should be. In a year where all legislative seats are on the ballot, who on earth is going to try to implement “draconian cuts” during a special session? A 6 billion deficit was handled in years past, this isn’t $6 billion…
I left Minnesota as my home state in 2004. I still come back for the summer. The taxes in the state are so high anyone with the financial means moves when they retire. The government here is incapable of saying no to anyone. The Democrats always come back to the same tired line, just tax the corporations and the rich. At some point they leave. I wish the author would have done due diligence and point out how many corporations have already left. And the wealthy will follow, especially now that public schools have shifted all new magnet schools move to the north side.
The sad truth is there are so many poor people who live in the Twin Cities, the cost to maintain our excellent services for them are now sucking the life out of the average citizen. One could only hope they finally realize you’ve got to start electing a few Republicans to offset them
People have been saying that for years, but its never been true. People like living in Minnesota. Especially when the option is living in a horrible place like Florida.
I personally know five well off individuals who left the state for that reason.
And you know Florida is a terrible place how?
Precisely. The population of the Twin Cities has increased over the past couple years, there are new condo buildings everywhere, rents are high—clearly there is demand to live here. But people who have packed up and moved to Florida still feel the need to squeak about how we’re doing everything wrong.
Which corporations have moved outside of Minnesota because of the taxes, by the way? People always say this but they rarely give examples. I’m not doubting that some have, just wondering which ones.
Why would it be a good thing for government to cater to the whims of the wealthy?
Put another way, why should the preferences of seasonal residents matter?
I applaud Gov. Walz who is taking a balanced and rational perspective.
” We can talk about everything, but the idea that you’re gonna fix it with a tax increase alone is not going to work. And the idea that you’re gonna fix it just by cutting instantly, cuts off your growth for the future.”
The bonding bill is precisely what we needed. Borrow now with an excellent credit rating at historically low rates to create jobs and tax revenue while improving state infrastructure.
Yup, a total no-brainer, which every prominent economist in America would advocate. Yet we’ve got plenty of American “conservatives” with the economic sense of Charlemagne or Charles V blathering to the contrary, simply of out deranged hatred of gub’mint spending.
A house divided cannot stand.
Let’s just go with the Republican plan. They won’t agree with anything else anyway.
Oh wait– they don’t have a plan for this either.
(Potshots from the wings is all we’ll get from them.)
Maybe Dems could get Gazelka to be minority leader after the election.
That would give us a new look, and a chance to govern as a democratic Legislature.
Well, what wasn’t mentioned is that the tsunami that is hitting state and local budgets across the nation is the direct result of the Trump Pandemic, and that means that the only answer will be significant aid from the federal government to offset the catastrophic drop in state revenues. As we can now see, pandemics are by far the greatest risk to national security that the nation faces, and why an unqualified, manifest incompetent cannot be thought acceptable to hold the office of president.
But such aid will only happen, of course, if the blithering Trumpist regime and the paralyzed McConnell majority are voted out in Nov and a Dem government installed in DC in Jan 2021. If that fails to happen, then we will see massive contraction of state and local government jobs and services, which is what caused the drag in recovery from the Great Recession. But the destruction of MN state government will be small potatoes compared to the destruction of American democracy that another Trump (electoral college) “win” would mean.
In any event, a change of regime in DC from incompetent and crazy “conservative” Repub to realist and pragmatic Dem is actually going to be far more important in balancing the state budget than anything else under discussion, both here and across the nation. So if you’d like to have a functioning state government in 2021, the sadistic and spiteful Trumpolini must go.
Simple as that.
If you look at our state spending the last 10-20 years due to the never sated appetite for money that the DFL has done in this state, we would not be in this problem. State spending has increased far over inflation and increase in population. If this was stemmed to even half of the increases, we would have a surplus – it’s just simple math. Dayton and the DFL rammed in a record tax increase on all taxpayers and it’s still not enough.
Hortman shows her true colors in that those who have been prepared and not hurt as much need to pay more. Why penalize those that do the right thing? But that is the mantra of Democrats. Keep hurting people who do the right thing.
The article states what the Dems in Congress has passed in the House. But most of it is not even about helping people through this. It’s a liberal policy wish list plus the added benefit that the government needs to bail out the states that are fiscally irresponsible. This virus is not Trump’s as Mr. Anderson states – he says that because he has TDS and has to place blame on anywhere that isn’t where it should be placed, where the Dems run the show.
Well, Mr Petersen, your reply does not exactly refute my observation about how this massive deficit (caused by the Trump Pandemic) is to be resolved. It will be done in DC if the Dems can defeat the Trump/McConnell regime and its appalling stew of incompetence, lawlessness and paralysis.
You have some blinders on with your history of the past “10-20 years”, as you seem to forget that the MN state government was controlled by our first “conservative” governor, Tim Pawlenty, for much of that time, with at least one chamber of the legislature involved in aiding his crusade of cutting state government. Yet somehow this paragon of fiscal prudence (also) presented the state with a deficit of billions. Why? The Great Recession.
As for the idea that Pelosi’s House bill is now attempting to “bail out the states that are fiscally irresponsible”, that is merely an evidence-free rightwing talking point, with no basis in reality. MN, for example, had projected a large surplus before the Trump Pandemic hit, and had an enormous rainy day fund as well, so you don’t seem to recognize what “fiscal responsibility” even looks like. What Repubs don’t like is that the Dem bill would aid states that actually have functioning state governments, because to “conservatives” the True Evil in America is government spending (on anything but bigger roads for Monster pick-ups).
Finally, you are right, it’s not just the demagogue Trump who is responsible for our nation’s (totally failed) attempt to combat the Covid 19 virus. It’s the entire “conservative” movement and Repub party, which was (barely) on board for containment for about a month, and then (predictably) took up the banner of American Selfish Individualism, to the ridiculous point of challenging epidemiologists about the efficacy of wearing masks. Hopefully the cry of “We opposed masks in an airborne pandemic!” will be its epitaph…
Please tell us Betsy, how many businesses have left Minnesota because of high taxes. I hear about this all the time, but there is never any substance provided.
On you mean like Honeywell….
Allied Signal bought Honeywell in 1999 and I understand the headquarters of the company were moved to New Jersey as part of the purchase.
Interesting that conservatives see the answer to everything being to downsize government. I’m a government employee. Since the lockdown began in March, I’ve been spending money on rent, groceries, gas, utilities, and other things like a new smoker, a bicycle, hair cuts (once they were available again), and carryout food.
I’m letting you in on a secret: money spent on government employees doesn’t just evaporate into the air. We pump LOTS of that money back into the economy. Most of it, really, since we don’t get paid much. I recognized early on in April that, while many people were out of work, including my own adult kids, my sister and her partner, etc. I was still being paid, and did my part to be a good capitalist and spread my money around. So please don’t be so quick to want to cut government worker’s pay and/or jobs. If you work in the private sector and are hoping for the best, part of your livelihood may depend on the fact that many of us are still able to work.