ST. PAUL — A projected budget surplus in Minnesota has evaporated due to the coronavirus pandemic and actions to contain it and the state now faces a $2.4 billion deficit in the current budget.

State budget officials on Tuesday, May 5, gave a unique update that cast a grim outlook for Minnesota's economy and reset legislative conversations about how state government could manage the hit and how lawmakers could offset the financial damage suffered by Minnesotans.

Since budget officials put out their initial estimates in February, the COVID-19 pandemic has struck the United States and Minnesota, causing thousands of infections in the state and killing 455 as of Tuesday. And actions aimed at limiting the disease's spread put more than 600,000 Minnesotans out of work and forced whole sectors to close down.

The new figures represented a nearly $3.6 billion swing compared to the rosier economic forecast put out months earlier. And while the state has $2.36 billion in budget reserves that could be used to offset the expected gap in funding, Minnesota Management and Budget Commissioner Myron Frans said lawmakers should avoid draining them as uncertainty about the pandemic and likely economic recession loomed large.

“Today is a rainy day, unfortunately, now is the time to use some of our $2.3 billion rainy day fund to help Minnesota weather this severe economic downturn,” Frans said. "I also want to caution against relying solely on the reserves to close the budget gap. Committing these funds in this current situation is difficult because we know revenues are going to continue to decline."

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The state normally offers previews at what its economic outlook could look like down the road in November and February, but the pandemic spurred the need for an updated picture. Lawmakers needed the newer estimates to determine whether they could tap into the state's reserves, and now, they'll use the outlook to decide how the state can bridge the budget gap.

Revenues coming into the state were expected to be $3.611 billion lower than projected three months ago and state spending was projected to be $391 million higher than what was forecast at that time.

And the state's macroeconomic consultant, IHS Markit, predicted that the state is set to face economic recession over the first nine months of this year, causing a 5.4% decline in real GDP in 2020. Projected consumer spending is expected to take a 5.5% hit this year due to orders aimed at limiting the disease's spread, per the estimates.

After an anticipated drop-off in cases late in the summer, the state could begin easing restrictions, which would allow more Minnesotans to return to work and lead to a 6.3% increase in real GDP in 2021. Given the unpredictability of the virus, economic advisers said the projections could vary widely.

State lawmakers and the governor entered the 2020 legislative session expecting a budget surplus of around $1.5 billion. But that quickly vanished. They'll spend the final weeks of the legislative session and beyond debating the best way to balance the budget by weighing possible federal aid, government cuts and possible tax and fee increases.

Walz eyes cuts, calls for a targeted approach

As soon as the new figures became public, all variety of stakeholders asked lawmakers to defend their existing funding, avoid tax increases, prevent proposed budget cuts from pulling from local governments and support a bonding bill that could fund public construction projects.

Gov. Tim Walz urged lawmakers not to try and take on the deficit all at once in the remaining two weeks of the legislative session and suggested he could call them back later in the year for a special session to rebalance the state's budget. And state spending cuts could be part of that discussion, he said.

State commissioners have taken a 10% pay cut to bring down state expenses and the state has cut off all non-critical hiring. And additional furloughs and layoffs could be on the table as lawmakers and the governor explore ways to trim state spending.

The first-term DFL governor said lawmakers should avoid cutting into programs that provide a safety net to Minnesotans during or after the pandemic.

“There are decisions to be made. There’s going to be shared sacrifice because, at this point in time, the COVID-19 is not the great equalizer, it exposes inequities, it exposes communities that get hit harder,” Walz said. “It’s in times like this that you can make an austerity mistake and cut the very things that will grow that economy and then you end up staying at the bottom of that trough for a longer period of time.”

Republican lawmakers were quick to call for reining in state spending to reduce some of the projected strain on the state budget. In particular, they pointed to state employee contracts that were approved prior to the pandemic and have yet to be passed. The proposals would raise state employee pay beginning in July, and GOP lawmakers said the state should tighten its belt given the current economic outlook rather than approving salary increases.

“At the end of the day, we need to be able to look into the eyes of the small business owner and the laid-off worker and tell them state government is making sacrifices too," Senate Majority Leader Paul Gazelka, R-East Gull Lake, said in a news release. "Actions speak louder than words.”

Democratic leaders, meanwhile, have defended the contracts and said state employees have been asked to do more to respond to the pandemic and are also consumers who impact the state's economy. They also said the state should utilize around $2 billion in federal funding to the state and populous counties to offset the financial impacts of the pandemic.

“Minnesota has the resources we need to address this crisis; we just need the will to act,” House Majority Leader Ryan Winkler, D-Golden Valley, said. “We must stay the course to reduce the impact of COVID-19, save lives, and help Minnesotans get through the storm.”