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Minnesota bracing for possible budget deficit because of COVID-19

By Brian Bakst

Minnesota’s finance agency is bracing for a steep drop in tax revenues, increases in state expenses and an overall budget shortfall.

The fiscal chaos stirred by the coronavirus is so worrisome that a new economic forecast will be ordered to get a better handle on the problem and clear the use of the state’s rainy day reserves. It’s a stunning reversal from late February, when officials forecast a projected surplus of $1.5 billion that would pile up by July 2021.

“I believe we will be doing a new forecast somewhere in the near future. It’s just not going to be in the next month or so because we just don’t have enough precise data to make it worthwhile and accurate,” Minnesota Management and Budget (MMB) Commissioner Myron Frans said in an interview last week.

Frans said the extraordinary step of producing a new forecast — normally they’re prepared only in February and November — shows just how significant fallout from COVID-19 could be.

“It seems unlikely that we would want to wait until November given all the volatility of revenue and expenditures,” he said. “We would want to know before that.”

There’s a practical reason to do a forecast sooner: Minnesota has more than $2 billion in its reserve funds, but the governor’s administration can’t access the money as it sees fit unless there’s a forecast deficit.

A simulation that MMB completed in recent days and has shared with top legislators compares the current situation to the last recession of more than a decade ago. The analysis, which was provided to MPR News, contains two scenarios.

In one, tax collections dropped at half the rate they did in the Great Recession that began late in 2007 and carried into 2009. Under that analysis, Minnesota’s income, sales and corporate taxes would fall by $1.5 billion.

Under the more-severe estimate in which the revenue loss is on par with that earlier recession, the drop in tax revenue would hit $3 billion. Given that Minnesota has a healthy reserve account to buffer its losses, the presumed shortfall would be less than the tax dip.

Frans said Minnesota is in line for some federal assistance, which could top $2 billion. But some of that could be reimbursements for specific expenses related to COVID-19.

There’s another factor only a comprehensive forecast could help uncover: How much new spending is coming into play. When the economy slows, people depend more on government assistance programs, driving up state costs.

Minnesota has delayed its income tax filing deadline until July, so money it would normally see in April is certain to be delayed.

Frans is set to testify Monday before the Senate COVID-19 Response Working Group.

A new quarterly update is due on Friday that will offer a glimpse at the first quarter of tax revenues as well as revised estimates of economic growth or shrinkage for the months to come.

In a video released Sunday, Republican Senate Majority Leader Paul Gazelka said he is working “arm-in-arm” with Gov. Tim Walz and the Democratic-controlled House to address the coronavirus problem. Gazelka said state leaders also need to work to “get Minnesota back again as soon as possible” and find ways to limit the damage from disrupted work routines.

“The revenues coming to the state of Minnesota are significantly lower. We are going to have a budget shortfall next year,” he said. “We need to tighten our belt.”

In an interview last week, DFL House Majority Leader Ryan Winkler said Minnesota is better situated than most states to deal with a sudden financial shock. Since the last recession, it restocked the reserve fund and last year lawmakers didn’t spend every available dollar when setting a new two-year budget.

“We have resources, we have backup. We have very careful fiscal planning that has gone into keeping the state in good shape for the last 10 years almost,” Winkler said. “We have an opportunity to weather this storm, and that’s because Minnesota planned ahead.”

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