State Budget Forecast Improves

Unexpected improvement in the state’s budget outlook leaves many at the Capitol encouraged about the state budget and economy.
(Published Mar 4, 2013)

Minnesota Management and Budget (MMB) on Feb. 28 released the February 2013 Forecast. The report shows a projected state budget deficit of $627 million for fiscal year (FY) 2014-2015. This is an improvement of $463 million from the November 2012 Forecast, which showed a projected deficit of $1.1 billion.

The news on the reduction in the projected state deficit was welcome and, for many legislators and Gov. Dayton, somewhat unexpected. When last November’s forecast was released, the budgetary balance for the remainder of the FY 2012-2013 biennium had improved by more than $1.3 billion. However State Economist Tom Stinson had warned that some of that short-term good news may have been due to accelerations in tax collections due to decisions by individuals to take advantage of lower federal income tax rates before the end of the year. The February forecast seems to suggest that those concerns may not have materialized.

For the upcoming biennium, the forecast shows that total state revenues are now projected to be $323 million higher than projected last November and expenditures are now projected to be $117 million lower than previously forecasted. These expenditure projections do not include the effects of inflation on current law expenditure estimates. Inflation would add approximately $850 million to expenditures for the FY 2014-2015 biennium.

The 2013 Legislature is currently in the process of crafting a budget for this two-year period, and the reduction in the forecasted deficit will clearly have an impact on the Legislature’s budgeting process. The Legislature must complete its work—including the enactment of a state budget—by May 20.

Short term—FY 2012-2013
For the balance of the current FY 2012-2013 biennium, the state is now projected to have a positive balance of $295 million, which was largely due to an increase of $217 million in revenues over the November forecast. Under current law, $290 million must be used to reduce the K-12 education shifts from previous budget years, leaving an education shift balance of $801 million. The remaining $5 million is added to the state’s budget reserve bringing that balance to $649 million.

Longer term—FY 2016-2017
Looking ahead, the state’s FY 2016-2017 budget structural balance improves from the projected $263 million positive balance in the November 2012 forecast to $782 million. Although the 2013 Legislature does not budget for this longer-term horizon, many policy makers use this projection to gauge the state’s longer-term fiscal direction.

Congressional inaction clouds forecast
During the budget presentation, Stinson highlighted the uncertainty in the forecast and attributed much of it to Congress. According to the forecast, the federal fiscal cliff agreement reached in early January eliminated a major threat to economic growth in 2013. However, the forecast suggests that now there are remaining concerns about the possible impact of the March 1 federal budget sequestration and the looming partial federal government shutdown that could occur later in March.

MMB suggests that Minnesota’s direct exposure to federal cuts under sequestration is among the lowest of all states. State economists estimate that federal sequester cuts would reduce Minnesota employment growth by no more than 5,000 jobs by the end of 2013. Forecasters note that while these potential employment reductions are unlikely to produce a recession by themselves, the economy would be left with little cushion against further unanticipated economic shocks.

Governor’s reaction
Gov. Dayton suggested that he and his staff have not had sufficient time to analyze the forecast and therefore, they are not yet ready to make any supplemental recommendations to the governor’s budget recommendations. He indicated that he will likely amend his budget recommendations to reflect the new budget, but not until the week of March 11.

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