Minnesota budget officials project $641 million surplus, a significant swing from earlier estimates

ST. PAUL — State budget officials on Tuesday, Dec. 1, announced a rosier economic outlook than they'd projected earlier this year but said additional challenges remain on the horizon as the coronavirus pandemic continues to bear down on the state.

Minnesota Management and Budget leaders said the state expects to have a $641 million budget surplus in the cycle that ends June 30, a sizable swing from the $2.4 billion shortfall they'd predicted in May as the coronavirus pandemic took hold in the state.

The extra projected funds reignited efforts to get state aid out to business owners and workers hit hardest by the COVID-19 pandemic and state efforts to curb it. And legislative leaders said they continued negotiations about the best package they could pull together for Minnesotans.

Business and labor union leaders, frontline workers affected by the pandemic and those who'd lost their jobs this year meanwhile called on state legislators to quickly approve a package that could help them hang on.

Lower-than-expected state spending and higher-than-anticipated tax revenue contributed to the updated forecast, state budget officials said Tuesday morning. And in the two-year budget cycle set to start July 1, the state projected a $1.3 billion gap, a smaller hole than the $4.7 billion shortfall they'd anticipated in May forecasts.

"Minnesota's forecast has significantly improved even as COVID-19 impacts remain," Minnesota Management and Budget Commissioner Jim Schowalter said. "Behind this rosier picture, we still have revenue issues compared to where we started last February and today's forecast only adds back about half the revenue taken in May ... we still have challenges ahead but this budget and revenue forecast brings a bit of good news to this state."

The COVID-19 pandemic, state efforts to curb the disease's spread and broader economic shifts have shaken Minnesota's outlook in the last year. In February, budget experts predicted a $1.5 billion surplus in the current budget cycle but the onset of the pandemic cratered those expectations.

Early estimates projected the pandemic's impact on U.S. gross domestic product would take a 5.4% hit or more this year, but indirect support from federal CARES Act funding, state aid packages and other resilience in the U.S. economy helped GDP decline at a level closer to 3.6%.

Consumers continued buying goods like electronics or new couches but shied away from services as recommendations to social distance and later state-mandated shutdowns of entertainment venues, restaurants and bars made many unavailable. State taxes on many of those goods helped the state bring in higher-than-expected revenues.

"Consumer spending on these goods, which are generally taxable in Minnesota, has not only outperformed expectations from April and didn't fall in the spring but instead has increased and exceeded the February forecast," State Economist Laura Kalambokidis said.

Individual income tax revenues and corporate franchise tax revenues were forecast to come in above rates expected in May, according to state data. State budget officials said the impacts of the pandemic disproportionately impacted low-wage-earning individuals, who were more likely to lose jobs during the pandemic. And those hits to the state's tax base, in turn, were lower than predicted.

Meanwhile, the state reported decreases in spending as more than 8,000 students opted to delay kindergarten, move to private schools or home school during the pandemic. And increased federal funding paired with lower usage of state medical services also decreased expected state spending.

State budget officials said their estimates didn't account for additional federal stimulus funding this year or a faster-than-expected rollout of a COVID-19 vaccine, both of which could improve projections.

The latest forecast could influence lawmakers' willingness to quickly craft a COVID-19 aid package for businesses and workers hit by the pandemic. Gov. Tim Walz and legislative leaders on Tuesday said they were also hoping to quickly approve a package to help business owners and others at least until another round of federal funding could be moved.

"There’s no reason we can’t have this thing wrapped up in the next week or so," Walz said.

Minnesota Chamber of Commerce President Doug Loon said the group was "laser-focused" on getting financial help out to business owners. And House Majority Leader Ryan Winkler, D-Golden Valley, said the aid should target those hit hardest.

"We need to not only provide emergency relief now, but we have to make sure that Minnesota families, Minnesota small businesses, service workers, the communities of color, the people who are hardest hit by this pandemic are first in line for recovery," Winkler said. "Minnesota should put those who are struggling the most first, and this budget forecast shows us we have the resources to do it."

Speaking for his caucus, House Minority Leader Kurt Daudt, R-Crown, said House Republicans support using state dollars to help struggling businesses weather the storm and extend unemployment insurance benefits. State Rep. Pat Garofalo, R-Farmington, said the fate of a state assistance package depends on how big the bill gets, and if legislators squeeze in too many caveats or “wish list” items into their negotiations.

“Keep it clean and just focus on small businesses. This could be done this week,” Garofalo said.

Senate Republicans, who hold a majority in that chamber, didn't immediately share their priorities for an aid package.

The forecast also sets an early stage for budget debates that will kick off at the Capitol in 2021. Republican lawmakers were quick to say the state should skip conversations about raising taxes with a surplus on the table, while Democrats said the state should keep options open.

Lawmakers are required to pass a balanced two-year budget, but leaders in the divided Statehouse have split on the best plan to do that. The state's reserves also contain about $2.3 billion that could cushion the blow of additional COVID-19 impacts or plug a budget hole.

Forum News Service reporter Sarah Mearhoff contributed to this report.