Minnesota budget forecast swings from $1.65 billion surplus to $188 million deficit

ST. PAUL, Minn. (KMSP) - Minnesota is facing a $188 million deficit, according to the latest projection from the state budget office. Last year at this time, Minnesota Management and Budget officials had a projected budget surplus of a $1.4 billion – a surplus that grew to $1.65 billion in the March projection.

The deficit is expected to grow to $586 million in the next three years, according to the forecast. State budget commissioner Myron Frans said “today’s forecast is a reality check."

State economic officials are blaming slowing economic growth nationwide, impacts of the 2017 Minnesota Legislature's actions and unknown impacts of federal tax reform for the projected deficit.

"Considerable uncertainty remains about what U.S. policy changes will be enacted and their impact on the economy," state officials wrote in their forecast. "At this time, it is unclear what tax law changes will emerge from the U.S. Congress and how those changes will affect the federal deficit and economic activity. Congress faces imminent deadlines for funding the government and for raising the debt ceiling, and possible changes to trade and immigration policy also bring uncertainty."

This past session, Gov. Mark Dayton and DFL lawmakers wanted to spend some of the state’s money on early childhood education, while setting more aside for savings. The Republican majority pushed through a large tax-cut package.

The state budget office says the February 2018 forecast will provide a clearer picture of the state’s finances, stressing the need for lawmakers to work together to address the projected deficit during the 2018 session. The state currently has nearly $2 billion is reserves to cover expenditures.

STATEMENT FROM GOV. DAYTON

“This forecast is complex; and does not lend itself to a single, simple explanation. It is also fraught with uncertainties, particularly around the federal tax bill and other pending federal actions. For example, if Congress refunds the CHIP program, as they must, the projected deficit for the current 18/19 biennium drops from $188 million to $10 million.

“This forecast is not saying that the U.S. economy and the Minnesota economy are not expanding, because they are; but rather they are not expanding quite as much as last February’s forecast assumed. Based on that forecast, the Legislature and I – and I’m not casting any blame on anyone here – we collectively cut state taxes and increased state spending, particularly in areas like transportation; early childhood, K-12, and higher education; the health insurance rebate; and reinsurance.

“All of those initiatives combined used up most of the projected surplus. Now, with a new, less optimistic economic forecast, we have slightly exceeded our budgetary limits. That is readily correctible, and I commit to doing so in the next legislative session.

“I want to emphasize that our state’s overall fiscal situation is very solid. We have accumulated a Budgeted Reserve of $1.6 billion, more than enough to support us through any of these economic uncertainties.

“As our state’s 3.3 percent unemployment rate attests, Minnesota’s economy is very strong and continues to grow. So, again, my goal in the next legislative session is to make modest corrections in future revenues and expenditures to restore structural budget surpluses for both this and the next biennium.

“As I have said before, I intend to wait for next February’s budget forecast, before I finalize my budget recommendations. Some of the questions surrounding this forecast will be answered during the next three months.

“Next February’s forecast should provide us with a more reliable guideline for the fiscal changes the Legislature and I will need to work together to make.

“The need for those modifications underscores the imperative that we re-establish constructive working relationships between the legislative and executive branches before and during that session. We will have our honest disagreements; that is to be expected. However, we all share a responsibility to the people of Minnesota to work together for their best interests. I pledge to do my part to contribute toward that goal.”

OTHER TAKEAWAYS FROM THE BUDGET FORECAST

Paychecks getting bigger: Economists expect average wage income to rise. In the updated forecast, growth in Minnesota average wage income increases for a few years before stabilizing in 2020. Annual growth in Minnesota’s average wage income is forecast to grow from 1.4 percent in 2016 to 2.4 percent in 2017, 3.2 percent in 2018 and 3.6 percent in 2019. These rates exceed forecasted rates for inflation over the same period, showing improvements in "real wages."

Jobs: "A robust demand for workers together with low unemployment" has created a tight job market. Across Minnesota, there are about as many job openings as there are unemployed job seekers. Minnesota’s unemployment rate decreased 0.7 percentage points over last year to 3.3 percent on a seasonally adjusted basis, which is 0.8 percentage points below the national rate. Sectors that showed solid gains in jobs include: Education and health services (up 13,380 jobs), leisure and hospitality (up 6,776), retail trade (up 5,284) and construction (up 4,983).

Shortage of single family homes: Minnesota’s housing market continues to show a shortage of existing single family homes for sale. With this tight supply, median and mean sale prices continue to rise. According to the Minnesota Association of Realtors, the year-over-year increase in the median sale price was 6.8 percent in October, while the average sale price increased 6.9 percent. Statewide, there were about 21,538 homes available for sale on October, down 15.3 percent from last year's already low 25,427. With a shortage of homes available and a rising demand, home prices are likely to continue to rise, posing a risk to affordability. The last time prices were this high was 2006, when a 30-year fixed mortgage rate was about 6.5 percent, compared to today's average rates of around 4.0 percent.

Read the complete Minnesota budget forecast at https://mn.gov/mmb-stat/000/az/forecast/2017/november-forecast/complete.pdf