From surplus to 'tsunami': Pandemic dims bright forecast for Minnesota's budget

A month ago, Minnesota leaders were debating how to use an anticipated $1.5 billion surplus. On Monday, they were facing a radically different picture of hiring freezes, potential deficits and plummeting revenue brought on by the COVID-19 crisis.

"We are waiting for a tsunami of revenue to not show up," state economist Laura Kalambokidis warned a Senate working group Monday.

State budget officials said the coronavirus' financial toll remains uncertain, but it is clear the $1.5 billion they anticipated in extra revenue is dwindling fast. During the February budget forecast, Minnesota's economic consultant predicted 2.1% GDP growth this year.

Now the consultant, IHS Markit, projects GDP will drop 5.4% and that positive growth won't pick up until the beginning of next year, Kalambokidis said.

As income falls, state government has instituted a hiring freeze on all noncritical positions, Minnesota Management and Budget Commissioner Myron Frans told the Senate COVID-19 Response Working Group. It will continue to hire for priority positions, such as corrections officers and direct care and treatment staff, he said.

There's a "cruel irony" in how, when less money is coming into state coffers, there is a greater demand for state aid, Kalambokidis said. The unemployment insurance program, for example, has seen requests for help skyrocket.

The state will get more information on Friday about its tax collections, but the full picture of the drop in revenue won't be known for a while.

Minnesota allowed businesses to delay sales tax payments for a month, so that income will fall. Kalambokidis said analysts are trying to figure out how much of the shortfall is because of the delay and how much is due to the slowing economy.

Some lawmakers offered comparisons to the Great Recession of a decade ago.

"Frankly, I think this is worse than that," Senate Majority Leader Paul Gazelka, R-East Gull Lake, said. He argued one of the things Minnesota can do to "bend the curve" of lost revenue is to allow some workers, such as people working at golf courses or in landscaping, to resume work. Gazelka said Gov. Tim Walz is thinking about that as well.

Senate Minority Leader Susan Kent, DFL-Woodbury, asked if a borrowing bill to fund construction projects, commonly referred to as a bonding bill, would help the state's economy. Using bonding to put people to work when the interest rates are low is a good idea, Kalambokidis said, though she added a warning.

"It's not free money. There is debt service on that, so given the changing and deteriorating budget situation, that has to be taken into consideration as well," she said.

The Legislature has so far approved $551 million to respond to the COVID-19 crisis, and more aid is expected.

Frans said it's possible the Walz administration could ask legislators in May or later to approve a supplemental finance bill that includes some spending cuts, but it's too soon to tell. It depends on the updated revenue and economic forecast coming Friday and how much of the state's reserves they need to use, he said.

The state needs to review agencies and programs funded by dedicated revenue streams that are taking a hit, such as the Minnesota Zoo, Legacy Amendment funds and the Highway Trust Fund, Frans said.

Federal aid also is a piece of the financial puzzle, he said.

Minnesota is expected to receive nearly $2.2 billion in federal government aid by April 24, Frans said. About $1.2 billion of that will be for the state government, with the rest passed through to cities and local governments. Federal dollars are intended to help cover COVID-19-related expenses, not to make up for lost revenue, Senate fiscal analyst Eric Nauman said. Congress, however, could change that.

Medical equipment, unemployment claims, information technology upgrades and small business loans have been among states' top spending priorities, said Erica MacKellar, with the National Conference of State Legislatures.

Kalambokidis warned that the state's economic consultant has said the $2 trillion federal coronavirus aid package might be better described as a "preservation package" than a stimulus.

"It just may not have as much of an impact and give as much of a boost to growth as we would hope," Kalambokidis said.

Even after coronavirus cases in the U.S. drop to zero, she said, it could still take a while for businesses and consumers to begin spending in earnest.

Jessie Van Berkel • 651-925-5044