Two state finance leaders take helm amid Minnesota budget uncertainty

State economists will predict Minnesota's financial future Tuesday, which Gov. Tim Walz said looks "materially better" than it did last spring as the pandemic took hold.

But with massive uncertainties about the course of the country's COVID-19 fight and other big political unknowns, the two new members of Walz's Cabinet charged with stewarding Minnesota's finances are warning that conditions could still shift.

"We don't know if the [Affordable Care Act] is going to get struck down by the Supreme Court. We don't know if there's going to be additional help to deal with the costs of the pandemic. … We don't know if the vaccine is going to be in wide distribution until this spring or later," Management and Budget Commissioner Jim Schowalter said.

Schowalter and Revenue Commissioner Robert Doty took over agencies that are shaping Minnesota's budget at one of the most uncertain times in state history. Both men have spent years balancing budgets — Schowalter worked in the same or similar roles with three other governors — but they are entering new terrain amid the COVID-19 pandemic.

"This budget is going to be different," Schowalter said.

An October analysis predicted there would be a $2.3 billion deficit in the current budget and a $5 billion gap in the next two-year budget. But those numbers did not account for the state collecting $805 million more in revenue than was predicted during the last forecast in May. If that trend continues, there's a chance this year's $2.3 billion gap could disappear.

But with so many unknowns, Doty said they are not eliminating any options to address financial challenges. Walz has said he is considering budget cuts, tax increases, fund shifts or using reserves.

In January, Walz must present his spending plan for the next two years. Then come months of debate with a divided Legislature, where Republicans control the Senate and Democrats lead the House.

Schowalter said he wants to avoid a repeat of 2011. State government shut down for 20 days that year as Dayton, a Democrat, and GOP legislators clashed over how to fill a $5 billion budget deficit.

"The last time the state had a deficit like this we ended up shutting down state government. So it's hard to say, 'Gosh, it worked really well,' " Schowalter said. "I'd like to do it better."

Senate Finance Committee Chairwoman Julie Rosen, R-Vernon Center, said frequent communication is essential.

"That is the biggest problem and hitch we continually have with the administration is the lack of communication," Rosen said.

Doty tackled deficits when he was Minneapolis Public Schools' chief financial officer. It was like a microcosm of the state, he said: They had to balance different needs across the city and clearly explain the rationale behind tough choices.

For the past year and a half, Doty worked on tax policy and public engagement as an assistant commissioner at the Revenue Department. It was a new role for the agency, and he wants to continue that work by following up on suggestions from people who have been left out of the tax and budget process in the past. He declined to give specifics ahead of Walz's budget plan.

A brighter forecast on Tuesday would make that goal easier.

After months of Minnesotans spending more than expected and generating extra sales tax revenue, COVID-19 cases have spiked. Walz recently shut down bars and restaurants for a month.

But Schowalter said the closures and latest surge in cases had only a slight effect on the upcoming financial projection. The national and state economies weren't expected to grow much during the last projection in May, and that's largely still the case, he said.

"The key assumption has always been until we eliminate COVID-19 our economy will have a hard time doing anything good," he said. "As dramatic and important as it feels today, that long-term picture doesn't change much."

State leaders have a $2.4 billion budget reserve they can draw on. During the last recession, Schowalter was cautious about using those saved dollars. For someone in his job, the ideal situation is to leave the reserve intact so the state always has cash on hand to deal with surprises, he said.

"But it's there for a reason," he added. "It's a rainy-day fund, and it's raining as hard as it possibly can right now."

Staff writer Torey Van Oot contributed to this report.

Jessie Van Berkel • 651-925-5044