What does the Coronavirus mean for Minnesota’s state finances?

A few weeks ago, it was widely thought that the big issue dominating the legislative session in St. Paul would be what to do with the forecast stimulus of $1.5 billion. Should we spend it or give it back to Minnesotans with tax cuts?

Well, that was then. Now, it is the Coronavirus which dominates state affairs, as it does across much of the world at present. One of its impacts will be to eliminate that surplus.

Today, the Senate Covid-19 Response Working Group met, and the meeting can be seen below:

Commissioner Myron Frans of Minnesota Management and Budget pointed out that responding to the Coronavirus would blow a hole in the state budget. Unemployment claims are up to 300,000 and these mass layoffs together with enforced shutdown of businesses have driven state government spending up and revenues down. This will mean a budget shortfall.

Next up was Dr. Laura Kalambokidis, State Economist, who explained that economic forecasts had turned very negative, with the economy set to contract sharply this year, with a high degree of volatility. Like Commissioner Frans, she advised us to look out for the quarterly economic report in early April.

MPR News reports:

The fiscal chaos stirred by the coronavirus is so worrisome that a new economic forecast will be ordered to get a better handle on the problem and clear the use of the state’s rainy day reserves.

Forecasts are normally prepared only in February and November, but:

There’s a practical reason to do a forecast sooner: Minnesota has more than $2 billion in its reserve funds, but the governor’s administration can’t access the money as it sees fit unless there’s a forecast deficit.

A simulation that MMB completed in recent days and has shared with top legislators compares the current situation to the last recession of more than a decade ago. The analysis, which was provided to MPR News, contains two scenarios.

In one, tax collections dropped at half the rate they did in the Great Recession that began late in 2007 and carried into 2009. Under that analysis, Minnesota’s income, sales and corporate taxes would fall by $1.5 billion.

Under the more-severe estimate in which the revenue loss is on par with that earlier recession, the drop in tax revenue would hit $3 billion. Given that Minnesota has a healthy reserve account to buffer its losses, the presumed shortfall would be less than the tax dip.

If the state’s finances are plunged into deficit, the requirement for a balanced budget means that there will be some very difficult questions about how to close that. In the space of a few weeks, Minnesota’s fiscal question has been flipped on its head: from ‘How do we deal with a forecast surplus?’ to ‘How do we deal with a potential deficit?’

John Phelan is an economist at the Center of the American Experiment.