Minnesota Legislative Update: Budget Forecast Released

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Authors: Donovan M. Hurd , David H. Johnson

The Minnesota Legislature is nearing the halfway mark of session. With the first policy deadline only two weeks away, House and Senate committees have accelerated bill hearings and have added evening meetings. On Thursday, the state’s February Budget Forecast was released. This forecast anticipates reduced revenues from the November forecast but still projects a roughly $1 billion surplus. This leaves legislators with a number of things to consider as they start crafting their own budgets over the next two months and initiating negotiations with Governor Tim Walz (DFL).

Budget Forecast Update

On Thursday morning, Minnesota Management and Budget (MMB) released the state’s February economic forecast. The forecast projects a $1.052 billion surplus. This is $492 million lower than the November forecast. MMB cites slower projected economic growth and lower observed collections compared to prior estimates as the reason for the reduced forecast. Revenues are down 0.4 percent, or $198 million, from the November forecast, validating predictions of legislative leaders for the past few weeks. MMB also noted a number of forecast risks that could negatively impact revenue for the remaining 28 months of the biennium including taxpayer response to federal tax law changes, slowing labor force growth and trade policy uncertainty.

The trend of slower growth is forecasted into the next biennium with projected spending outpacing forecasted revenue.

In response to the forecast, Governor Walz emphasized that this is not a recession but rather a slowdown of the economy and they will revisit the budget released last week and submit change orders to reflect the new forecast. Speaker of the House Melissa Hortman (DFL – Brooklyn Park) also cited the labor shortage as one reason she is looking to pass policies that support workers, such as paid family medical leave and paid sick time.

GOP leaders in both the House and Senate responded that it is an issue that the forecast is lower than the November projects. House Minority Leader Kurt Daudt (R – Crown) said the reason Minnesota is at this place is due to tax increases and spending increases. Both GOP leaders agreed that Governor Walz’s current budget proposal spends too much while increasing taxes. Senate Majority Leader Paul Gazelka (R – Nisswa) said the state needs to develop a budget proposal to live within their means.

The House and Senate will now turn to establishing budget targets, crafting their own budget proposals and moving these through the Legislature.

Capital Bonding

On Tuesday afternoon, Governor Walz announced his $1.3 billion bonding proposal at Fort Snelling’s Upper Post Veterans Community. This proposal includes investments of $345 million for transportation and transit, $300 million for higher education, $217 million for agriculture, environment and natural resources, and $150 million for housing. No local projects were included in his proposal.

During the press conference, Governor Walz cited the need for all $1.3 billion of the proposal, not just a portion, to be approved by Senate Republicans this year. The Governor said it would be “fiscally irresponsible” to put off these improvements for future years, referencing the urgent need to improve Minnesota’s failing infrastructure and the increased costs of delay. To buttress his case, Governor Walz pointed to historically low interest rates and said it would be “good business” to pass the bonding bill in 2019.

Senate Majority Leader Gazelka stated Walz’s proposal is “a good bonding bill for next year.” Republican legislators in both the House and Senate share the Majority Leader’s sentiment and are in opposition to the passing of Governor Walz’s bonding package this year. Traditionally, legislators on both sides of the aisle support large bonding bills in even years only, such as the $825 million bonding bill passed in 2018. Republican legislators have indicated they have no intention of breaking that tradition this year.

Governor’s Budget Proposals Heard in Committee

Following Governor Walz’s 2019 budget recommendations, a number of commissioners and deputy commissioners from state departments visited the Capitol this week to provide legislators overviews of the Governor’s budget.

During the House Health and Human Services Finance Division meeting on Tuesday, commissioners from the Department of Human Services (DHS) gave members insight on Governor Walz’s spending recommendation for DHS. Governor Walz recommended an investment of $274 million to the department in FY2020-21, a .68 percent increase from the base. Some notable proposed investments include $58.6 million for children and families, $45.0 million for long-term services and support, and $33.5 million for behavioral health. During the meeting, DHS commissioners cited Governor Walz’s aim to reduce disparity in public programs as the driving factor behind many of his DHS budget recommendations.

In the House Jobs and Economic Development Finance Committee, commissioners from the Department of Employment and Economic Development (DEED) and the Department of Commerce presented the Governor’s budget recommendations for their respective departments. For the Department of Commerce, Governor Walz recommended a substantial amount of the proposed investment in FY2020-21 for commerce system modernization, senior financial fraud prevention, and modernization of unclaimed property operating systems. The Governor also had numerous budget recommendations for DEED, including allocations for the Community Prosperity Grant Program and Minnesota Innovation Collaborative. The Community Prosperity Grant Program provides aid for projects in communities with populations under 5,000, while Minnesota Information Collaborative creates incentives for entrepreneurs.

Commissioners presented the Governor’s $157.54 million higher education investment request to House Higher Education Committee members on Wednesday. During the meeting, commissioners explained that the Governor’s proposed investments are designed to narrow equity gaps, meet workforce needs and increase affordability. An investment of $54.167 million, more than one-third of the proposed total higher education allocation for the biennium, is devoted to state grants that provide aid to lower-income students, which is a substantial increase over the prior biennium. Representatives also cited funding concerns of our state’s public universities despite both Minnesota State Universities’ and the University of Minnesota’s proposed base increases of 3.6 percent and three percent, respectively, for the biennium.