Minnesota Legislative Update: Budget Deficit Projected

As expected, Minnesota Management and Budget (MMB) released an updated budget projection this week predicting a budget deficit of $2.426 billion for the current biennium. This projection is an approximate $4 billion swing from the $1.5 billion surplus projected when the legislature convened in February. The projected difference is due to $3.6 million less revenue and $391 million increased spending. The legislature will have ten days before it adjourns to determine whether and how to respond to this projection.

As they move closer to adjournment, Senators and Representatives have been holding informal meetings to discuss and agree to provisions for omnibus and capital investment bills. Because of logistical challenges associated with COVID-19 legislators are working to limit floor amendments. Few, if any, conference committees are expected. On May 4, all four caucus leaders reached an agreement requiring agreements on all legislative issues by midnight on Saturday, May 9. Issues unresolved by then will be considered at an impasse and may be delayed until any future special session or the 2021 legislative session.

Starting next week, Senate members were told to plan on meeting daily until the end of session. Remaining legislative business during the regular session include a bonding bill, a tax bill and a supplemental budget. House and Senate bonding proposals are expected next week.

The legislature is required to adjourn on May 18. One or more special sessions to address state government impacts of COVID-19 are now a possibility.

Budget Deficit Projected

MMB’s updated projection of a $2.426 billion budget deficit was prefaced with a number of unknowns impacting the accuracy of the projection and hampering the legislature and Governor Walz in their efforts to meet constitutional responsibilities to balance the state’s budget and support continued COVID-19 response efforts. These unknowns include the path of the pandemic, levels of consumer and business confidence, the number of businesses that survive, financial market volatility, the impact of fiscal and monetary policy, federal support levels, and revenue delays due to tax deadline extensions. Unlike other MMB forecasts, this projection did not consider economic impacts to the next biennium.

The updated projection provides Governor Walz, after consulting with the Legislative Advisory Commission (LAC) authority to utilize the state budget reserve to address the budget deficit. The state budget reserve is approximately $2.4 billion. MMB is currently unwilling to use the entire budget reserve to resolve the current deficit, as significant uncertainties remain in the budget projection and shortfalls may persist in future budget years.

The updated budget projection also opens the possibility of unallotment once the entire budget reserve is depleted. The power of unallotment has only been used six times in Minnesota history.

The Commissioner of MMB is granted authority to reduce general fund appropriations after the following occur:

• A balanced budget has been enacted in law.
• The commissioner has determined revenues will be less than originally anticipated.
• The governor has approved the unallotment.
• The commissioner has sought advice from the Legislative Advisory Commission.

The full text of the budget projection from MMB can be found here and the presentation can be found here.

Officials Respond to Budget Deficit

Governor Walz and legislative leadership responded to news of a state budget deficit in a variety of ways. MMB Commissioner Myron Frans and Governor Tim Walz emphasized that all budget options are on the table as the legislature and the administration work to balance the budget. Governor Walz stressed the importance of a bonding bill to invest in the state, additional federal support to meet budget challenges, and working with the legislature to ensure a thoughtful response.

House Speaker Melissa Hortman (DFL-Brooklyn Park) expects Minnesota’s financial situation to worsen, but believes the state can weather the downturn due to a decade of prudent financial management. She also noted that the budget reserve and cash flow accounts can cover the revenue loss while the full budgetary impacts become known and amounts of federal government aid becomes clearer.

Senate Majority Leader Paul Gazelka (R-Nisswa) responded that a holding pattern to deal with COVID-19 is not enough and, most importantly, that the economy needs to open. Regarding spending, Gazelka believes there can be no additional state spending unless reimbursement by the federal government occurs, and that state collective bargaining agreements need to be renegotiated to prevent layoffs from budget shortfalls. Senator Gazelka also urged caution regarding the size of the bonding bill because of debt payment obligations.

House Tax Proposal Released

The House DFL released their tax proposal Friday. HF3389, authored by Rep. Paul Marquart (DFL-Dilworth), provides approximately $31 million in relief for individuals and businesses including:

• Creating a new class rate and criteria for short-term rentals.
• Extending the exclusion from gross income for discharges of indebtedness for principal residence.
• Allowing distributions from 529 plans for student loans payments and certain apprenticeship expenses.
• Extending Empowerment Zone incentives.
• Allowing full Sec. 179 expensing for tax years 2018 and 2019 for like-kind exchanges.
• Establishing a “C-option” tax to allow pass-through businesses to file and the pay corporate franchise tax.
• Allowing excess TIF increment to be use for local government general fund expenses.

Chair Marquart indicated he has not received a target from leadership and that he has been working with the Senate to address differences in the omnibus tax bill proposals.

Concerns were raised regarding not providing full Sec. 179 conformity, not including any local option sales taxes, and that there is no exclusion from gross income for forgiven PPP loan amounts.

Governor Walz’s Executive Orders

Governor Walz has continued to use authority under the peacetime emergency declaration to sign a number of executive orders in response to COVID-19. This week saw the Governor announce Executive Order 20-51, which allows medical providers to return to elective surgeries and procedures beginning May 10 at 11:59pm.

Elective surgeries and procedures had been postponed since March 23 by Executive Order 20-09 in order to allow hospitals to preserve Personal Protective Equipment (PPE) and reserve ventilators for COVID-19 patients. Executive Order 20-51 requires providers to maintain significant PPE and critical equipment reserves in preparation for a rise in COVID-19 patients. PPE and equipment above those reserves may be used for elective surgeries and procedures.

In total, Governor Walz has issued 51 executive orders in response to COVID-19. A full list of executive orders issued in response to COVID-19 can be found here.

Important Dates

• May 15-16: GOP State Convention
• May 18: Legislature Adjourns
• May 30-31: DFL State Convention
• June 2: Candidate Filing Deadline for 2020 Election
• August 11: Primary Election Day
• November 3: General Election Day