ST. PAUL — Minnesota lawmakers and Gov. Tim Walz are sputtering toward approving a state budget that will set a record for spending, but also a record for how much cash will go unspent.
Walz, along with top Republicans in the Senate and top Democrats in the House, have a general agreement for a two-year state budget that will total about $52 billion. That’s the first time the state will burst the $50 billion ceiling, and it compares to the current two-year budget of $47.8 billion. That feat is accomplished with no new taxes, and some tax cuts.
In addition, the plan calls for the state’s rainy day fund to swell to $2.4 billion — also a record. On top of that, the plan leaves $1.2 billion in federal relief funds unspent through 2025. And on top of that, in May, state tax receipts brought in an additional $1.8 billion above what had been forecast in the planning documents lawmakers were using to craft the current budget framework.
“Minnesota’s government has never had so much money,” noted Rep. Pat Garofalo, R-Farmington, who serves as the lead Republican on the Ways and Means Committee and is a member of the taxes committee. And he’s among some lawmakers who think the flushness of Minnesota’s accounts is misguided.
“People will try to couch it down, but it really is a story of two different Minnesotas,” Garofalo said. “In the government/big business sector, things are really going great. Look at the stock market. Now contrast that with small businesses who are trying to claw their way out of the pandemic.”
To be clear, some of the tax cuts and key aspects of new spending are likely to target those hurt most by the pandemic, although many details were unknown as lawmakers Friday were still hashing out details in secret for many aspects of the budget as a June 30 deadline approached.
For years, whenever Minnesota’s finances appear strong, Republicans have generally sought reductions in taxes or fees, while Democrats have generally sought to expand government programs — a fundamental difference in how the two parties approach governing.
The economy is in unprecedented waters as it emerges from an unprecedented pandemic that carried with it unprecedented government restrictions on commerce.
It’s also important to understand that while Minnesota might be flush at the moment, large piles of money are essentially one-time windfalls and not guaranteed into the future.
And Minnesota is hardly alone in such waters.
“We like not to overuse the word ‘unprecedented,’ but in this case, I think that’s an appropriate word to use in terms of the challenges of accurately forecasting what would happen to states and specifically state revenues from the federal government,” said Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers.
White, who leads a team that tracks state spending across the nation, said the roller-coaster narrative ever since the coronavirus pandemic hit can’t be overstated.
That narrative goes something like this:
Before the pandemic, the economy was growing, but states were increasingly being frugal about how they handled it. Many had been stung during the Great Recession, and a few states, including and especially Minnesota, had adopted specific policies and laws requiring larger cash reserves to handle unforeseen economic catastrophe.
The pandemic hit, the economy shut down, and everyone, including Walz’s budget team, predicted catastrophe.
To the surprise of many, the pandemic was catastrophic for some parts of the economy — think restaurants, tourism, travel — but had little effect on other parts, such as finance, while it was a boon for others, like online retail. Predictions and forecasts went out the window. Still, many states, including Minnesota, planned to dip into their rainy day funds to ensure that they wouldn’t have cash-flow problems.
This spring, when a clearer picture began to emerge of actual tax revenues, many states, including Minnesota, actually had much higher-than-expected income. At the same time, the federal government, under a new president and a different makeup of Congress, was pumping record-setting amounts of cash not just to citizens, but directly into the accounts of state governments. So those accounts became doubly flush.
To be clear, White says, as state governments stand today, they’re by and large actually still below where they were forecast to be under pre-pandemic forecasts. But they’re way above where they were forecast to be mid-pandemic.
For years, Minnesota, like many other states, suffered from budgetary whiplash whenever the state’s economy — and thus tax revenues and often needs for services — took unexpected turns. Under former Gov. Mark Dayton, with a Legislature often controlled by fellow members of the Democratic-Farmer-Labor Party, Minnesota sought to learn the lessons of the Great Recession.
In 2014, the state reformed its rainy day fund, setting a target at 4.8 percent of the state’s general fund and requiring a regular analysis of the state’s economic volatility. The process is unique among the nation’s states, and an analysis by the Pew Charitable Trusts the following year found it “the most rigorous” in the country.
The size of Minnesota’s rainy day fund is hardly the largest in America; such funds are all over the map. Nevada and Illinois, for example, have all but drained theirs, while Wyoming and North Dakota have funds that eclipse Minnesota’s as a percentage of their expenses. In fact, when the pandemic struck, state rainy day funds, when taken on the whole, were at record levels.
Minnesota’s has generally served it well. When the doom-and-gloom forecasts merged early in the pandemic, lawmakers and Walz essentially agreed to take a breath and see how things progressed. They could afford to because, even under the dire predictions at the time, the state’s rainy day fund, formally called its budget reserves, appeared to have enough money to weather the storm.
Some states weren’t so fortunate and had to scramble to make cuts, while others with economies based more in tourism and energy were forced to dip into their reserves to keep up with cash flow — something Minnesota wasn’t forced to do.
In the end, there is no national consensus on how big or small a rainy day fund should be. State government analysts often say the actual size of the fund depends on how predictable the state’s economy is, combined with the political and fiscal philosophy of state leaders.
Federal money and timing
In all, about $8.5 billion in federal COVID recovery funds have flowed into Minnesota state and local governments. Of that, some $2.8 billion has been designated for the state in largely unrestricted terms.
The specifics of those funds weren’t actually clear until early last month, creating a dilemma for leaders in a politically divided state — Democrats control the House and the governor’s office while Republicans control the Senate — working under a looming fiscal deadline.
As a result, Walz, a Democrat, House Speaker Melissa Hortman, DFL-Brooklyn Park, and Senate Majority Leader Paul Gazelka, R-East Gull Lake, agreed to just leave a big chunk of those funds to be dealt with in the future. That $1.2 billion in federal money will be allocated by the Legislature two years from now after a new round of elections that could tip the balance of power — and can be spent as late as 2026.
So while the state is flush with cash at the moment, many inside the Walz administration point to the wild ride of the past year in cautioning that any cushion for the future shouldn’t be scoffed at.