March 3, 2013

Forecast Shows Small Improvement

The release of the February 2013 Economic Forecast means legislators can begin in earnest the challenge of setting a budget for the FY 2014-15 biennium. The good news from the forecast is that Minnesota’s economy is moving in a positive direction. However, the state continues to face structural deficits, meaning we haven’t found a sustainable way to meet the state’s needs and make investments that are critical for our future economic success.

More good news for the FY 2012-13 biennium. There is a $295 million positive balance for the current biennium, FY 2012-13. Of that, $290 million must be used to continue to buy back the school payment shift, bringing the total amount that has been repaid to schools to $1.9 billion, with $801 million left. The remaining $5 million of the positive balance will go into the state’s budget reserve, bringing the balance to $649 million.

Next biennium improves, but deficit remains. The November forecast predicted a $1.1 billion deficit for the FY 2014-15 biennium. Thanks to a combination of improved revenues and lower-than-anticipated spending, that deficit has been reduced to $627 million. This still leaves policymakers with the challenge of addressing the deficit without cutting vital services and undermining future economic growth.

After considering inflation, structural deficit continues in FY 2016-17. Although the economic improvements we see in the near future are expected to carry over into FY 2016-17, the state is still anticipating a nearly $1.5 billion deficit after including the impact of inflation.

There is always some level of uncertainty inherent in developing a forecast. In recent years, that task has become even more challenging due to unprecedented economic and political conditions. This forecast takes a cautious road, presuming that Minnesota would experience a “modest shock” from federal sequestration, but expecting Congress to eventually agree to a more targeted deficit-reduction plan. There is a 20 percent chance of sequestration cuts continuing the whole year and slowing economic growth, but still no strong risk of a recession.

We can all breathe a little sigh of relief that Minnesota’s economy is looking better, leading to an overall improvement in the state’s fiscal picture. But this is an important moment for policymakers. As we recognized yesterday, the Governor’s budget focuses on the goals of raising revenues fairly – ending the cycle of deficits, gimmicks and deep cuts – and recognizes the importance of securing future economic growth by investing in stronger, healthier and more educated communities. The Legislature should also pursue these goals as they begin to assemble their budget proposals.

During a press conference, Governor Dayton announced that he will release his supplemental budget during the week of March 11, which will include an increase in the property tax credit for low-income renters