Minnesota’s budget position and economic outlook has weakened since November, according the updated budget forecast released Thursday by the Minnesota Management and Budget (MMB). Commissioner Myron Frans reported that the $1.5 billion surplus reported in December has shrunk by $492 million. This leaves a $1.052 billion surplus for the next biennium.

More concerning is that the tails forecast (fiscal years 2022-2023) shows an $11 million deficit. None of these figures assume inflationary increases in state government services including the general education formula.

As a result of the Revenue Forecast, Gov. Tim Walz will present a revised budget to the Legislature in the next few weeks. In describing how he will revise his priorities, Walz said, “We must make investments that continue economic growth.”

Slower projected economic growth and lower collections result in a reduced revenue forecast throughout the budget horizon. A slightly lower expenditure forecast partially offsets the overall reduction to the projected balance.

What’s Changed?

Minnesota’s low unemployment, 2.8 percent compared to 3.9 percent nationally, and over 150,000 job vacancies is part of the slower growth story. Many Minnesota employers aren’t able to expand their businesses due to workforce shortages and that’s an impairment to economic growth. Every sector of the state’s economy, including education, knows the realities of this tight labor market.

What’s Next?

The tightening state budget picture increases the level of difficulty to reaching a budget agreement by May 20. Like Gov. Walz, the House DFL will propose an increase to the gas tax for roads and bridges and a proposal to maintain the provider tax for public health care programs. The House DFL may go a step further and look for more tax revenue for the general fund to support early childhood, K-12 and Higher Education investments beyond the next two years.

The Senate GOP is standing on the tax increase brakes and will insist on budgeting within available revenues. Members will focus more narrowly on the next two fiscal years where surplus funds exist. They’re hoping this, among other issues, will be sufficient to make a successful 2020 re-election bid for the Senate majority and will sort out today’s tails budget at that time.

What’s the Impact on E-12?

What does all of this mean for the E-12 budget target? It’s unclear, but the Governor’s initial $733 million investment is a high water mark. The House DFL may try to come in higher, but the Senate will come in significantly lower than both.

Two years ago, the Senate GOP came to conference committee with $300 million compared to then Gov. Dayton’s $709 million plan. Education walked out of the 2017 budget session with a $535 million target, enough for 2&2 and a $50 million School Readiness Plus grant program that was funded for two years.

We’ll know the House and Senate E-12 targets closer to the end of March.