Minnesota and Ohio governors split on rainy day fund use for new budget gaps

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Minnesota must close a $2.4 billion budget hole after the COVID-19 pandemic put an end to the state’s long streak of budget surpluses.

The revenue hit has wiped out the $1.5 billion surplus projected in the state’s annual February forecast and revenues are now projected to fall by $3.6 billion while spending is anticipated to rise by several hundred million. That leaves the state with a $2.4 billion gap, Minnesota Gov. Tim Walz and Management and Budget Commissioner Myron Frans announced Tuesday.

“Since February, economic conditions have dramatically weakened. Our economic outlook remains volatile due to the coronavirus,” Frans said at a news conference with Walz, state economist Laura Kalambokidis, and budget director Britta Reitan.

"We need to be cautious, targeted and focused on the choices we make to balance our biennial budget," said MMB Commissioner Myron Frans.

The state has $2.4 billion in a rainy day fund built up from years of surpluses and the revised projections give the state legal authority to now dip into that surplus to manage. The state also maintains a $350 million cash flow fund.

It is time to use some of the rainy day fund, Frans said, while cautioning against relying too heavily on the reserves. “We need to be cautious, targeted and focused on the choices we make to balance our biennial budget.”

Spending and cost structures must also be considered in tackling the deficit, he added.

Walz said all options remain on the table as lawmakers consider budgetary changes whether in the current session that ends later this month or in future special sessions expected later in the year. “There’s going to be shared sacrifice,” Walz said.

The state and its local governments received $2.1 billion from the Coronavirus Aid, Relief, and Economic Security to cover costs incurred in fighting COVID-19 but Walz said he is pressing federal lawmakers for additional aid to offset revenue losses for the state and its local governments.

General fund revenues of $45 billion are expected, down by 7.4%. The drop includes a 6.4% hit to individual income taxes due primarily to projected declines in wage and non-wage income, including capital gains and business income. General sales tax revenue will take a projected 11.2% hit. The corporate franchise tax is projected to fall by 13%.

The revised budget projections did not offer a view of the next biennium that begins July 1, 2021.

“It is not possible to accurately project state revenue and spending into the fiscal year 2022-23 biennium. However, it is likely that the negative impact on the state budget in the next biennium will be significant,” the report read.

Fitch Ratings and S&P Global Markets rate the state AAA and Moody’s Investors Service rates it Aa1 level. All assign stable outlooks.

Ohio Gov. Mike DeWine is taking a different approach when it comes to use of the state’s rainy day funds, at least for now, leaving Ohio’s $2.7 budget stabilization fund intact for now. Dipping into the fund would require legislative approval.

DeWine on Tuesday announced more than $700 million in budget cuts for fiscal 2020 that runs through June 30. The state operates on a two-year budget that runs through June 30, 2021.

The state had previously reported revenue estimates were up by $200 million over budgeted projections, but state fiscal results through April now project a $777 million deficit.

The cuts trim Medicaid spending by $210 million, reduce kindergarten through 12th grade foundation payments by $300 million and higher education by $110 million and trim $100 million in other state agency allocations.

“We believe that instituting these cuts now will provide the most stability moving forward, however I am greatly concerned about the cuts we must make in education. We have an obligation to our schools to give them as much predictability as we can, but if we don’t make these cuts now, future cuts would be more dramatic,” DeWine said.

The state previously ordered freezes on hiring, new contracts, pay increases, and promotions at all state agencies, boards, and commissions. Ohio and its local governments are receiving a total of $4.5 billion under CARES.

"I know that I have said that 'it’s raining,' but we do not want to tap into the rainy-day fund yet," DeWine said. "The rain is not a passing spring shower. It could be a long, cold, lingering storm, and we should not use the fund until it is necessary."

The state also maintains operating cash account that holds about $500 million.

April collections showed a $636 million decline in state income taxes and a $237 million hit to sales taxes. All taxes collectively declined an overall $867 million.

Ohio carries issuer default and general obligation ratings of AA-plus from Fitch and S&P and an Aa1 from Moody’s Investors Service.

Missouri lawmakers are currently debating a fiscal 2021 budget that cuts spending by about $700 million. The House passed its version and the Senate is debating its own version so the two will have to resolve differences by a Friday deadline. Gov. Mike Parson previously announced $180 million in expense cuts to keep the fiscal 2020 budget balanced. The state and its local governments received $2.4 billion under CARES.

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