Minnesota warns of potential $4.7B FY22-23 coronavirus blow ahead of billion dollar sale
Minnesota’s projection of a $2.4 billion gap in the current budget cycle remains on target, but another $4.7 billion gap looms in the next two-year budget as the toll mounts for the COVID-19-induced economic shutdown and recession.
Minnesota Management and Budget laid out the grim budget news ahead of a $1.2 billion new money and refunding general obligation sale set for a competitive sale Aug. 11.
The state in May had offered an interim budget projection warning the pandemic’s economic impact has erased a $1.5 billion expected surplus in the current biennium that runs through June 30, 2021 and would leave a $2.4 billion hole. The state did not release an update on fiscal 2022-2023 projections at the time.
With the approaching bond sale requiring the state’s best estimates for disclosure purposes, MMB Commissioner Myron Frans on Friday presented an update on revenues and expenses expected in the next biennium that warned of the $4.7 billion hole.
“Today’s revenue update gives us more information about the budget problems we need to solve during this current biennium and the next,” Frans said. “The planning estimates for 2022-23 will help decisionmakers begin the budget planning process as we continue to respond to the pandemic.”
Frans cautioned the estimates for planning purposes through the next biennium remain guesswork given the volatile impact of the pandemic on the state’s economic health.
The state is among those pressing Congress and President Trump for direct aid to make up for tax losses in the relief package currently in the works.
“We have challenges ahead, but we will continue to make smart fiscal decisions and request aid from the federal government to help our state manage this difficult time,” Gov. Tim Walz said in a statement.
The state releases monthly revenue updates and two formal forecasts that guide budget decisions — a February forecast released in early March and a November forecast released in early December.
The state’s February forecast had projected a modest structural balance in the next biennium. “With this update, the next biennium is no longer structurally balanced,” Frans wrote. Revenues are now estimated to total $46.6 billion, 3.3% higher than the current biennium, while expenditures grow 5.5% to $51.4 billion.
“The planning estimates for the next biennium should be used with caution,” Frans said. Estimates of tax liabilities and base levels for other revenues could change before the biennium begins and deviations from assumed growth rates for factors affecting revenues also will impact the forecast.
“Economic conditions remain extraordinarily volatile. Should the economy grow at a different rate than projected, or should some volatile income source such as capital gains or corporate profits fall well outside of projections, the revenue outlook for FY 2022-23 will change,” Frans said.
Frans previously said the state intends to use a portion of its nearly $2.4 billion rainy day fund built up from years of surpluses, but he has cautioned against relying too heavily on it. The state also maintains a $350 million cash flow fund.
The state competitively sold deal will offer $506 million of new money GOs in three tranches including $333.4 million of various purpose bonds, $152 million of state trunk highway bonds and $20.7 million of taxable various purpose paper.
The deal’s nearly $700 million of refunding debt offers $128.6 million of various purpose refunding bonds, $163.5 million of state trunk highway refunding bonds, $224.8 million of taxable various purpose refunding bonds, and $181 million of taxable state trunk highway bonds.
Ahead of the sale, Fitch Ratings affirmed the state’s AAA GO rating and Moody’s Investors Service affirmed its Aa1 rating. Both assign a stable outlook. S&P Global Ratings had not published a report on the deal. It rates Minnesota at AAA and stable.
Fitch said it anticipates Minnesota will address its projected revenue shortfalls by relying on federal coronavirus relief funds to cover eligible costs and replace reductions in state aid to local governments, as well as by potentially delaying some planned capital projects and enacting hiring and salary freezes for state employees.
The state received $2.2 billion in direct aid for COVID-19 costs in the CARES Act signed March 27. The state directed $1.35 billion to local governments for their response costs, to provide small-business grants and cover coronavirus testing and supplies.
As in prior recessions, the state could also delay the distribution of state aid to local government units such as higher education institutions and K-12 schools into the next fiscal year or utilize a portion of the state's current $2.4 billion rainy day fund balance to backfill some expenditures.
Moody’s said its rating reflects the state’s “recent economic expansion and revenue growth that allowed the state to build reserves since the last recession, creating a strong buffer that will help it manage the current coronavirus-induced downturn.”
“Although the state has a history of politically fraught budget negotiations, they have not yet caused material disruption during the current budgetary adjustments,” Moody’s said.
The political divide in the legislature with the Democratic-Farmer-Labor Party holding a majority in the House and the GOP holding a Senate majority most recently was on display with the failed passage of a $1.8 billion capital plan during a special session last month. Walz is a DFLer.
The state has $6.7 billion of GOs outstanding.