State revenue and cash flow steady, but economic worries remain

October 12, 2011

First the good news. The State of Minnesota started out the first quarter of the FY 2012-13 biennium with higher-than-expected revenue. From July through September, the state collected $59 million above estimates, up about two percent from earlier projections, according to the state’s October 2011 Economic Update. Corporate income tax, individual income tax and sales tax receipts all exceeded forecasted levels.

While revenue is up slightly, Minnesota’s cash reserves remain low. Still, state financial experts reported at a legislative hearing last week that they do not expect that it will be necessary to take any administrative actions or turn to short-term borrowing in order to cover our bills during the current fiscal year. (State leaders took out a line of credit in 2010, just in case.)

The national economy continues to be the problem. The October Update reiterated concerns raised earlier this summer:

While most economists expect the U.S. to avoid a recession, real GDP growth over the next six to nine months is expected to be very slow…Forecasters’ major concern is that the tepid growth rate now seen likely through at least mid-2012 leaves the expansion dependent on the absence of extraordinary events and the avoidance of policy errors both in the U.S. and in the Eurozone.

State economist Tom Stinson says Minnesota will likely face a new deficit for the current biennium, MPR reported. When Governor Dayton and the Legislature made FY 2012-13 budget decisions, the national economy was expected to grow at a somewhat respectable pace – 3.2 percent growth in GDP in 2011 and 2.9 percent in 2012. The latest GDP growth estimates have been cut by about half, to 1.7 percent for 2011 and 1.4 percent for 2012. The steep drop in economic growth means a decline in state revenues, which increases the likelihood that a deficit will open up within the current biennium.

Federal and state leaders need to steer a careful course. This subdued level of economic growth assumes Congress will extend the expiring employee payroll tax cut into 2012, a proposal that is part of President Obama’s jobs bill. Stinson said last week that if Congress fails to extend the payroll tax cut, it would further reduce GDP growth expectations by one percent in 2012, resulting in a virtually no-growth scenario nationally.

We’ll know whether the state will face a deficit in the current biennium – and the size – when Minnesota Management and Budget releases the November Forecast. And on January 24, the Minnesota Legislature will reconvene. Given the current fiscal instability, policymakers need to focus on supporting Minnesota families struggling in the slow economy, and investing in the future economic health of the state.

-Scott Russell


State’s revenues on track, but forecast looks grim

September 13, 2011

The odds are increasing that Minnesota state government will face a new revenue shortfall when the Legislature reconvenes in February. This July, the Governor and Legislature passed a balanced budget for the FY 2012-13 cycle, which runs through June 30, 2013. But a weakening economic outlook raises the prospects that a mid-biennium shortfall will open up.

Minnesota Management & Budget (MMB) recently released its July/August Economic Update, providing current state revenue numbers and a look at economic trends. Minnesota closed FY 2011, which ended on June 30, 2011, $355 million, or 2.3 percent, above what was projected in the February Forecast. However, this is not a sign of an economic turnaround. More than 60 percent of that increase came by collecting Wisconsin income tax reciprocity payments earlier than expected (in FY 2011 instead of FY 2012.)

For July and August, the first two months of FY 2012, MMB said revenues “appear on track.” Although revenues are down $93 million, or 4.4 percent below the February Forecast, part of that resulted from collecting Wisconsin income tax reciprocity payments in FY 2011. Further, the state government shutdown in the first half of July slowed tax collections.

The big concern is for the future. Global Insight, Minnesota’s macroeconomic consultant, has downgraded its economic forecast. Its September baseline forecast predicts that the nation’s economy, as measured by GDP, will grow 1.5 percent in 2011 and 1.8 percent in 2012. That is down from its February baseline forecast that anticipated GDP growth of 3.2 percent in 2011 and 2.9 percent in 2012. Such an economic slowdown would mean that more Minnesotans will be struggling, and the State of Minnesota would collect less revenue than it budgeted for in the coming months.

Global Insight gives a 50 percent probability that its baseline forecast is correct. It gives a 40 percent probability that a recession will start this fall, saying the U.S. economy is “dangerously close to stall speed.” According to the July/August Update:

Global Insight’s concern is that in its current weakened state the U.S. economy is unlikely to be able to withstand a policy mistake in either Washington or the Eurozone. And, given the counterproductive political stalemates observed in both Europe and the U.S. in recent months, the risk that policy adjustments will not be made quickly enough to avert another economic downturn is high.

Minnesota faces a potentially weakened economy in a tenuous situation, the result of both economic forces and political choices. Minnesota came through very difficult budget negotiations this year without finding a long-term solution to funding our state’s priorities. Further, Congress spent months stuck on what should have been a routine vote on the debt ceiling and did not move a jobs agenda.

MMB will issue another Economic Update in October, with new revenue numbers. Its November Forecast will provide a more comprehensive picture based on a more current economic forecast and updated revenues and spending estimates, and determine if the Governor and Legislature will need to act in 2012 to bring the budget back into balance. If so, policymakers will have the opportunity to take a balanced approach, including raising revenues, that prevents deeper job losses, maintains the services that Minnesotans are turning to during these tough times, and lays the groundwork for our future prosperity.

-Scott Russell

State revenue inches up, but economic growth estimates cautious amid global uncertainty

April 20, 2011

State revenues inched up in February and March, increasing $32 million or 1.4 percent above projections, according to the state’s April 2011 Economic Update. Income tax collections created most of the gain, increasing 3 percent more than February 2011 Forecast estimates. Minnesota Management and Budget notes that this gain “appears to be attributable to larger than projected bonuses, not stronger than projected general wage growth.”

The slight revenue increase is good news, but there is some caution as well. Global Insight, the state’s macro-economic consultant, has downgraded expectations for national economic growth in 2011, saying the economic expansion should continue, “but not as strongly as hoped.” According to the April Economic Update:

There have been several major shocks to the global economy during the first three months of 2011. Those shocks have left forecasters less optimistic about U.S. economic growth than they were as little as two months ago. No one expects another recession … But, the combination of geo-political unrest through much of the Mid-East, materially high oil prices, a disruption to global supply chains caused by the Japanese earthquake and tsunami, and the most recent developments in the European sovereign debt saga, have led most forecasters to cut-back their outlook for the first half of 2011.

Global Insight gives a 60 percent probability that the economy will track as projected in their April forecast, and more optimistic and more pessimistic (recession) scenarios each get a 20 percent probability.

The increased revenue collections in February and March don’t change the challenge before policymakers as they work to pass the budget this session. The Governor and Legislature will continue to use the February Forecast as the official budget-balancing yardstick, as it is a more comprehensive analysis including projections for both revenues and spending. The April Economic Update only considers how revenue collections are tracking with forecast figures.

As the policymakers head into their final rounds of negotiations, the economic uncertainty underlines the importance of finding long-term solutions to the state’s budget shortfalls and continued investment in the state’s economic health.

-Scott Russell

State’s economic picture shows some improvement

January 13, 2011

Minnesota’s economic prospects got an upgrade in the state’s January 2011 Economic Update, released by Minnesota Management and Budget on Tuesday.

The change in the economic projection is a result of the December federal tax compromise, which provided more economic stimulus than forecasters had anticipated. Most economists had already assumed the deal would include extensions of the Bush-era tax cuts and Unemployment Insurance benefits and had factored those into their forecasts. However, they had not expected the 2 percentage point reduction in workers’ Social Security payroll tax (on the first $106,800 of wages).

This payroll tax reduction will add $120 billion to workers’ take home pay in 2011, the Center on Budget and Policy Priorities said. It gets money into the economy quickly by putting it in the hands of those most likely to spend it right away. Forecasters anticipate that this will create a “substantial boost” in consumer spending.

The result is a slightly more optimistic economic outlook for 2011. The estimated Gross Domestic Product growth for FY 2011 is now projected to be 3.1 percent, up from the 2.5 percent forecasted in November, according to Global Insight, the state’s national economic consultant. The GDP growth for FY 2012-13 is estimated at 3.0 percent, up from 2.7 percent.

As a result of the projected economic growth, Global Insight has removed the prospect of a second recession from its economic projection. In November, Global Insight said there was a 20 percent chance of a double-dip recession. Now it projects that, at worst, there is a 15 percent chance of one negative quarter in 2011.

The January Economic Update provided additional information on state revenue trends for November and December. Although state job growth numbers have been disappointing, state revenues still came in $28 million above forecast, a one percent increase. Both income and corporate taxes were three percent above expectations, while sales tax collections were down slightly.

Governor Dayton will base his budget proposal on the November Forecast, which remains the official yardstick. It projects a $6.2 billion deficit for FY 2012-13. The next official forecast, which will reflect these improvements in national economic projects, will be released later in February. If the economy follows the forecast and revenues improve, it could translate into a lower projected deficit for FY 2012-13.

It’s important to remember that these revenue estimates are preliminary.

-Scott Russell

Bad news and really bad news about Minnesota’s financial situation

July 12, 2010

First, the bad news. Despite some optimism from the Governor at the end of the 2010 Legislative Session that the cash flow situation for FY 2011 was manageable, the latest news from Minnesota Management and Budget (MMB) shows that the state’s cash balance in the statutory general fund will dip to near zero as early as October. The cash balance will remain near or below zero until May. That’s clearly well below the minimum workable cash balance of $400 million.

The administration is proposing some options to help manage the cash flow situation which could be implemented as soon as this August. Recommendations include:

  • Deferring $83 million in K-12 payments until May 2011.
  • Deferring $89 million in payments to the University of Minnesota until June 2011.
  • Delaying $221 million in sales tax and corporate tax refunds over $5,000 by up to six months (all would be paid out by January 2011).
  • Delaying $110 million in payments to health plans and county-based health services in October and November (all would be paid by December 2010).

Unfortunately, these actions wouldn’t be sufficient to completely resolve the cash flow problem that persists through next spring. The state is also pursuing a line of credit option to help manage those shortfalls.

And now for the really bad news. The latest economic update released by Minnesota Management and Budget shows the state’s revenue collections for the current biennium are below expectations. We are closing FY 2010 (which ended on June 30) with a $99 million revenue shortfall. This shortage will be absorbed by the $6 million policymakers left on the bottom line and the $266 million in the cash flow account. As a result, there is no deficit for the current biennium. However, if there is another shortfall of more than $173 million before the end of FY 2011 (that’s what will be left in the cash flow account), then policymakers may need to solve another budget deficit before June 30th. (As a side note, the cash flow projections mentioned above take into account the $99 million shortfall.)

The future doesn’t look any rosier. Remember that the actions of the 2010 Legislative Session left the state with a $5.8 billion deficit for the FY 2012-13 biennium, $6.9 billion if you include inflation. Although the U.S. economy is showing consistent growth, the economic update points out that, “a crisis of confidence is emerging now as Americans begin to recognize how slow this recovery is likely to be.” Although most economists do not fear another recession, real GDP growth is now expected to average 2.9 percent over the next biennium, not the 3.5 percent initially projected. As a result, “it appears that the 2012-13 budget gap is likely to be materially wider than end-of-session estimates.”

State policymakers may soon be regretting that they did not take more action to reduce the FY 2012-13 deficit during the last legislative session. A slim ray of hope could come from the federal government. Congress has been debating for months whether to provide states with additional fiscal relief. This latest financial news clearly shows that the crisis in the states continues and federal assistance is critical to preserving core public services and sustaining economic growth.

-Christina Wessel

State’s October Economic Update says the recession is over, but times are still tough

October 13, 2009

In my last post, I talked about what kind of state budget deficits lie ahead, and said we would have more up-to-date information when Minnesota Management and Budget released their October Economic Update. That came out on Monday, and I thought this was worth quoting:

…[T]he longest and deepest recession since World War II almost certainly has come to an end…Forecasters no longer are debating when the recession will end. Their attention has turned to the question of what kind of recovery should be expected and how long it will take to regain pre-recession levels of output and employment.

The answers are sobering.

Few forecasters expect to see increases in U.S. payroll employment until after the first of the year and most expect the unemployment rate to move higher until early summer…Payroll employment is not expected to again reach pre-recession levels until 2012 and the U.S. unemployment rate is not expected to dip below 8 percent until 2013.

What does that mean for the state’s budget, past, present and future?

FY 2008-09, the biennium that just ended: Mid-July analysis estimated that FY 2009 would end with a $188 million surplus. That $188 million carries forward and helps balance the FY 2010-11 budget. The October Economic Update reports that general fund revenues came up $142 million below projections for FY 2009.

FY 2010-11, the biennium we’re in: In July, a balanced budget for FY 2010-11 was projected. However, these October figures estimate that we started FY 2010 with $142 million less than expected. The October Economic Update further finds that general fund revenues for the first quarter of FY 2010 were down $52 million, or 1.7 percent, from projections.

The Economic Update notes that IHS-Global Insight, the state’s economic consultants, is projecting a smaller decline in GDP in 2009 than previously. However, Global Insight is now projecting slower GDP growth in 2010 and 2011. Given that, I would not be surprised if there is an adjustment in the underlying economic model with lower economic growth when the November Forecast comes out, and as a result, a deficit for FY 2010-11. But that is speculation at this point.

FY 2012-13, the biennium to come: In July, the FY 2012-13 deficit was estimated by Minnesota Management and Budget at $4.4 billion. If the November Forecast does indeed include lower economic growth projections than previously modeled, a larger deficit for FY 2012-13 seems likely.

But again, take this with all the necessary caveats, cautions and grains of salt – these are figures based on one quarter of preliminary revenue data for FY 2010. A more comprehensive analysis awaits us when the November forecast is released.

-Nan Madden

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What kind of state budget deficits lie ahead?

September 28, 2009

We’ve gotten several questions lately about what kind of deficits the state is anticipating. That’s actually a complicated question, so let’s break it down by biennium.

FY 2008-09, the biennium that just ended: Mid-July analysis that took into account the decisions of the 2009 Legislative Session and the Governor’s unallotment plan estimated that FY 2009 would end with a $188 million surplus. That $188 million carries forward into FY 2010-11 and helps balance that budget. But the July Economic Update from Minnesota Management & Budget reports that preliminary end-of-year figures came up $150 million below projections for FY 2009 (which ended June 30, 2009). But those numbers are just preliminary – we’ll know more about how FY 2009 really ended in the next economic update in October. Bottom line: the surplus for FY 2008-09 may be smaller than originally anticipated.

FY 2010-11, the biennium we just started: After taking into account both the decisions of the 2009 Legislative Session and the Governor’s unallotment decisions and line-item vetoes, the state was expected to have a balanced budget for FY 2010-11 – meaning no surplus or deficit by the end of the biennium. However, I just mentioned those preliminary close-of-09 figures, which suggest that we may have started the FY 2010-11 biennium with $150 million less than we expected. However, other data show a more positive direction. Preliminary August figures show that tax revenues for FY 2010 so far (July and August) were $40 million better than the projections. As always, budget officials warn us not to read too much into any one month’s figures – there are all kinds of timing issues that can throw things out of whack – so this may or may not signal a trend.

FY 2012-13, the biennium to come. After all legislative and gubernatorial actions were over, the deficit for the FY 2012-13 biennium was estimated to range somewhere between $4.4 billion and $7.2 billion. This range reflects the uncertainty about the impact of the Governor’s unallotment decisions and line-item vetoes in the next biennium: do those shifts and cuts continue into the future, or do things go back to the way they were?

Here’s how we identified those areas of uncertainty in our analysis of the 2009 session and unallotment outcomes:

  • If delayed payments to school districts are fully repaid, the deficit would increase by up to $1.8 billion.
  • If General Assistance Medical Care (GAMC) – a public health care program for very low-income adults without children – is restored, the deficit would increase by up to $890 million. This funding was line-item vetoed by the Governor and cut further under unallotment.
  • If the impact of inflation is taken into account, the deficit would increase by $1.4 billion.
  • If the economy does not improve as was forecasted back in February, the deficit could increase by an unknown amount. The July update notes that Global Insight (the state’s national economic consultants) is now modeling slower economic growth than they did in February. That would lead one to expect that, all things being equal, the FY 2012-13 deficit is likely to grow.

So, the low-end $4.4 billion figure assumes that $1.2 billion of the school funding shift is paid off and funding for GAMC is not restored in FY 2012-13. The high-end $7.2 billion figure assumes all of the school funding shift is paid off , funding for GAMC returns to normal in FY 2012-13, and the impact of inflation is included.

Bottom line: It’s really too soon to tell whether there’s a deficit opening up for FY 2010-11 and how big the deficit in FY 2012-13 will actually be.

We’ll have a better idea of what is happening we get the final FY 2009 figures in the October Economic Update, as well as a few more months of FY 2010 economic activity and tax receipts info. And of course, the big enchilada – including an updated economic model and updates in projected expenditures – comes in the November forecast.

-Nan Madden

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