ST. PAUL, Minn. — Minnesota may face a $188 million budget deficit next year but that shortfall could grow, shrink or dissolve entirely when lawmakers return to the Capitol in February, according to an economic forecast released Tuesday.
State officials blamed slowing economic growth nationwide and spending increases and tax cuts in the Legislature’s new two-year budget for the expected deficit, which would be Minnesota’s first in more than four years. But with an economic update expected in early March, Gov. Mark Dayton and lawmakers appeared content to wait before plotting a solution.
Much of the final size of any deficit — or surplus — would hinge on the federal government.
The state’s economic consultants assumed Congress would not pass a tax bill in the coming year, though the U.S. Senate recently passed $1.5 billion in tax breaks that could provide an economic jolt and unleash some unexpected tax revenue for the state. And the forecast left Minnesota on the hook for $178 million in funding for the Children’s Health Insurance Program (CHIP), at least until Congress reauthorizes and pays for the program.
While both actions could shrink Minnesota’s budget gap, it could also grow larger. The forecast doesn’t factor in nearly $120 million in operating funding for the Minnesota House and Senate, which Dayton vetoed this spring but vowed he’d approve next year after an ugly a protracted legal battle with top Republicans throughout the summer and fall.
Altogether, the uncertainties left top state officials with a more questions than answers about Minnesota’s finances.
“Some of the questions surrounding this forecast will be answered during the next three months,” Dayton said.
Dayton isn’t making concrete budget plans until that financial picture becomes clearer next year. But he indicated any budget hole would require “modest corrections” to the state’s new $46 billion budget, which boosted spending on public schools and infrastructure repairs while cutting taxes by roughly $650 million over the next two years.
Top Republicans, including Senate Majority Leader Paul Gazelka, dismissed the projected deficit as “obsolete on arrival,” given the assumptions about a tax bill and CHIP that could soon be out of date. They urged patience until a second update is delivered before worrying about a potential deficit.
“It created a number that’s a little lower than it needs to be,” Gazelka said.
The governor and his top budget official, Minnesota Management and Budget Commissioner Myron Frans, cautioned against tapping the state’s $1.6 million budgetary reserve to fill a remaining budget gap.
“They are meant to be used in times of economic downturn,” Frans said. “Today’s forecast is more of a mist than a downpour.”
Still, Frans called the projected red ink a “reality check” for the state, the result of a mix of factors including increased government spending, lower-than-expected tax collections and signs of slowing national economy. Laura Kalambokidis, the state’s economist, said slowing economic growth “makes the economy more vulnerable to shocks” and warned that the post-recession recovery could sputter out after nine long years.
Dayton is entering his final year in office in 2018, looking to cement his legacy of boosting early childhood education options and improving the state’s water quality. And lawmakers are facing major questions about financing the state’s array of health care offerings when they return on Feb. 20.
But beyond the fiscal questions and constraints, Dayton and Republicans who control the Legislature will enter 2018 with relations at an all-time low after a long and expensive legal battle over Dayton’s decision to zero out House and Senate operating budgets. The Minnesota Supreme Court ruled that veto was constitutional last month.
Dayton stressed the need for both sides to repair their relationships in the coming months.
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