Supplemental budget proposals on the table, but very different priorities

As we finish up the last week of the state’s legislative session, the Legislature has passed their initial budget and tax bills, and now need to reach compromise agreements with Governor Mark Dayton.

In February, the state’s economic forecast projected a positive balance of $329 million for the current FY 2018-19 biennium. That provides some opportunity to make additions to the two-year state budget passed last year. In addition, a major pressing issue for policymakers this session is how to respond to the federal tax bill.

As policymakers move into final negotiations, they have taken different approaches. The governor allocates about half of the surplus to education, while the House and Senate make taxes their biggest priority.

Proposed General Fund Changes (FY 2018-19)
Governor Senate House Conference
Education $164 million $20 million $30 million $28 million
Higher Education $30 million $1 million $5 million $3 million
Health and Human Services -$40 million $23 million $10 million $18 million
Environment $3 million $0 $750,000 $0
Agriculture $200,000 $0 $250,000 $0
Public Safety $23 million $8 million $7 million $10 million
Transportation $36 million $14 million $101 million $58 million
Jobs and Energy $34 million $15 million $15 million $15 million
State Government $34 million -$17,000 -$7 million $0
Capital Investment $27 million $0 $14 million
Taxes -$12 million $171 million $107 million $140 million
Other Bills $27 million $28 million $46 million $27 million
Net Changes $327 million $280 million $329 million  
*A conference target for Capital Investment has not been released.

The governor introduced his proposed budget in March, in which his largest new investments were focused on education. He includes funding for safe schools and special education, as well as expanded access to pre-kindergarten. He more recently proposed emergency funding for schools through an increase the basic student formula. Dayton’s budget also includes investments in health and human services, including provisions to protect families from disruption in their child care, and maintains an essential funding source for affordable health care – the provider tax. Dayton also includes investments in other areas of the budget, like additional funding to expand access to broadband for thousands of Minnesotans.

The Legislature’s tax plan shares some important components with Governor Dayton’s tax plan – both would maintain parts of the tax code that protect families with children, seniors, and people with disabilities from state tax increases as a result of conformity. But they have important differences in how additional tax cuts are distributed. The Legislature proposes income tax cuts that leave out an estimated 1 in 5 Minnesotans, and provide the largest tax cuts to those with higher incomes. Dayton’s tax plan takes a more across-the-board approach, through a $60 per person tax credit and expanding the Working Family Credit, so families struggling to get by are included.The 2017 federal tax bill creates complexity and challenges for states, and a top issue in this session has been how to respond. While the federal legislation provides the largest tax cuts to profitable corporations and high-income individuals while adding to the nation’s debt, Minnesota can instead put everyday Minnesota families first while protecting the resources needed to fund essential services.

The Legislative tax plan is $140 million in the current biennium – over 40 percent of the projected FY 2018-19 surplus. Also concerning is that it contains cuts in income and corporate taxes that grow over time, but relies on some temporary funding sources to pay for these ongoing tax cuts.

The House also includes a large general fund target for Transportation, three-fourths of the proposed $101 million would be transferred to a fund that supports the state’s highways. The conference agreement of $58 million follows this value and overwhelmingly goes to roads and bridges and the state’s computer system for vehicle license plates (MNLARS).

Both the House and Senate make some investments like funding for safer schools and increased access to broadband in Greater Minnesota, but their investments often don’t go far enough to meet the needs of Minnesotans. For example, as we discuss in another blog, the House and Senate budgets make some important policy changes to make child care more accessible, but additional investment is needed to fully address the fact that 2,000 families are on a waiting list for child care.

Legislators and the governor are now in negotiations to reach agreement on tax and budget decisions for this session. We continue to urge policymakers to include a tax response that prioritizes those Minnesotans who were left behind in the federal tax bill and make targeted investments to support Minnesota families and communities.

-Clark Goldenrod

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Legislative tax bill needs improvement; is there enough time left to make the grade?

I’ll admit it – I was hoping for a relatively quiet 2018 Legislative Session in terms of tax policy. Then in December 2017, the federal government passed a wide-ranging tax bill that included large, permanent tax reductions for corporations, and a complex set of changes in the individual income tax. Because of the many ways that Minnesota’s tax laws connect with federal law, that put a big job in front of state policymakers.

The federal bill gave the largest benefits to profitable corporations and the highest-income households while adding on to the national debt. We’ve made the case that Minnesota should not mirror those mistakes, and instead Minnesota’s response to it should be grounded in Minnesota values of fairness and sustainability.

Federal conformity done poorly could raise state taxes on families with children in order to pay for tax cuts for others – that’s how it turned out in states such as Idaho and Utah. We’ve called for fiscal responsibility – recognizing that some of the potential additional revenues from conformity are temporary, and that it would be unwise to substantially undermine the state’s ability to raise revenues for education, health care, safe and thriving communities, and other public investments that Minnesotans expect. Minnesota is going to need those revenues if federal policymakers follow through with their proposals to dramatically reduce funding to the states, and whenever the next economic downturn inevitably arrives.

The Legislature’s tax bill (House File 4385) makes some important progress in meeting these goals, but falls seriously short in other respects. In particular, its tax cuts are unsustainable and leave out too many ordinary Minnesotans. These are some of the reasons that Governor Mark Dayton vetoed the bill this morning.

Some of our priorities for conformity are to protect families with children from state income tax increases and prevent cuts in Property Tax Refunds for seniors, people with disabilities, and families – both of which are potential consequences of the federal tax bill’s elimination of personal and dependent exemptions.

Fortunately, both the legislative tax plan and the governor’s proposal would maintain the value of these exemptions and refunds, at least initially. There’s also agreement to maintain the standard deduction, and allow Minnesotans to continue to take most itemized deductions that were available to them before the federal law’s changes.

All this adds up to most Minnesotans having about the same amount of income subject to state income taxes as they had before the federal law passed, instead of a patchwork of some paying more and some paying less.

However, the Legislature’s tax plan only temporarily protects Minnesotans from conformity-related tax increases. The Legislature would adopt a slower-growing measure called “chained CPI” to adjust the tax code for inflation. Deductions and exemptions, as well as the Working Family Credit, the Child and Dependent Care Credit, and other tax benefits, would be worth less compared to current law. The Department of Revenue estimates this change would raise Minnesotans’ taxes by $60 million in the next two-year budget cycle. Modest-income Minnesotans would pay more to help pay for tax cuts that provide little to no benefit to them.

One of the biggest points of contrast between the Legislature’s and the governor’s plans is how and to whom they would provide additional tax cuts.

In terms of individuals and families, the Legislature’s tax bill leaves out many Minnesotans and provides larger tax cuts to those with higher incomes. It would cut income tax rates in a couple of steps, ultimately lowering the tax rate by 0.1 percent in the first bracket, and by 0.2 percent in the second bracket. But an estimated 1 in 5 Minnesota taxpayers don’t have enough taxable income – after subtracting their deductions and exemptions – to see any benefit from these rate cuts. In contrast, a family of four earning about $180,000 or more would get the maximum tax cut – that’s an income that puts them in the highest-earning 10 percent of Minnesota households.

Dayton’s proposal provides its tax cuts more evenly. It would create a new $60 per person Personal and Dependent Tax Credit for individuals with incomes up to $140,000, and married filers with incomes up to $280,000. Unlike the Legislature, he ensures that Minnesota’s most struggling workers and their families are included in the tax cuts by expanding the Working Family Credit. The governor’s Working Family Credit expansion would benefit 329,000 Minnesota workers and families, who would see an average $160 tax benefit.

The legislative tax plan also cuts Minnesota’s corporate tax rate, on top of the 40 percent rate cut corporations received in the federal tax bill. It would cut the corporate tax rate by 0.7 percent by year 2020, and eliminate the corporate AMT, as well as reduce business taxes through other provisions. In the near term, these tax cuts are paid for through conformity provisions that raise business taxes. But these cuts are unsustainable, as they grow larger over time, and rely on temporary revenues to pay for permanent tax cuts.

The Department of Revenue calculates the cost of the income and corporate tax rate reductions to reach $570 million in FY 2022-23.

Other issues that are sure to be part of the negotiations between the Legislature and governor include Dayton’s proposal to reverse three tax cuts in the 2017 tax bill that grow over time (regarding the estate tax, tobacco taxes, and the statewide property tax paid by businesses) and provisions in the Legislature’s tax bill that preempt local governments’ decision-making authority.

There are only five days left in the legislative session. That’s not much time to reach agreement, but it is possible to put together a fair and sustainable tax plan that updates the tax code in ways reflecting Minnesota values, if there is the will to do so.

-Nan Madden

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Documentation requirements didn’t work in food assistance; let’s not make the same mistake twice

Minnesota has the opportunity to learn from its mistakes. Currently, Minnesota’s Legislature is considering new documentation requirements in Medical Assistance, Minnesota’s Medicaid program. The reality is we know how this turns out: many Minnesotans will likely lose health care and struggle to stay healthy enough to work.

This isn’t the first time Minnesota has required extra documentation to receive basic supports. In 2013, Minnesota implemented a documentation requirement rule in its Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps. This rule required that single adults without dependents demonstrate they work 20 hours each week, participate in job training, or work at an unpaid job for the government in order to receive assistance to buy nutritious food through SNAP. The SNAP rule has exemptions for people with a serious illness or disability.

Unfortunately, nearly 47,000 Minnesotans lost their food assistance within one year of starting the SNAP reporting requirements. In 2017, only 6,000 adults without children were able to buy nutritious food through SNAP under this rule, likely because so many people faced significant barriers to work or paperwork glitches that prevented them from using SNAP.

The people who are denied assistance to put healthy food on their table because of this rule face many barriers to getting and keeping a job. They include Minnesotans experiencing homelessness, struggling with addictions, dealing with the aftermath of intense trauma and PTSD; experiencing  literacy challenges; or lacking reliable transportation. All of the people who lost food stamps made less than $19,000 a year, and half of them had no income at all because of the significant barriers to employment they experience.

Minnesotans also lost food assistance because of problematic paperwork glitches. Some Minnesotans who should have been exempted still lost food assistance because counties were unable to process exemptions due to a lack of resources. Counties had thousands of mailed notices returned to them, meaning many Minnesotans lost assistance because they never even knew there was more paperwork to complete.

The reporting requirement proposal in Medical Assistance has a complex exemption system that Minnesota’s 87 counties would have to implement at great expense. In fact, a recent analysis by Minnesota Management and Budget indicates that counties will have to spend $284 million just in the first two years of implementation in order to handle the volume of new paperwork this rule would require. Failure to adequately fund these costs will likely result in people needlessly losing their health care. There is also no funding for employment and training services.

We can expect similar results from the proposed changes in Medical Assistance: fewer Minnesotans able to get basic necessities for survival. Last time it was food; this time it’s the ability to see a doctor or fill a prescription. Creating more barriers to health care is the wrong choice for Minnesota.

-Sarah Orange with special thanks to Jessica Webster from Mid-Minnesota Legal Aid Legal Services Advocacy Project for compiling the data and tirelessly advocating for Minnesotans who buy nutritious food through SNAP

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Add your voice: expand the Working Family Credit

With just days left in this legislative session, much is at stake as Minnesota responds to the federal tax changes passed last December. But the Legislature’s tax plan leaves out 1 in 5 Minnesotans who don’t earn enough to benefit from their bill’s tax cuts.

Join us in asking policymakers instead to make everyday Minnesotans a priority in this year’s tax bill by expanding the Working Family Tax Credit. Governor Mark Dayton’s Working Family Credit expansion proposal would benefit 329,000 Minnesota workers and families, providing an average tax reduction of $160.

The Working Family Credit makes our tax system fairer, supports work, and gets Minnesota kids off to a stronger start. It also reaches all parts of the state: 49 percent of Minnesota workers and families who receive the Working Family Credit live in Greater Minnesota and 51 percent in the Twin Cities metro area.

Two things you can do today:
Email your legislator.
Call Governor Mark Dayton. Thank him for his leadership on this issue and ask him to continue to make the Working Family Credit a top priority.

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Nibbling around the edges: the Legislature’s Health and Human Services proposals fail to fully address critical issues

With just over a week left in the legislative session, lawmakers have finalized their supplemental proposals for the state’s health and human services budget. Both the House and Senate proposals start to address important issues, such as child care, the opioid crisis, and abuse of vulnerable adults, but miss big opportunities to protect and expand affordable health care in Minnesota.

The supplemental budget gives lawmakers the opportunity to adjust the two-year state budget that was passed last session. The House and Senate health and human services budget proposals are comparatively small: the House bill has a net $67 million General Fund impact through 2021, and the Senate bill has a net $69 million General Fund impact.

The legislative proposals do include some important investments. First, both the House and Senate authorize family-friendly changes in Minnesota’s Child Care Assistance Program, including expediting the application process for homeless families; allowing continuous access to child care assistance for families that move into a county with a waiting list; making it easier for families transitioning off of Minnesota’s welfare-to-work program to retain access to child care; and increasing provider reimbursement rates. However, the federal funding these state proposals rely on won’t fully fund these child care improvements in the future. Additional state investment, such as what is included in the Governor Mark Dayton’s supplemental budget proposal, is necessary to fully address the child care crisis in Minnesota.

Additionally, both proposals include some new funding to address the ongoing opioid crisis. They also start to address the threats to vulnerable adults, though the Senate proposal is expected to move as a standalone bill.

These Legislative proposals also do not include solutions to ensure Minnesotans have affordable health care options in 2019 and beyond. Dayton’s supplemental budget proposal includes an important step to sustainably fund affordable health care by repealing the scheduled sunset of the health care provider tax, the largest state funding source for public health and affordable health care. However, the House and Senate would allow the sunset to go forward, and fail to address the more than $600 million annual shortfall that the state’s Health Care Access Fund will face starting in 2021.

Dayton’s MinnesotaCare buy-in option would allow people who are in the individual market the option to buy an affordable MinnesotaCare plan. This would provide more affordable health care choices for approximately 100,000 Minnesotans. This proposal is particularly timely, considering that health insurance premiums in the individual market are expected to increase in 2019. Neither legislative proposal includes the MinnesotaCare buy-in, and in the House finance proposal and the Senate tax bill would prohibit this option.

The House bill does seek to expand affordable health care options by permitting the sale of short-term, limited-duration health insurance plans. However, these plans fall short of meeting Minnesotans’ needs. The plans are not required to cover important services such as maternity care or substance abuse treatment, and they allow discrimination against people with pre-existing conditions.

While neither legislative proposal contains the harmful provisions heard earlier this session to take health care away from people who are unable to comply with burdensome paperwork requirements, this provision may move ahead as an individual bill before session ends on May 21. Estimates indicate that 25,400 people could be pushed off of their health care through Medical Assistance if this provision becomes law.

However, the House proposal places more barriers to seeing doctors through Medical Assistance and MinnesotaCare, and putting healthy food on the table through SNAP. A provision included in the House proposal is designed to double-check that Minnesotans are eligible for these supports through a third-party vendor. If a person is flagged by the vendor, it puts the person at risk of losing their health care or assistance to buy nutritious food. This double-checking will likely cause eligible Minnesotans to lose access to food and health care because of data entry errors or having an old address in the system.

Overall, the legislative supplemental health and human services budget proposals miss opportunities to help Minnesotans thrive. They fail to provide more affordable health care options, and only nibble around the edges of the opioid crisis, protecting vulnerable Minnesotans, and ensuring affordable child care is available around the state.

-Sarah Orange

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We’re hiring a summer research intern!

The Minnesota Budget Project is hiring a research intern who will make a significant contribution to our work on state immigration policy and economic trends affecting immigrants in Minnesota. This intern will conduct research and work with Minnesota Budget Project staff to produce analytic materials. The ideal candidate will have strong quantitative and data analysis skills.

The Minnesota Budget Project is an initiative of the Minnesota Council of Nonprofits that combines sound research and analysis with advocacy, engagement and communications strategies to support policies that expand opportunity and economic security to all Minnesotans.

This is a paid internship. Candidates who have the lived experience of moving to the United States are encouraged to apply. More information, including how to apply, is available on the Minnesota Council of Nonprofits website. The application deadline is Monday, May 21.

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House budget targets devote 2/3 of surplus to taxes, transportation

The Minnesota House of Representatives’ budget targets tell us how they propose to allocate the state’s projected $329 million surplus for FY 2018-19. The House targets put the bulk of the surplus toward tax reductions and transportation.

The targets are an important milestone in the budgeting process. They set the size of the House’s omnibus budget bills. Last year, policymakers passed the state’s FY 2018-19 two-year budget, so any budget decisions this year would be adjustments to that budget.

House General Fund Targets (net) FY 2018-19
Tax Cuts and Aids to Local Governments $107 million
Transportation $101 million
Education $30 million
Jobs and Energy $15 million
Health and Human Services $10 million
Capital Investment $8.9 million
Public Safety $7.1 million
Higher Education $5 million
Environment and Natural Resources $750,000
Agriculture $250,000
State Government -$7 million
Other Bills $51 million
Net Changes $329 million

Taxes get the largest piece of the projected surplus. The tax bill needs to respond to the federal tax bill passed in December. This was a sweeping and complicated piece of legislation, and since Minnesota’s individual income tax and corporate tax systems use federal tax law as their starting point, Minnesota policymakers have to decide how to respond to those federal changes. We have urged policymakers to honor Minnesota values, including treating taxpayers fairly, continuing to practice fiscal responsibility, and maintaining the revenues to sustainably fund the state’s priorities. Taking targeted action that prioritizes low- and middle-income taxpayers should be the goal.

Transportation is the second largest funding priority for the surplus. Traditionally, transportation has relied more on dedicated funding sources, rather than competing with schools, health care, and other priorities for general fund dollars.

Since the targets allocate most of the projected surplus toward taxes and transportation, they leave little room for investments in other areas of the budget. The House indicated that some investments, like those addressing the opioid crisis and funding for vulnerable adults, could be included in the “Other Bills” category.

The House budget also would accelerate a $75 million transfer to Minnesota’s budget reserve from unused funds that had been dedicated to the Premium Subsidy Account. Every year, Minnesota Management and Budget sets a goal for the budget reserve that would get the state through most recessions. This addition would get our state a little closer to that goal.

The Senate has not released targets, although they have been developing their supplemental budget bill. We’ll be watching closely as the House, Senate, and Governor Mark Dayton put together the final budget in these final weeks of the 2018 Legislative Session.

-Clark Goldenrod

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New report finds Medicaid reporting requirements are a raw deal for workers

Many working adults are at risk of losing their health care under new Medicaid work reporting requirement proposals, according to a new report from the Center on Budget and Policy Priorities.

The report examines the work documentation requirement rule that will be implemented in Kentucky this year, which requires non-disabled adults on Medicaid to document 80 hours of work, volunteering, or job training each month in order to receive health care. If people are unable to provide the required documentation, they will lose their health coverage.

The report found that 46 percent of lowmedicaid-and-workers-48-percent-t-income workers who would be impacted by Kentucky’s new rules would be at risk of losing their health care for one or more months. Even among people who work substantial hours over the course of the year (about 80 hours per month on average), 25 percent would be at risk of losing their health care for one or more months because they would be unable to meet the requirements every single month.

Why is this? Because many of these people work in jobs that have high levels of instability, such as in food service, retail, home health care, or construction. Jobs in these industries frequently have volatile hours or inconsistent scheduling, and no guarantee workers will get to work a consistent number of hours each week. Workers in these types of jobs often don’t have sick time or much say in their work schedules, making it more likely they will lose their jobs if they need to take time to recover from illness, because of gaps in child care, or to deal with a family emergency. Many hardworking people may not be able to meet the 80-hour monthly work requirement through no fault of their own.

While many of the new work rules being implemented, including Kentucky’s, allow workers to fulfill the 80-hour requirement through volunteering or participating in job search programs, this doesn’t solve the problem for many people who are already working. Workers without much control over their schedules or who have to be available to work “on call” will have a difficult time lining up a volunteer position or slot in a job training program on short notice. So while the flexibility is laudable, it does not address the underlying challenges that many low-wage workers face in today’s labor market.

While proponents argue that these proposals will create greater incentives to work and will increase labor force participation, these new rules may actually impede people’s ability to work. Disruptions in health care can have serious consequences for people’s health. People working at low wages have above average rates of chronic health conditions. Not being able to see a doctor or treat an illness may exacerbate health issues further, which in turn make it more difficult to work.

Work documentation rules will likely lead to a vicious cycle: People with health conditions lose their jobs due to illness and then lose their health care, making it even more difficult to get healthy enough to find a new job.

Minnesota is currently considering a proposal that would impose work documentation requirements similar to Kentucky’s. The Center’s report demonstrates how just one of the many unintended consequences of work rules for Medical Assistance (Minnesota’s Medicaid) will not improve the health of Minnesotans and their families, or address barriers to success in the workforce. Instead, it’s clear that Minnesota workers will get a raw deal if reporting requirements are implemented in our state.

-Sarah Orange

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Tip penalty proposal in Minnesota House threatens economic security

The economic security of workers who receive hourly wages and tips in Minnesota is threatened by House File 4061, which was the subject of a hearing in the House Job Growth and Energy Affordability Policy and Finance Committee earlier this week.

Minnesota is one of seven states that ensures that workers who receive tips earn the same minimum wage as most other workers. The minimum wage for large employers is currently $9.65 per hour and, importantly, increases with inflation each year to help keep up with the cost of living.

House File 4061 would set a separate, lower minimum wage for workers, such as restaurant servers, who receive about $4.00 per hour or more in tips on average in a work week. The minimum wage for these workers would be frozen at the current minimum wage, and would not increase with inflation in future years. This policy is bad news for a few reasons:

  • While the wages for other low-wage workers would increase each year to help keep up with the cost of basic necessities like child care, groceries, and rent, workers receiving tips would be stuck earning 2018-level wages. And the gap between what tipped workers earn and what it takes to make ends meet would grow larger over time.
  • A substantial number of Minnesotans work in tipped positions at some point, and could be harmed by this proposal. According to the JOBS NOW coalition, openings for food preparation and serving jobs are up by 200 percent compared to four years ago.
  • This bill would make it very hard for workers to keep track of how much they should actually be paid by their employers, making workers more susceptible to wage theft. Since earnings could vary weekly between the inflation-adjusted minimum wage and the tip penalty wage, workers who receive tips right around $4 an hour on average would need to diligently track their tips and scrutinize their paychecks to make sure they’re being paid correctly. At the same time, it would also add a layer of complexity for employers to ensure they’re conforming to the law and counting tips and wages accurately.

The minimum wage sets a wage floor, and for tipped workers it provides a certain level of stability. This bill would erode the progress Minnesota workers made in 2014 when policymakers passed a long overdue raise to the state’s minimum wage. That boost to the state’s minimum wage is bringing more than 300,000 Minnesotans closer to economic security, and supports workers who are most often left behind in the state’s economy, including workers of color and women.

But House File 4061 would undo some of this important work. Policymakers should support Minnesota workers and promote economic security, not pass legislation that suppresses wages.

-Clark Goldenrod

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April Economic Update shows revenues on track

The recently released April Revenue and Economic Update gave us good news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that the most recent state revenues have come in on track, and that the national economy is expected to grow at about the same rate as predicted earlier this year.

Some of the top takeaways from the Update include:

1. State revenues are coming in on track with projections. The state’s revenues for February and March came in $6 million above projections; that’s 0.2 percent more than projected in the state’s February 2018 Economic Forecast. The slight increase is primarily due to higher income and sales taxes received. The Update notes that the state will have a fuller picture of total tax year 2017 income tax payments later in April.

2. Economic growth is expected to be roughly on track with the February forecast. The national economic forecasters continue to predict 2.7 percent national GDP growth for 2018. In 2019, growth is projected to be higher than earlier anticipated at 2.9 percent, but then is expected to taper off to 1.7 percent by 2021.

april-economic-update-gdp

3. National unemployment rate expected to remain low, with strong consumer spending expected. Nationally, unemployment has been holding steady at 4.1 percent. That is the lowest it’s been in 17 years. Unemployment is expected to drop to 3.6 percent in 2019, roughly what the February forecast projected.

4. Forecasters are fairly confident in their projectionsThe forecasters assign a 65 percent chance that their baseline forecast is correct. They also give a 20 percent chance for a more pessimistic scenario and assign a 15 percent probability to a more optimistic scenario.

This new update tells us that not much has changed since the February forecast. However, there’s still need for caution this legislative session. As we’ve written before, there’s still considerable uncertainty around the economy and federal funding.

This is the last quarterly revenue update that policymakers will get before the legislative session ends in May. As they work toward the tax and budget decisions they will enact this year, they should be mindful of the considerable uncertainty of these times, and seek to strengthen the state’s ability to sustain support for our schools, families, and communities.

-Clark Goldenrod

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