State budget adds to an uncertain future

With the state scheduled to release its latest Economic and Budget Forecast next Tuesday, it’s a good time to look back at the state budget passed earlier this year and whether it made it easier or harder for the state to respond to economic bumps or federal tax and budget choices.

It took five months and a short special session for Minnesota policymakers to complete the primary work of the 2017 Legislative Session: passing the budget for FY 2018-19, which started on July 1. The state had a $1.7 billion projected surplus, resources that could have been used to address two pressing issues: to expand economic opportunity to more Minnesotans, and to prepare for potential federal decisions that would have a profound impact on the state and its residents.

While policymakers completed the task of getting the budget done, they came up short in terms of meeting those broader goals. The budget makes some important investments in building a broader prosperity, but it uses up nearly all of the surplus, leaving the state with less flexibility to respond to federal funding cuts or economic rough spots. And last month’s economic update reminded us, when state revenues came in below expectations, that a state’s budget outlook is vulnerable to changes in the economic outlook.

Net General Fund Changes (FY 2018-19)
Tax Cuts and Aids to Local Governments $648 million
K-12 Education $485 million
Transportation $301 million
Higher Education $210 million
Public Safety $159 million
State Government and Veterans $46 million*
Jobs and Energy $30 million
Debt Service, Capital Projects $16 million
Environment $8.1 million
Agriculture $5.7 million
Health and Human Services -$463 million
Other Bills (including reinsurance) $142 million
Total $1.6 billion
Bottom Line $50 million
*pre-veto of Legislature’s budget
Figures shown are changes compared to FY 2018-19 baseline.

The largest portion of the surplus went toward the tax bill: $648 million in FY 2018-19 and $791 million in FY 2020-21. Provisions such as large cuts to the estate tax could reverse the state’s recent progress toward making Minnesota’s taxes more equitable across income levels, and the large and growing size of the tax cuts harms the state’s ability to fund essential services. Bright spots in the tax bill include expansions of the Working Family Credit and the Child and Dependent Care Tax Credit, which support the work efforts of lower-income Minnesotans and their families.

The second largest use of the surplus is for E-12 Education; per-pupil funding on the basic student formula is increased by 2 percent each year of the biennium — that’s a little less than the cost of keeping up with inflation. The Education budget also expands Early Learning Scholarships so that more young children can benefit from early childhood programs.

Despite the surplus, this budget makes large reductions in Health and Human Services, cutting its general fund dollars by $463 million in FY 2018-19 and by $273 million in FY 2020-21. The budget also nearly empties the Health Care Access Fund by FY 2021, which puts affordable health care for hundreds of thousands of Minnesotans at risk, even as substantial health care funding cuts are being considered in Washington. One positive component of the HHS budget is that Minnesota improved the Child Care Assistance Program, making it easier for families to afford consistent care for their children. Unfortunately, there are still more than 2,000 families on the waiting list.

A $301 million general fund boost makes a down-payment on the state’s transportation needs. However, the budget puts transportation in greater competition with K-12 education, higher education and other services for general fund dollars, rather than funding these needs through dedicated transportation funding sources. It also fails to bridge the funding gap to meet the state’s infrastructure needs highlighted by the Transportation Finance Advisory Committee.

Since it leaves just $50 million of the projected surplus remaining, the state’s biennial budget puts Minnesota in a precarious situation. Budget or economic projections changing even a little bit could mean deficits. With unprecedented uncertainty about the future of federal-state partnerships, the budget put together last session leaves Minnesotans in a vulnerable spot.

-Clark Goldenrod

About Clark Goldenrod

Clark Goldenrod is the Minnesota Budget Project's policy analyst.
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