Initial Reaction: Budget Targets

Declaring the era of gridlock over, DFL legislative leaders have unveiled their global budget agreement committee targets, a full two months before the constitutional deadline of May 22.  The total net General Fund impact is $17.9 billion wiping out the forecasted FY 24-25 budgetary balance of $17.5 billion.   Big winners are E-12 education receiving a boost of over $2 billion or 11.8% over current forecast; housing whose $1 billion target is over 9 times current forecasted spending; and transportation whose General Fund support would grow by a factor of four.   Health and Human Services spending, always a big consumer of new biennial tax revenue under current law, would increase by about $2.3 billion.

Given the significant amount of one-time resources, out-biennium targets have also been set presumably to help ensure fiscal responsibility in FY 24-25 budget decision-making.  Out-biennium targets have “only” $8.2 billion of General Fund impact indicating (as expected) this year’s omnibus finance bills will be comprised of a lot of one-time spending.  Based on the February forecast, projected FY26-27 spending ex-inflation would be $64.446 billion yielding an out-biennium structural balance (forecasted revenues less forecasted spending) of $284,000. 

The fiscal details of these targets are still difficult to discern because the line “tax, aids, and credits (net)” includes a potential mix of one-time relief, ongoing relief, tax bill spending (e,g. aids to local governments), and potential tax increases.   In addition, the proposed use of $2.3 billion of cash for capital projects is a wild card.  If a bonding agreement could be reached it could free up roughly $1.5 billion of additional resources.   

One conclusion can be drawn from these numbers: tax relief expectations this session must be ratcheted way back.  A lot of built-up hope and anticipation is chasing a much smaller target.  The aforementioned “tax, aids, and credits (net)” line item is $3 billion in FY24-25 but only $1.3 billion in FY 26-27.   As we recently noted, about $9 billion in new and expanded income tax credits and subtractions, property tax refunds and local aid increases, and sales tax exemptions have been laid over for consideration to date.   For example, the proposed changes in the just-released House Property Tax Division report alone have a projected $916 million FY 26-27 General Fund impact which would consume over 70% of the FY 26-27 planning target.  Full exclusion of Social Security income just by itself is an out-biennium target buster.    

Shoehorning just some of the proposed relief this session into these targets will require a dramatic scaling back of both the generosity of and access to these provisions as well as making them temporary.  It is likely the death knell for any use of one-time dollars to remedy or address payment shifts like remaining revenue streams still operating under accelerated June payments and the delivery dates of aids to local governments to help with local government cash flow issues.  And the word “net” also foreshadows the possibility of tax increases for some to make tax relief for others a reality.

Regardless of how it shakes out, the description of this being a “transformative” budget is apt.  How fiscally responsible it is given the uncertainty and risks in the economy and whether Minnesota can muster the economic growth to sustain it remains to be seen.