Minnesota governor's budget would tap reserves and raise some taxes

Minnesota Gov. Tim Walz launched the state’s budget season with a two-year proposal that would dip into reserves and raise some taxes to erase red ink and cover new spending, setting the stage for a partisan clash.

Walz, a member of the Democrat-Farmer-Labor Party, laid out a $52.4 billion spending plan for the biennium that begins July 1 dubbing it the “COVID-19 Recovery Budget.” It’s up from the current $47.9 billion two-year budget and relies on $1.6 billion in new tax revenues.

The plan would drain $1 billion from the state’s $1.8 billion budget reserve, free up $130 million from a stadium reserve account, and raise the cigarette tax by $1 per pack. The income tax on just under 1% of taxpayers who are the top earners would go up by just under 1%. About $217 million of carry-over funds from this fiscal year would be used and some areas of spending would be cut by $150 million.

The end result is a budget that closes a projected $1.3 billion shortfall in the next fiscal year while also adding $1.3 billion in new spending to pay for initiatives Walz believes are needed to help the state recover from the pandemic.

“We know the COVID-19 pandemic hit our working families, small businesses, and students particularly hard. They need our help,” Walz said. “The budget I am unveiling today will make significant strides in helping those Minnesotans stay afloat.”

Education would be a big beneficiary of the increased spending with $745 million in additional spending. The budget would provide $50 million for a new small business COVID-19 recovery forgivable loan program and expand the working family tax credit for 300,000 eligible households. About $150 million of aid would go to businesses hurt by the riots that followed George Floyd’s killing by Minneapolis police in May.

The corporate tax rate for large, profitable companies would also go up and the state would raise revenue from an estate tax on some and a capital gains tax hike. The state would cut income taxes for some by expanding the lowest first tier of the income tax bracket.

Republicans who control the state Senate are pressing for spending cuts and reserve use instead of higher taxes.

“We do not need to raise taxes on anyone,” said Senate Majority Leader Paul Gazelka, R-East Gull Lake. “That’s a line in the sand.”

Walz's budget would use $1 billion in reserves, which include both a rainy day fund and $350 million cash fund, and impose a cap of $100 million on the stadium reserve that was established as a cushion in connection with the state’s $468 million issue of appropriation bonds in 2014 to help fund a new $1 billion stadium for the National Football League’s Minnesota Vikings. The cap would free up about $130 million from the U.S. Bank Stadium reserve.

“It is certainly raining and our rainy day fund is not needed for this current year but we are drawing $1 billion from the reserve as a buffer for the projected shortfall in the next biennium to help provide services and get us through this period,” Minnesota Management and Budget Commissioner Jim Schowalter said at a budget news conference. It’s prudent to leave $847 million in the reserve, he said, because of ongoing uncertainty.

Schowalter defended use of the stadium reserve saying the remaining funds would cover at least two years of debt repayment and that gambling revenues from electronic pull tab games that flow to the account have been stronger than expected.

The numbers are subject to change based on the annual February forecast and could also change if the federal government adopts a new relief package. The state’s annual November forecast provided better news for the state after grim warnings over the summer of a projected $7 billion pandemic-driven deficit through fiscal 2023. The November forecast predicted a $641 million surplus for the current fiscal year and the $1.3 billion deficit in the next budget.

Republicans and the Vikings oppose the draw on the stadium reserve, saying it's a violation of the original financing agreement.

The GOP instead wants to pursue a refinancing in 2023 and wants to use the reserve to pay down the bonds.

Minneapolis debt payments of $17 million on the public borrowing begin this year and some local state lawmakers have pitched the idea of using the reserve to help the city, which is dealing with pandemic-related tax revenue losses.

After the new forecast, Walz will tweak his plan and legislative leaders will lay out their own versions with a budget vote due in May. Walz faces a tough road due to the divided legislature, which has driven past budget deadlocks that rating agencies have cited as negative factors weighing on the state’s credit. The Democrats hold a House majority.

Ahead of a $1.2 billion August bond sale, Fitch Ratings affirmed the state’s AAA GO rating and Moody’s Investors Service affirmed its Aa1 rating. Both assign a stable outlook. S&P Global Ratings affirmed the AAA rating but moved the outlook to negative from stable saying it believed the state would “likely significantly rely on one-time measures and reserves, rather than structural adjustments, to address its structural deficit.”

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