Why is Minnesota now forecasting a budget deficit?

It's the first time since 2013 the state is projected to lose money.

The Essentials

1. Minnesota is projecting a state budget deficit of $188 million over the next two years and $586 million in 2020-21, officials announced Tuesday.

2. It's the first time in almost five years the state is projecting a budget deficit. This time last year, a surplus of $1.4 billion was projected.

3. The deficit projection is being blamed by state forecasters on budget uncertainty at the federal level, reduced U.S. economic growth forecasts, and spending/cuts agreed in the 2017 budget.

The Big Picture

It's been a while since we've been in this position; February 2013 was the last time Minnesota was projecting a deficit in its state budget.

And Minnesota's deficit for 2018-19 could be even bigger – $302 million – if and when funding vetoed by Gov. Dayton in his fight with GOP legislators is restored.

So, how did we get to this point?

The first reason, according to the Minnesota Management and Budget Office, is reduced growth forecasts for the U.S. economy, which is weaker than it was towards the start of this year.

State forecasters believe we've been on to too much of a good thing, with a ninth year of economic growth in the state leading the agency to believe there's heightened risk a downturn is on the way.

At the same time, there remains "considerable" uncertainty about what policies will change in Washington, and the impact those changes could have on Minnesota.

The projection, which was calculated a month ago, doesn't take into account the tax bills currently being discussed in D.C., though it does include $178 million extra spending to provide health coverage for low-income children because Congress hasn't reauthorized funding for the Children’s Health Insurance Program (CHIP).

Also having an impact is the extra spending on early childhood education backed by the DFL and Gov. Mark Dayton, as well as the tax cuts pushed and passed Republicans in the Legislature during the past session.

The two tables below show that the state is predicted to bring in $559 million less in taxes over the next two years than earlier forecasts said, while spending will increase $398 million.

For all the debate that will now ensue, it's worth noting that the November/December budget projections are always subject to the most change.

We're likely to have a better indication of state coffers when the final budget projection is released in March. Even if there is a deficit, there's still plenty of money in reserve to cover it in the short-term.

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