State Starting to Feel Economic Downturn.  The House Ways and Means Committee heard from the Commissioner of Minnesota Management and Budget Myron Frans and State Economist Dr. Laura Kalambokidis gave an update of Minnesota's fiscal situation as the state begins to experience the economic ripple effects resulting from society-wide adjustments to the COVID-19 virus.  Economic activity in Minnesota began to slow as businesses shut down and the shelter-in-place orders were issued by Executive Order.  Revenue collection from three of Minnesota's primary taxes--individual income, corporate income, and sales--were all down.  The corporate franchise tax was up and the net effect of these dynamics is a drop in $103 million off the state's bottom line.  As outlined in the Minnesota Management and Budget Revenue and Economic Update document released last Friday and linked below,  IHS Markit--the firm that provides macroeconomic projections for Minnesota's budget forecasts--predicts a 5.4% decrease in national gross domestic product for 2020 and with Minnesota's economic performance tied very closely to national measures, we can expect the $1.5 billion forecasted budget surplus (much of which has been spent on COVID-19 related interventions and supports) to dwindle dramatically with a deficit looming as the Legislature convenes in 2021.  IHS Markit projects that the national gross domestic product will increase by more than 6% in 2021, but that will not make up for the revenue lost during the downturn.  This all bears watching and the IHS Markit projection is based on a relatively optimistic "V" recovery (rapid slide followed by rapid recovery, hence the V-shape) to which they assign a 45% level of probability.  IHS-Markit assigns a 35% probability to a more pessimistic recovery that would stretch into 2021.  It is difficult to tell how consumers will react even when the shelter-at-home restrictions are lifted, which makes projecting revenue numbers extremely difficult.  In another item, the federal stimulus package (considered modest in IHS-Markit's view) is factored into their economic performance numbers.

While the committee absorbed the troubling economic news, a larger portion of the committee process was dedicated to trying to map where the Legislature and the Governor can, and perhaps will, go from this point forward.  We are closing in on the end of the regular session and there is concern about how a precipitous downturn in revenue collection will be addressed during the interim.  The Governor could call a special session, but he also has the ability to reduce state expenditures in a variety of spending areas and that power has been used in previous times of economic trouble.  While the budget reserve sits at $2.4 billion, keeping that in place until the absolute last minute will be crucial and one legislator urged the administration to use unallotment powers before exhausting the budget reserve.

There will be difficult discussions over the coming months and today offered what will be the first taste of what lies ahead.

Link:  Minnesota Management and Budget Revenue and Economic Update