Former Minnesota finance commissioner weighs in on state budget forecast
Minnesota budget commissioner Erin Campbell introduces the latest state budget forecast during a presentation at the Minnesota Department of Revenue building in St. Paul on Wednesday.
Ben Hovland | MPR News
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Wednesday morning Gov. Tim Walz and legislative leaders received a state budget forecast that was about $1.1 billion less than what they were expecting from the prior forecast. The state budget report shows lawmakers will not have a surplus to craft their two-year budget. Instead, it looks like they may have to take measures to prevent a financial deficit.
What does this lack of fiscal wiggle room mean for the upcoming session? Tom Hanson has poured through budgets like this many times before and joins MPR News host Nina Moini with insight. He served as a finance commissioner at the state Department of Management and Budget under Republican Gov. Tim Pawlenty.
Use the audio player above to listen to the full conversation.
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Audio transcript
NINA MOINI: Well, this morning, Governor Tim Walz and legislative leaders received a state budget forecast that was about $1.1 billion less than what they were expecting from the prior forecast. The State Budget Report was released to the public a few minutes ago and shows that lawmakers will not find the surpluses they were hoping for to craft their two-year budget. Instead, it looks like they may have to take measures to prevent a financial deficit. So what does this lack of fiscal wiggle room mean for the upcoming session?
Well, Tom Hanson has pored through budgets like this many times before. He's on the line. He served as a Finance Commissioner at the State Department of Management and Budget under Republican Governor Tim Pawlenty. Tom, thanks for taking the time to help us understand all of this today.
TOM HANSON: Well, thanks for having me, Nina. I'm glad to be here.
NINA MOINI: Thank you. I mean, this sounds pretty serious. The report shows that really, barring a change in course, there's a $5-billion deficit brewing in the not too distant future. So how much can-- can and should, maybe, lawmakers do to try to patch this hole before it develops?
TOM HANSON: Well, first of all, the state-- your state officials put together a budget forecast once in the late fall. They call it the November forecast, although it's December. And then they do one in February.
And the whole idea is they determine how much revenue is going to be collected and how much government goods and services are going to-- to cost. And the budget that the governor and the legislature is working on is the two-year budget beginning on July 1.
So it's fiscal years '26 and '27. And for that budget period, the legislature-- you know, the MMB says the state's got a $616 billion-- or million, $616 million surplus. The numbers you're quoting are for the next biennium, '28 and '29. So they have four years to fix what's out and what lawmakers call the horizon, or the tails.
NINA MOINI: OK. What do you think of that four years? I mean, is that, in this context, a good amount of time?
TOM HANSON: Well, I do. And I will tell you right away, Nina, I have a bias. And that is, I was the MMB commissioner, the Finance Commissioner during the Great Recession in 2008 and '09 when we had billions of dollars in deficit.
NINA MOINI: Yeah. You've Seen a lot of it.
TOM HANSON: Well, and so if I look at $616 billion-- million. I keep saying billion-- million, I generally consider that to be positive. Yes, it's less money than they anticipated.
They thought they were going to-- at the end of session, they thought they were going to have $1.7 billion, but they ended up with $616 million. But I think they have enough tools available to them to work out them going forward.
NINA MOINI: OK.
TOM HANSON: Especially with the-- you know, four years out.
NINA MOINI: Sure. And thank you for explaining all of this, because when Minnesotans are hearing these huge numbers, it's really hard to assess where we're going and what this means for the everyday person. Do you have a sense for what caused this projection to be so much lower than what was planned for?
TOM HANSON: Well, that's interesting, because I think these forecasts are, like, 120 pages, and a bunch of it is economic data. Detailed-- how many people are going to work? How factories-- how much goods are going to come out and all of that. And they use that to determine revenue.
And they're anticipating slower revenue growth throughout-- kind of into '25 and '26. So they're projecting that the listeners, the collective listeners are going to pay less in income tax and buy less things, you know, pay less sales tax in the next year. And then there's a few things that spending goes up. But generally, it's a revenue issue.
NINA MOINI: And so in a political context more, what happens when these forecasts are not in line with what they thought before? Does it create a bit of a blame game, or, like, where-- where does the blame, so to speak, fall?
TOM HANSON: Well, you always get the blame game in anything related to government policy and you get that with finance as well. If you've already-- you know, the Republicans, the legislative, Republicans and Democrats are going to have press-- dueling press conferences. Governor Walz will comment.
The Republicans will argue that the Democrats, when they had the trifecta for the last two years, increased spending by too much and increased taxes and that has caused Minnesota's economy to not be as strong and has caused these numbers. I mean, if you're a Democrat, you're going to start raising the specter of President Trump taking office and his tariffs, and is he going to cut spending at the federal level that will then trickle down to the state level? And how will that impact? So you'll see dueling narratives going forward.
NINA MOINI: Sure. Sure. And you did mention that DFL trifecta, where they had control of the House, the Senate, and the governor's office. But we know that recent election results resulted in a 67 to 67 tie in the House. So at least in the House, things are going to be different and kind of changes the balance of power there. What do you think a tighter budget means for how lawmakers can get things done in this sort of split legislature?
TOM HANSON: Well, you can do it one of two ways. And again, each party has a different focus. If you're Republicans, you want to cut spending, because you think people are taxed more. If you're the Democrats, and-- you're going to want to-- I mean, you'll do some spending cuts around the edges, but you're going to raise revenues.
And for Minnesota, the big three revenues are income tax, sales tax, and corporate tax. And actually, it's mostly the income tax you and I pay, and your listeners, and-- and then the sales tax we pay when we go to the store. So if you're going to raise revenues, it's got to be some version of that.
And then with regards to spending, you know, it's primarily-- you know, about 70% of it is health and Human Services, K-12 and higher ed, and then to a lesser degree, the aid we give to cities and counties to buy down our property tax. So those are the six levers. You know, there's a lot of other spending too, but you don't do a budget unless you do those big three on either side.
NINA MOINI: Yeah. So those-- I was going to ask you what you think would be of non-negotiable going into the session early next year and then what you think might be, you know, around the edges like you referred to that might be cut. Do-- do you have a sense for that?
TOM HANSON: Well, this will-- what'll be very important is what the February forecast will be. Because that will be the final budget that all of the end-of-session negotiations will be based on. The numbers you and I are looking at today are-- the governor's going to be the only one who acts on them.
Governor Walz and his MMB commissioner, and all of his other commissioners are going to use these numbers to put out a budget that we'll all see the third week of January. But I think people are hoping that maybe the February forecast boosts the numbers a little bit.
NINA MOINI: OK.
TOM HANSON: But when you have a tie, you got to agree with the other side at some point. And you can't-- I would assume they have to negotiate. And another interesting thing is that a few years ago, the-- the US-- the Minnesota Supreme Court ruled that if you don't have a budget by July 1, it is a hard shutdown.
NINA MOINI: Yep.
TOM HANSON: And that the government-- that the courts have no ability to mitigate. They can't open nursing homes, they can't open roads, or whatever. So they have a deadline of July 1 to get this all done.
NINA MOINI: And so working together will be critical, it sounds like.
TOM HANSON: Yes, it will.
NINA MOINI: Before I let you go, Tom, I did want to ask, just because of your expertise and background, could President-elect Trump's promise of tariffs on goods from Mexico or Canada affect the budget forecast here in Minnesota in any way?
TOM HANSON: Well, it could potentially. And what's interesting about this forecast, they probably did it on purpose. The-- Minnesota bases their forecast on some macroeconomic forecast numbers that they received the day of the election. So this particular forecast doesn't consider any revenue or spending projections based on incoming policies of a Trump administration. So you will also get that--
NINA MOINI: OK.
TOM HANSON: In the February forecast.
NINA MOINI: That's good to know. So lots of changes to come. And we appreciate you coming here and breaking this all down for us, Tom.
TOM HANSON: Well, Thank you very much. Thanks for having me.
NINA MOINI: Sure thing. That was Tom Hanson, a former finance commissioner under former Governor Tim Pawlenty.
Well, Tom Hanson has pored through budgets like this many times before. He's on the line. He served as a Finance Commissioner at the State Department of Management and Budget under Republican Governor Tim Pawlenty. Tom, thanks for taking the time to help us understand all of this today.
TOM HANSON: Well, thanks for having me, Nina. I'm glad to be here.
NINA MOINI: Thank you. I mean, this sounds pretty serious. The report shows that really, barring a change in course, there's a $5-billion deficit brewing in the not too distant future. So how much can-- can and should, maybe, lawmakers do to try to patch this hole before it develops?
TOM HANSON: Well, first of all, the state-- your state officials put together a budget forecast once in the late fall. They call it the November forecast, although it's December. And then they do one in February.
And the whole idea is they determine how much revenue is going to be collected and how much government goods and services are going to-- to cost. And the budget that the governor and the legislature is working on is the two-year budget beginning on July 1.
So it's fiscal years '26 and '27. And for that budget period, the legislature-- you know, the MMB says the state's got a $616 billion-- or million, $616 million surplus. The numbers you're quoting are for the next biennium, '28 and '29. So they have four years to fix what's out and what lawmakers call the horizon, or the tails.
NINA MOINI: OK. What do you think of that four years? I mean, is that, in this context, a good amount of time?
TOM HANSON: Well, I do. And I will tell you right away, Nina, I have a bias. And that is, I was the MMB commissioner, the Finance Commissioner during the Great Recession in 2008 and '09 when we had billions of dollars in deficit.
NINA MOINI: Yeah. You've Seen a lot of it.
TOM HANSON: Well, and so if I look at $616 billion-- million. I keep saying billion-- million, I generally consider that to be positive. Yes, it's less money than they anticipated.
They thought they were going to-- at the end of session, they thought they were going to have $1.7 billion, but they ended up with $616 million. But I think they have enough tools available to them to work out them going forward.
NINA MOINI: OK.
TOM HANSON: Especially with the-- you know, four years out.
NINA MOINI: Sure. And thank you for explaining all of this, because when Minnesotans are hearing these huge numbers, it's really hard to assess where we're going and what this means for the everyday person. Do you have a sense for what caused this projection to be so much lower than what was planned for?
TOM HANSON: Well, that's interesting, because I think these forecasts are, like, 120 pages, and a bunch of it is economic data. Detailed-- how many people are going to work? How factories-- how much goods are going to come out and all of that. And they use that to determine revenue.
And they're anticipating slower revenue growth throughout-- kind of into '25 and '26. So they're projecting that the listeners, the collective listeners are going to pay less in income tax and buy less things, you know, pay less sales tax in the next year. And then there's a few things that spending goes up. But generally, it's a revenue issue.
NINA MOINI: And so in a political context more, what happens when these forecasts are not in line with what they thought before? Does it create a bit of a blame game, or, like, where-- where does the blame, so to speak, fall?
TOM HANSON: Well, you always get the blame game in anything related to government policy and you get that with finance as well. If you've already-- you know, the Republicans, the legislative, Republicans and Democrats are going to have press-- dueling press conferences. Governor Walz will comment.
The Republicans will argue that the Democrats, when they had the trifecta for the last two years, increased spending by too much and increased taxes and that has caused Minnesota's economy to not be as strong and has caused these numbers. I mean, if you're a Democrat, you're going to start raising the specter of President Trump taking office and his tariffs, and is he going to cut spending at the federal level that will then trickle down to the state level? And how will that impact? So you'll see dueling narratives going forward.
NINA MOINI: Sure. Sure. And you did mention that DFL trifecta, where they had control of the House, the Senate, and the governor's office. But we know that recent election results resulted in a 67 to 67 tie in the House. So at least in the House, things are going to be different and kind of changes the balance of power there. What do you think a tighter budget means for how lawmakers can get things done in this sort of split legislature?
TOM HANSON: Well, you can do it one of two ways. And again, each party has a different focus. If you're Republicans, you want to cut spending, because you think people are taxed more. If you're the Democrats, and-- you're going to want to-- I mean, you'll do some spending cuts around the edges, but you're going to raise revenues.
And for Minnesota, the big three revenues are income tax, sales tax, and corporate tax. And actually, it's mostly the income tax you and I pay, and your listeners, and-- and then the sales tax we pay when we go to the store. So if you're going to raise revenues, it's got to be some version of that.
And then with regards to spending, you know, it's primarily-- you know, about 70% of it is health and Human Services, K-12 and higher ed, and then to a lesser degree, the aid we give to cities and counties to buy down our property tax. So those are the six levers. You know, there's a lot of other spending too, but you don't do a budget unless you do those big three on either side.
NINA MOINI: Yeah. So those-- I was going to ask you what you think would be of non-negotiable going into the session early next year and then what you think might be, you know, around the edges like you referred to that might be cut. Do-- do you have a sense for that?
TOM HANSON: Well, this will-- what'll be very important is what the February forecast will be. Because that will be the final budget that all of the end-of-session negotiations will be based on. The numbers you and I are looking at today are-- the governor's going to be the only one who acts on them.
Governor Walz and his MMB commissioner, and all of his other commissioners are going to use these numbers to put out a budget that we'll all see the third week of January. But I think people are hoping that maybe the February forecast boosts the numbers a little bit.
NINA MOINI: OK.
TOM HANSON: But when you have a tie, you got to agree with the other side at some point. And you can't-- I would assume they have to negotiate. And another interesting thing is that a few years ago, the-- the US-- the Minnesota Supreme Court ruled that if you don't have a budget by July 1, it is a hard shutdown.
NINA MOINI: Yep.
TOM HANSON: And that the government-- that the courts have no ability to mitigate. They can't open nursing homes, they can't open roads, or whatever. So they have a deadline of July 1 to get this all done.
NINA MOINI: And so working together will be critical, it sounds like.
TOM HANSON: Yes, it will.
NINA MOINI: Before I let you go, Tom, I did want to ask, just because of your expertise and background, could President-elect Trump's promise of tariffs on goods from Mexico or Canada affect the budget forecast here in Minnesota in any way?
TOM HANSON: Well, it could potentially. And what's interesting about this forecast, they probably did it on purpose. The-- Minnesota bases their forecast on some macroeconomic forecast numbers that they received the day of the election. So this particular forecast doesn't consider any revenue or spending projections based on incoming policies of a Trump administration. So you will also get that--
NINA MOINI: OK.
TOM HANSON: In the February forecast.
NINA MOINI: That's good to know. So lots of changes to come. And we appreciate you coming here and breaking this all down for us, Tom.
TOM HANSON: Well, Thank you very much. Thanks for having me.
NINA MOINI: Sure thing. That was Tom Hanson, a former finance commissioner under former Governor Tim Pawlenty.
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