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Minnesota finance officials on Thursday projected the state budget surplus at 

 over the next 19 months, setting the stage for intense debate in the Legislature this spring over what to do with the windfall.

But while the budget numbers look bright, the state's economists cautioned that Minnesota employment and wage income growth will likely lag the nation in 2016 and 2017 after several years of post-recession strength and that the state faces a long-term labor problem as Minnesota's population ages.

State finance officials say the projected available surplus will actually run about $1.2 billion, after $665 million is moved into budget reserve accounts and repayments. Under state law, one-third of the surplus must be used for those purposes.

Nearly $900 million of the cushion was left over from the last legislative session, when lawmakers couldn't agree on transportation funding or a package of tax cuts. 

Both of those issues are expected to get renewed attention in the 2016 session. And interest groups are already lining up to ask for new spending. Senate Republican leader Sen. David Hann called for the GOP's transportation plan to be approved as soon as the Legislature returns in March.


Gov. Mark Dayton and state lawmakers will use the new forecast numbers to begin planning for potential budget adjustments next year. A revised forecast is due in early March.


"Overall this is very good news for Minnesota in terms of the economy," Dayton said after the numbers were released.


Asked about his priorities, Dayton said he anticipated proposing $850 million to $1 billion in public works construction in the coming session.


He also threw in the towel on increasing the gas tax, something he'd championed last session.


While Minnesota needs to spend more on transportation, a gas tax hike was likely a dead issue politically given the surplus, he acknowledged.


The governor indicated he'll also have his own tax cut proposal next year but said that any tax cuts must be matched by increases in education funding, including early childhood education.

Hann, however, said he wasn't interested in the governor's attempt to tie tax cuts to additional education spending, and that there's already been plenty of spending.

On the House side, the GOP will seek a "balanced" tax cut bill that helps businesses and families, House Speaker Kurt Daudt, R-Crown, told reporters.

Signs had been pointing to a healthy budget surplus

 and the numbers released Thursday didn't disappoint.

Daudt, however, said he's worried about the caution flags raised in the forecast about future job and wage growth in Minnesota.

While Minnesota's economy has looked solid the past few years coming out of the Great Recession, the expansion is expected to lag the nation the next few years, the state's economists wrote in their outlook accompanying the budget.


Low international commodity prices, a strong dollar and a tightening labor market may be starting to constrain job growth statewide.

"Already, Minnesota's exports have fallen 6 percent during the first nine months of 2015 from a year earlier. Canada, the state's largest trading partner, has reduced Minnesota product orders by 23 percent," the state analysis found.


Those conditions hurt Minnesota's export-heavy businesses, including Iron Range taconite. The forecast noted the drop in taconite demand has led to layoffs this year for nearly half of northeastern Minnesota's 4,400 iron ore mining jobs in 2014.


Minnesota State Economist Laura Kalambokidis on Thursday acknowledged that even as Minnesota's service economy thrives, manufacturing, mining and agriculture had a tough 2015. 


At the same time, Minnesota appears to be a victim of its demographics as well as its post-recession success. 


Unemployment has fallen below to 3.7 percent and job vacancies have soared. Meanwhile, the state's seen a drop in the number of Minnesotans in the labor force, a change likely driven by Minnesota's aging population.


Kalambokidis said the slower labor force growth is limiting the state's ability to add jobs.

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The budget numbers look bright and DFLers and Republicans on Thursday quickly laid out their spending priorities. Economists, however, also cautioned that Minnesota faces some long-term economic worries.

Minn. forecast: $1.9 billion budget surplus; 'modest' job, wage growth

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