Minnesota’s budget surplus grows to $1.65 billion

Commissioner Myron Frans discusses the state budget during the February forecast meeting in the Minnesota State Capitol in St. Paul on Tuesday, Feb. 28, 2017.

Chances improved Tuesday for a sizable tax cut, increased spending on schools and a burst of new road construction as Minnesota lawmakers received word that a projected state budget surplus has grown to $1.65 billion.

The economic forecast produced by the Department of Minnesota Management and Budget sets the parameters for a budget debate shaping up between Democratic Gov. Mark Dayton and the Republican-led Legislature. Their main task this session is to craft a new two-year budget set to go into effect in July.

"It gets real now," said Republican Senate Majority Leader Paul Gazelka, echoing a similar starting-line sentiment from Dayton.

But the budget report is filled with notes of caution, given uncertainty over policy changes that could come out of Washington, where President Donald Trump has promised a shakeup to business as usual.

Dayton said Minnesota leaders would be wise to tread carefully until a fuller picture emerges.

"The uncertainty surrounding this budget forecast demands extreme caution and restraint from my administration, the Legislature and various affected interest groups," Dayton said, adding that he and fellow governors left a conference in Washington this week fretting over the "unprecedented degrees of uncertainty, anxiety and confusion" because of the few specific details that had been offered by the Trump administration.

Dayton had to prepare his budget proposal using a forecast released in December -- showing a $1.4 billion surplus -- meaning he’ll now have to come forward with changes to match the latest figures. He expects to do that in a couple of weeks.

Republicans have held back on committing to specific proposals. The GOP legislative leadership made clear Tuesday that cutting taxes will be job one as their budget frameworks are released in coming weeks.

"We're first focused on tax relief, and then we'll work on everything after that," said Gazelka, of Nisswa.

Dayton's roughly $46 billion budget plan includes about $300 million in targeted tax relief but also calls for more spending on public education, health care and upgrades to state government technology.

Republican House Speaker Kurt Daudt of Zimmerman said the size of Dayton's budget plan is untenable.

"The governor continues to want to grow state government faster than the economy is growing, and I think that's out of touch with what most common-sense Minnesotans expect of state government," Daudt said. "But we're optimistic. We're optimistic that we can come together, work together to agree on a budget that will invest back in Minnesotans and put Minnesotans first."

The forecast is built on estimates of tax revenues years into the future offset by spending patterns in the current budget. In the estimates, there are expectations of only slight changes in state spending obligations under current law and modest upticks in income, sales and corporate tax collections.

There’s a bit of educated guesswork involved because the numbers are based on how economists think the state and national economies will perform, how federal budget decisions will trickle down, and how things like gas prices and tax rates will affect business and consumer behavior.

Those benchmarks could be trickier to pin down than usual. The 77-page forecast notes that Minnesota's economic consultants feel confident that their projections for 2017 adequately balance the possibility of stronger national growth and the risks of a slowdown. But for 2018, the report says, "council members believe the risks are primarily on the downside."

Minnesota Management and Budget Commissioner Myron Frans told reporters the lack of clarity about federal budget policy and changes to U.S. trade stances could change the positive budget outlook quickly.

"If I sound cautious, it is because there are a number of unique risks in this forecast that could amplify the impact of any impacts of wrong budget decisions," he said.

Some state lawmakers have suggested that Minnesota proceed cautiously in setting a budget, perhaps leaving a bigger cushion, to guard against swings in federal support. Many state programs, particularly health and welfare programs for the poor, are fed by federal grant dollars.

Minnesota has about $2 billion in its rainy day reserves and other ready cash accounts – just shy of 5 percent of projected spending for the next two years.

Dayton and Senate Minority Leader Tom Bakk of Cook said the Legislature should consider socking more away in case the economy turns south. But Daudt indicated that wasn't the path Republicans would go down.

"Frankly we’d like to leave a little more money on the bottom line of Minnesotans,” he said.

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