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Minnesota budget back in black: $329M surplus forecast

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Physical or cognitive disability advocates rallied at Minnesota's Capitol.
Advocates for people with physical or cognitive disabilities rallied Tuesday in Minnesota's Capitol. Among other things, they're seeking a state-funded rate increase for care providers.
Brian Bakst | MPR News

Updated 4:15 p.m. | Posted 9:40 a.m.

Minnesota officials said Wednesday the state now has a projected budget surplus of $329 million, reversing the deficit projection made in December.

The rosier forecast for the 2018-2019 budget cycle sets the backdrop for the Legislature's coming debate over tax cuts and potential new spending.

There were wide expectations that the report would show a surplus, barely three months since a prior estimate pushed Minnesota back into deficit territory for the first time in almost five years.

Since the last forecast in early December, federal lawmakers erased doubts about a pool of funding for children's health insurance programs and approved a massive tax plan that jolted economic activity. State tax collections have also been far stronger than expected in the past few months. 

Still, while the new numbers represent a $517 million positive swing between fall and winter forecasts, the surplus unveiled Wednesday is smaller than many in the Legislature were predicting and could stop some proposals in their tracks. 

Minnesota Management and Budget Commissioner Myron Frans noted that the current surplus forecast is less than 1 percent of the state's total two-year budget and urged lawmakers to curb their appetites to spend it.

"With this forecast, Minnesota's budget is back on track. We should not take a positive balance for granted, though," Frans told reporters.

Questions remain about the health of the national economy and the longer-term effects of the federal tax code rewrite, including whether people spend or save as a result of tax cuts, he added.

It will also make the tax rewrite plan a slightly more difficult lift.

DFL Gov. Mark Dayton said the forecast is good news for Minnesota, but added the projected surplus is relatively modest.

Dayton urged caution when considering additional tax cuts and spending increases this session. He won't make his recommendations about what to do with the money until March 15, he said.

   "We have a very limited surplus here for this biennium and even more so for the next biennium," Dayton said. "I'm going to have to look very carefully, the Legislature is going to have to look very carefully at what's possible, what's fiscally responsible to do or not do given the reality of the situation."

Dayton leaves office in January and said he's adamant about leaving his successor with a sound budget rather than the deep hole he walked into in 2011.

The governor said he was watching for how much of the surplus was expected to be a one-time dose of money versus tax revenue that officials expect to appear year after year. The federal tax law gave corporations incentive to move profits they had in accounts abroad back into the United States, creating a one-time infusion of tax dollars.

But in recent months, the state's economic consultants had also adjusted economic growth projections upward. That would have a positive effect on the budget projection that looks out years into the future.

Republicans who control the Legislature have said any surplus would help ease a state tax code rewrite in a way that would avoid tax increases for some filers. 

But there is also new pressure on lawmakers to devote dollars to school security initiatives in the wake of the Florida high school shooting. Dayton said he will have a proposal for that and Republicans said they would, too.

Senate Minority Leader Tom Bakk, DFL-Cook, has floated using cash to pay for some construction projects the state might otherwise borrow for, perhaps leveraging federal pots of money in the process.

Bakk said he thinks a bill funding the state's obligations to public employee pensions should also be a priority this year. 

"It's now pretty clear we have very little revenue. We'll probably take a little bit of the excitement out of some of the people coming here looking for additional funding in the second year of the biennium," he said.

Advocacy groups are also ramping up their campaigns for additional aid.

Republican legislative leaders on Wednesday applauded news of the surplus.

"Today's budget forecast shows tax cuts lead to economic growth. The doom and gloom predicted by Democrats after passage of last year's historic tax bill has not come to fruition," Senate Majority Leader Paul Gazelka, R-Nisswa, said in a statement. 

Gazelka also said he wished the surplus was more and that the Senate GOP agenda for the session may need some adjusting.

But he stressed that the priority is still to put state tax laws in line with the new federal system without making anyone pay any more. 

"What are some of the other things that we need to do to make sure people don't have a tax increase? So, we were going to work on that no matter what the number was. We have to do that," he said.

Gazelka added that school security improvements and a fix for the vehicle licensing and registration system are also top priorities, raising questions about just how far the $329 million surplus can be stretched.

Republican House Speaker Kurt Daudt, R-Zimmerman, described the projected surplus as one of the largest forecast turnarounds in modern history.

"While Minnesota Management and Budget continues to be overly pessimistic, we are optimistic about Minnesota's financial outlook," said Daudt.

Besides the surplus forecast, state officials also shared their economic outlook for Minnesota. Among the findings:

• Minnesota wages are expected to rise 5.5 percent next year, significantly higher than prior forecasts and larger than the forecast change for U.S. wage growth in 2019.

• Around the state, Minnesota now has fewer unemployed job seekers than open positions.

• $22 million was shifted to the state's clean water fund. A law passed last year requiring money be transferred to the fund if the state ended its last fiscal year with a positive balance. 

• Minnesota now expects to spend $54 million less than it thought on school education formulas, due mostly to lower demand for special education/compensatory accounts.

The report also says Minnesota officials expect that taxpayers who prepaid 2018 property taxes will claim those as deductions on 2017 taxes. That would leave itemizers with more state tax liability on their 2018 taxes though.

MPR News reporter Tim Pugmire contributed to this report.