Minnesota budget surplus projected to top $1.5B

The Minnesota Capitol dome
The Minnesota Capitol dome rises above snow-capped trees on Sunday, Oct. 14, 2018 in St. Paul.
Andrew Krueger | MPR News

Updated: 3 p.m. | Posted: 10:32 a.m.

Gov.-elect Tim Walz and a divided Minnesota Legislature will have a $1.544 billion surplus to work with next session as they craft the state's two-year state budget.

State budget officials released the latest economic forecast Thursday, kicking off what will be a busy budgeting year in St. Paul.

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Lawmakers are constitutionally required to approve a balanced state budget in odd-numbered years or state government will shut down.

The number is particularly significant for Walz, a DFL congressman who will head into the governor's office in January after campaigning on increased funding for education, health care and other state programs.

By law, he must deliver his two-year budget proposal first, meeting a Feb. 19 deadline.

The Republican-controlled Senate and incoming House DFL majority will wait weeks or even months to present their counter proposals, relying on a new budget forecast issued in February.

The surplus is welcome news, but it won't necessarily make crafting the $48 billion budget any easier. Republicans say the surplus is a result of economic growth spurred by recent state and federal tax cuts, and more tax relief should be on the table next session. Democrats say their priorities will be more spending on education, health care and other programs, which Minnesotans elected them to do this fall.

Walz praised outgoing DFL Gov. Mark Dayton for restoring "fiscal stability" to the state. He also signaled a long list of spending priorities that could tap into the surplus, including education, health care, housing, affordable child care and state aid to cities and counties.

"Under my leadership, Minnesota will be the education state. We will work tirelessly to ensure every child, no matter their race or zip code, receives a high-quality education," he said. "We will increase access to affordable health care. We will help provide local communities with the tools they need to ensure they aren't just surviving, they are thriving."

But he'll be working with a divided Legislature next year, including a state Senate under GOP control by a single vote.

Senate Majority Leader Paul Gazelka said the surplus is bigger than he anticipated, putting additional tax relief on the table this session. That includes a push to eliminate a tax on Social Security income, new child care tax credits and lowering the rates for the lower income brackets, he said.

Republicans will also look into more one-time spending on road and bridge projects, but Gazelka, R-Nisswa, said he's not interested in raising the gas tax.

"It gives us some breathing room. It is certainly a time when we should not be considering a gas tax," he said. "We certainly can live within the resources that we have."

That will be a tension point next year. Walz ran on increasing the gas tax, and he said using one-time money for roads and bridges doesn't address the long-term investments needed in state infrastructure.

"Minnesotans were very clear that infrastructure investment was a priority for them," he said.

The forecast shows the state finishing the current biennium at the end of June with money on the bottom line and healthy reserves. State law requires one-third of any excess dollars anticipated by June of next year to flow automatically into the reserves, which now exceed $2 billion.

Budget Commissioner Myron Frans on Thursday highlighted the reserves, which are at an all-time high.

"When I started with the Dayton administration in the immediate aftermath of the great recession, there was no reserve. We had a $6 billion deficit and budget gimmicks had borrowed from students to pay our bills," he said. "It is impossible to invest in the future or take care of those suffering the most from an economic downturn when you have no money and have a huge deficit."

But he warned that economic growth will slow starting at the end of 2019, as benefits from the 2017 federal tax bill begin to fade, the U.S. dollar weakens and the nation's workforce gets older. The forecast projects just $456 million in extra revenues in the 2022-23 state budget.

And parties could have to temper expectations from groups clamoring for a piece of the surplus. One-time money makes up a large chunk of the new funds, making it harder to pay for a permanent upgrades to state programs.

Inflation costs and future economic uncertainty make it unwise to look at more tax cuts next year, said incoming DFL House Speaker Melissa Hortman.

"Inflation is a fact of life and we need to be prepared to deal with it in the budget," said Hortman, DFL-Brooklyn Center. "People need to have restrained expectations about what we will be able to deal with in the budget."