Updated: 1:35 p.m.
Strong tax collections and lower-than-projected spending have boosted Minnesota’s projected budget surplus to $17.6 billion, Minnesota Management and Budget said Tuesday.
The brighter economic forecast sets the table for how much DFL lawmakers and the governor can spend on the state’s next two-year budget, and on their priorities, including a new paid family leave program, education and additional child care programs. Lawmakers at the divided Capitol left more than $7 billion in surplus funds unspent when they closed out the 2022 legislative session in May with much of their work undone. Since then, the state has reported bringing in more revenue than economists expected month after month.
Minnesota remains susceptible to headwinds beyond its borders. Russia’s invasion of Ukraine, high inflation and the Federal Reserve’s moves to raise interest rates have weakened the state’s real GDP outlook, while job growth is expected to slow amid an expected mild recession, Laura Kalambokidis, Minnesota’s state economist, said following the release of the budget numbers.
Still, Minnesota Management and Budget Commissioner Jim Schowalter said the state was well positioned to manage a downturn. Minnesota’s rainy day funds are brimming and expected to get topped off again with surplus money, as required by law.
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“Minnesota remains in a strong financial position with a solid labor market,” Schowalter said. “Despite the headwinds that I mentioned earlier, inflation, high interest rates, slowing growth and continued concerns around COVID, Minnesota remains resilient and our budget outlook bright.”
The state’s economy has outperformed expectations, posting the lowest ever unemployment rate earlier this year. And with a possible recession ahead, Kalambokidis said lawmakers and Minnesota businesses should consider changes that could bring more people into the workforce.
“One thing that we know for certain is that you need more workers,” she said. “Policies that can remove barriers to people working, continuing working, creativity on the part of employers to search out those pockets of unemployment that we still have, looking to populations they may have overlooked, those are all things that can help us thrive through this period.”
The historic surplus yielded a quick and enthusiastic response from DFL state leaders, who took to the podium right after economic officials to start spelling out their wish lists for the money.
“Now's the time to lower costs for families, now's the time to reduce and get some money back in their pockets, now's the time to make sure that those classrooms are funded with the things that they need to do to make our kids the best qualified workforce in the world," Gov. Tim Walz said.
The information will help Walz craft an initial budget proposal, but lawmakers will look to another economic forecast in February for updated information before passing a final more than $52 billion spending plan.
After winning majorities in both legislative chambers at the Capitol and keeping a hold on the governor’s office, DFLers will determine how the surplus dollars get spent.
Walz said he’d again propose rebate checks for Minnesotans, a cut to the tax on Social Security income and new one-time spending for schools, child care, climate efforts and more. Overall, he said his focus would be on helping those hit hardest by the pandemic and efforts to curb it.
DFL leaders echoed some of those concerns and said Minnesotans voted to give Democrats one-party control of the Capitol, and they planned to take cues from them.
“We listened to Minnesotans during the campaign. They told us they were tired of gridlock and inaction. Families and communities have real needs and they want action,” said incoming Senate Majority Leader Kari Dziedzic. “Starting in January with this legislative trifecta we will use this tremendous opportunity to help Minnesotans afford their lives.”
House Majority Leader Jamie Long, DFL-Minneapolis, echoed calls to fund child care, investment in climate measures, housing and education. And he said his caucus would have to take a closer look at plans to cut the tax on Social Security and issue rebate checks.
“This is an exciting time for our state. Hard work is ahead but this trifecta is united around the core values we share with Minnesotans and we're ready to achieve big things,” Long said.
Republicans, meanwhile, pushed to return some of the surplus through ongoing tax cuts.
“So much of the surplus is one time spending, it's one time money. So we need to look at possible one-time rebates to our tax filers,” incoming House Minority Leader Lisa Demuth, R-Cold Spring, said. “This is Minnesotans money, and it is not a reason for the government to create new or governmental spending.”
Demuth said her caucus would push back on any proposed tax cuts but would be open to a conversation on rebate checks. She also said that Republicans agreed that addressing issues like the child care shortage, housing availability and transportation infrastructure improvements were important.
In a statement, Senate Minority Leader Mark Johnson, R-East Grand Forks, said lawmakers should use the surplus dollars to help Minnesotans afford costs at home. “We are being battered with high property taxes, rapid inflation, rising energy costs, and a looming recession,” he said in a statement. “We need real relief that all Minnesotans can count on for years to come.”
MPR News correspondent Brian Bakst contributed to this report.