Minnesota projects $329 million surplus amid federal tax changes, spending decisions

Gov. Mark Dayton and state lawmakers head into the rest of the legislative session with a $329 million projected budget surplus, with state economists crediting the federal tax bill and other congressional action for the swing up from a deficit just a few months ago.

The surplus amounts to about 1 percent of the state's total budget.

The good economic news prompted legislators from both parties to take a victory lap Wednesday, as the state's tax revenue is now expected to exceed spending obligations for the remainder of the current two-year budget cycle.

Dayton, while calling the surplus good news, characterized it as modest. He said he and legislators would need to be cautious in deciding what to do with it, noting that consultants to the state have warned that the economic boost from tax changes would be temporary.

"Like the Legislature, I will have to compress what I would like to do into what I believe we can do, given these limiting fiscal realities," Dayton said.

Legislators agreed they should be cautious about spending the newly discovered surplus. However, they have expensive wish lists for this session.

Both DFL and GOP legislators said they need to adapt the state tax code to federal changes, fix the vehicle licensing and registration system, improve school safety and address underfunded public employee pensions. This legislative session will likely include many debates over how exactly to address those issues and how much to spend on solutions. Election-year politics will add fuel to the contentious conversations.

The forecast "puts us in a very good position to meet the priorities we set forward," said House Majority Leader Joyce Peppin, R-Rogers.

Republicans suggested state forecasters were not optimistic enough about the benefits of the tax reductions.

"We did tax relief here at the state level, and the federal government did tax relief at the federal level. So Republicans put more money back in Minnesotans' pockets and the state has benefited from that," said House Speaker Kurt Daudt, R-Crown.

State economists with the Minnesota Management and Budget Office said it's not tax changes alone that brightened the forecast from last December. They said the major factor was Congress' recent reauthorization of funding for the Children's Health Insurance Program, which decreased the state's obligations by $225 million. Other state spending on early childhood through high school education was also millions less than predicted.

The last budget forecast, in December 2017, projected a $188 million deficit. Dayton and lawmakers said earlier in February that they expected it would shift to a surplus. Still, Daudt said the budget office made the biannual forecast through a "fairly pessimistic lens," and he believes the surplus will be higher than the $329 million predicted for this two-year budget.

Dayton warned it would be a "very ugly legislative session" if legislators are claiming he is "cooking the books."

"Anybody who casts aspersions on the integrity of the process without proof positive is being extremely irresponsible," he said.

Dayton, who is in his final year in office, said he will present a supplemental budget request in March based on the surplus.

State economists projected a $251 million surplus for the following two-year budget cycle, from 2020 to 2021, but Dayton warned that could change. He said he doesn't want to set the stage for state government to face a "fiscal cliff" in a few years.

Dayton and Republican majority leaders want to pass a public infrastructure bonding bill, but they have very different ideas about how big it should be. Dayton has proposed a $1.5 billion bill, with one-third of the money devoted to improving higher education infrastructure. Management and Budget Commissioner Myron Frans said the state's budget outlook could support a bonding bill of that size. Low interest rates make it a good time for bonding, Frans said.

The forecast accounts for an $800 million bonding bill, which GOP lawmakers said is a more appropriate size.

"We need to exercise caution ... $1.5 [billion] is out of the question," Peppin said.

However, state leaders have far less money to work with than last year, when the February forecast projected a $1.65 billion surplus. The DFL governor and GOP legislative majorities used that for a package of state tax cuts, spending increases for some programs and financial assistance to stabilize the state's individual insurance market.

The twice-yearly forecasts provide details on state spending and revenue, as well as a broader view of state and national economic trends.

Minnesota's labor market remains tight, state economists reported, with more job vacancies than unemployed job seekers and the lowest unemployment rate in more than 17 years. Workers' pay is expected to continue to grow at rates of 4.6 to 5.5 percent per year, faster growth than the state previously anticipated.

The state's housing market continues to see a shortage. Forecasters reported there were 14,451 active listings at the end of last year, which is down nearly 22 percent from an already low level in 2016.

Meanwhile, the budget office predicted general sales tax revenue for the two-year budget will be $119 million more than they said in the last forecast. The corporate franchise tax and other tax revenue was forecast to generate significantly more than expected.

"I think we should all take a victory dance," said Senate Finance Committee Chairwoman Julie Rosen, R-Vernon Center.

Jessie Van Berkel • 651-925-5044