Minnesota projects $1.5 billion surplus

Minnesota's strong economy and an anticipated savings in health care costs are expected to leave the state with a $1.5 billion budget surplus for the next two years, a dramatic increase from a projection earlier this year.

The nation is in the second-longest period of sustained growth in history, behind a stretch in the 1990s, and it's left the state with a string of back-to-back budget surpluses.

Budget numbers released Thursday "show a remarkable recovery from the financial shambles in which I took office eight years ago," said outgoing Gov. Mark Dayton, who came into office facing a $6.2 billion deficit, drained reserves and late payments to public schools. Incoming Gov. Tim Walz, a Democrat, will take over in January in a strong position to start working on some of his campaign vows, including boosting educational spending, expanding publicly funded health care and new money for transportation. Republican leaders, meanwhile, are already pushing for tax cuts.

The state's economist and budget officials release forecasts twice a year, looking at state, national and even global economic trends. This new projection is $1.2 billion higher than the forecast in February.

Minnesota Management and Budget officials attributed the jump to increased income and business tax collections and lower spending, particularly on health care. But they cautioned that slower growth is on the horizon.

While the state's short-term financial outlook is strong, the sustained economic expansion is projected to slow in 2022 and 2023. Budget officials estimate that if left alone, the surplus will drop to $456 million in those years.

State Economist Laura Kalambokidis said there are a number of factors that could change those projections. The recent wave of tariffs and new uncertainty about U.S. trade policies with China could cause businesses to become uneasy and hamper economic growth, she said. Minnesota exports grew to $23 billion, up 8 percent in 2017, placing Minnesota 23rd among states ranked by export value.

The stock market gains of earlier this year were disrupted by recent volatility, Kalambokidis noted, and it is still not clear how Minnesotans are responding to the latest round of federal tax changes.

Minnesota continues to add jobs, but the state's rock-bottom unemployment rate of 2.8 percent is well below the national average, so workers have become scarce, budget officials said. That could further limit employment growth.

Any slowing of economic growth could temper what ends up in the budget for 2020 and 2021, which Walz and state legislators will be drawing up over this winter and spring. In February, Walz must release his initial two-year budget proposal, expected to be around $50 billion. That will kick-start negotiations with legislators.

As Walz develops the budget, he will need bipartisan support from the Republican majority in the state Senate, who have different ideas for what to do with the extra money.

Walz reiterated his support Thursday for raising the state's gas tax to repair roads and bridges and would not rule out additional tax increases for other priorities.

"When we're talking about investments in education, in health care, in infrastructure, we are talking about generational investments," Walz said.

Many Republican legislators strongly resist the idea of tax increases at a time when the state is sitting on a sizable surplus.

House Speaker Kurt Daudt, R-Crown, said he wants to continue spending on roads and bridges, but said that can be done without raising taxes. Daudt will shift to minority leader in January, when Democrats take control of the state House.

Daudt and Senate Majority Leader Paul Gazelka said Thursday they would like to see tax cuts instead of other new spending. Daudt said he likes the idea of cutting state taxes on senior citizens' Social Security, and Gazelka said Republican legislators are also interested in a child care tax credit or lowering all income tax brackets.

"Republican-led budgets have brought us to this fiscal stability," Gazelka, R-Nisswa, said.

House Speaker-designate Melissa Hortman, DFL-Brooklyn Park, urged caution with spending, noting that the forecast does not account for inflation, which could gobble up a large share of the projected surplus.

She said the state needs to be prepared to absorb $1.2 billion in inflation in 2020 and 2021.

"People need to have restrained expectations about what we will be able to accomplish. We will invest in Minnesotans ... and this positive forecast allows us to do that. But we have to do it in a responsible and sustainable way," she said.

Minnesota Management and Budget Commissioner Myron Frans urged the incoming Walz administration and legislators to maintain what he called Dayton's financial restraint.

When Dayton took office, the state's budget reserves had been drained and the state was borrowing billions of dollars from public schools as it clawed its way out of the Great Recession. During his campaign, Dayton's signature promise included raising the income tax rate on the state's highest earners. He eventually persuaded legislators to adopt his approach after a bruising battle with Republicans.

As the governor departs, Minnesota's reserves are at their highest in the state's history, topping out at more than $2 billion. Schools are long since repaid and education spending is up by $2 billion, Dayton said.

The governor said the credit does not belong with him.

"The principal reason for this extraordinary budget turnaround is that Minnesota employers have added over 318,400 jobs during the past eight years," he said.

Jessie Van Berkel • 651-925-5044