Minnesota's staggering surplus stays mostly unchanged at $17.5 billion

Minnesota's staggering estimated budget surplus remained largely unchanged at $17.5 billion, with Monday's financial forecast setting up DFL state leaders to continue their push for significant new spending in the next budget.

Higher-than-anticipated tax dollars and unspent cash from years past boosted revenue projections. The latest figure would have eclipsed the previous record-breaking $17.6 billion surplus prediction from a few months ago.

But for the first time in two decades the forecast factored inflation in spending, eating up some of the revenue growth. State leaders said the move paints a more honest picture of state finances.

"Our budget outlook is strong and very stable. A forecast recession — while still in our anticipated forecast — is mild. Our total available balance for the budget and for this legislative session is large," Minnesota Management and Budget Commissioner Jim Schowalter said. "It's a great position for the state to be in."

Economists and budget officials provided a detailed update Monday on state finances and a long-range look at national and local economic trends. Their estimate of tax dollars and other state revenue jumped by nearly $600 million compared to the last forecast from November, with high income and corporate tax collections. State revenue is expected to continue to exceed spending through 2027.

Meanwhile, inflation in the cost of government services is projected to amount to more than $1.4 billion in the next two-year budget and nearly $3.1 billion the following two years.

"I want to thank the Legislature for moving what I think is a more accurate budgeting picture," said DFL Gov. Tim Walz, who signed off last week on the change to include inflation in forecasts.

Walz proposed a $65 billion budget in January that contains major increases to education spending and tax breaks. He is also aiming to use the surplus for one-time expenses, including sending checks to some Minnesotans and providing an influx of cash to jumpstart a paid family and medical leave program.

He plans to re-examine his spending and tax plans in light of the latest numbers. Walz noted that he's heard requests for more money from a variety of groups, from local governments to the University of Minnesota.

Walz did say he plans to propose spending more on public safety in response to gun violence, whether that's on gun control measures or for communities to devote to police or violence interveners.

The governor and Democrats who control the House and Senate will work together to try to finalize the next budget before the Legislature adjourns in May. Laws already enacted during this year's fast-moving legislative session also affected the forecast, most notably the measure to align some state and federal tax laws that is expected to cost the state about $104 million in the next budget.

DFL legislative leaders have yet to release their full spending plans. But they stressed Monday that $12.5 billion of the $17.5 million is one-time money left unspent from past years, which they cannot count on to continuously fund state programs.

"Our focus and priority continues to be the people of Minnesota and how we can improve their lives. We also know we have to be responsible," said Senate Majority Leader Kari Dziedzic, DFL-Minneapolis. "We understand that much of this surplus is one-time money and can't be relied on in future years. And with the threat of inflation continuing we need to budget wisely."

Meanwhile, GOP lawmakers have repeatedly pushed for tax breaks and plan to debut a so-called "give it back" tax plan Tuesday.

Senate Minority Leader Mark Johnson, R-East Grand Forks, said Walz plans to increase government spending while Republicans want to direct surplus dollars to residents and businesses.

"Where do those dollars come from?" Johnson said. "That's coming from Minnesota taxpayers. Businesses, individuals that are moving forward in this state and really seeing the burden of tax impact their bottom line and their pocket."

Walz aims to partly eliminate Social Security taxes, give tax credits to low-income families with children and give direct checks to some Minnesotans.

"We want to give it back to working Minnesotans to make a difference for the future, rather than giving it to the wealthiest Minnesotans," Walz said.

With an aging workforce and people leaving northern states for warmer climes, Walz said future budgets need to help ensure the state can attract and retain workers and families. He stressed the need for state spending on affordable child care and health care, strong public schools and safe communities.

Minnesota's labor market is one of the nation's tightest. Minnesota's unemployment rate is the fourth lowest in the nation, state economist Laura Kalambokidis said. There are about four unemployed job seekers for every 10 openings in Minnesota, she said.

The forecast comes as national inflation continues to rise, with a U.S. Commerce Department report Friday showing consumer prices jumping from December to January. That could lead to continued interest rate hikes by the Federal Reserve, exacerbating recession fears.

Kalambokidis noted that the state's macroeconomic consultant expects a mild recession, with a recovery starting in the third quarter of 2023.

The latest predictions could change depending on a number of factors, like whether Congress raises the debt ceiling. The state forecast assumes it will be raised and the U.S. Treasury can make timely payments on its obligations, Kalambokidis said, noting that if that doesn't happen it could risk a deep recession.

But after years of dramatic fluctuation, budget officials celebrated Monday's relative calm.

"This is a remarkable stability and similarity to the last forecast," Schowalter said. "The economy and economic outlook is very similar, the spending patterns are very similar, we haven't been buffeted by events like a pandemic or a new war."