Minnesota projected to have historic $7.7 billion budget surplus

Minnesotans are earning and spending more than anticipated, boosting the state's budget outlook to a historic $7.7 billion surplus and triggering an avalanche of proposals for how to use the cash.

Economists' prediction Tuesday of the largest surplus in state history comes just a year and a half after Minnesota leaders were pondering a grim deficit as the coronavirus pandemic hit the United States.

"COVID-19 is still here and still dangerous, however our economy is learning how to adapt," Management and Budget Commissioner Jim Schowalter said. "With this forecast the state's ability to sustain services, to respond to emerging needs, keeps getting better."

Strong growth in income, consumer spending and corporate profits drove the high revenues in the last fiscal year, according to the state's economist, Laura Kalambokidis, and high tax receipts are expected to continue as the economic outlook keeps improving.

Meanwhile, state spending estimates for the current $52 billion budget in 2022-23 are down slightly. The two-year budget cycle kicked off July 1 and since then the state has spent less than anticipated on education, health and human services and other areas.

"This gives us a golden opportunity," Gov. Tim Walz said of the surplus, adding that he wants to give a hand to struggling families while investing in the middle class.

The pandemic's financial toll has been uneven and the state needs to help those hit hardest, the governor said. His spending priorities, he said, include paid family and medical leave, help for caregivers and lowering the costs of health care and child care. He also said he wants to address climate change and gun violence.

But when lawmakers gather at the State Capitol for the next legislative session on Jan. 31, there will be a long list of competing interests pushing plans for the anticipated billions. And the fight for the money will take place in a politically supercharged environment, as the governor's office and all 201 legislative seats go on the November ballot.

Senate Finance Committee Chair Julie Rosen, R-Fairmont, said Republicans want to help people struggling with high gas and energy costs, and provide tax relief.

"I stand here with a $7.7 billion surplus. And why do I feel so bad?" she said. "I feel really bad because of the hardworking, earnest, everyday Minnesotans who need some relief. And the governor talked about investment — all I really see that as is investment in government programs. We want to give relief."

House Minority Leader Kurt Daudt, R-Crown, said his goals during the next session include eliminating the tax on Social Security income, instituting a moratorium on energy taxes, continuing the reinsurance program and boosting law enforcement funding.

Republican legislators and the Minnesota Chamber of Commerce also are pushing for the state to use surplus dollars, or remaining federal pandemic aid from the American Rescue Plan, to repay Minnesota's debt to the federal government for covering unemployment insurance payments to workers who were sidelined. Otherwise, businesses might face sizable payroll tax hikes to cover debt payments and interest, and to restore the state's unemployment insurance trust fund.

Walz declined to offer specifics Tuesday about how he would address that situation, saying simply: "We'll fix it."

DFL lawmakers stressed Tuesday that they want to prioritize spending that helps families, children and front-line workers — who have been waiting for checks that legislators were supposed to agree on months ago.

House Majority Leader Ryan Winkler, DFL-Golden Valley, called on legislators to use the surplus to help workers access paid sick leave and affordable child care, to give businesses tax support and provide families with housing.

"There is a generational opportunity to make Minnesota's economy work better for the average Minnesotan, and we need to take advantage of that," Winkler said.

Many groups that lobby at the State Capitol, from local government organizations to hospitals and state colleges, added their particular wishes Tuesday to the growing list of ways to spend the money, unleashing a deluge of tweets and news releases.

Construction union members called for the state to put the surplus toward improving infrastructure, and school advocacy groups asked for more spending on education and helping students recover from the pandemic. Environmental organizations said the money should be used to fight climate change and secure clean drinking water.

But while spending ideas proliferated, budget officials emphasized that a lot of uncertainty and risk remains.

The delta variant continues to overwhelm some Minnesota hospitals even as the omicron variant is starting to take hold in the United States. The state's macroeconomic consultant created the financial outlook, which is part of the basis for Tuesday's prediction, in early November before the omicron variant had emerged.

The consultant, IHS Markit, predicated the outlook on the expectation that gross domestic product growth in 2022 would be supported by a decline in COVID infections, increased vaccinations, a reduction of supply-chain blockages and more people participating in the labor force.

The consultant took the federal infrastructure bill into account in providing the big-picture economic overview. It did not include the potential impact of the $2 trillion social safety net and climate package that the U.S. House approved but the Senate has yet to pass.

While economists emphasized the uncertainty, they said the improved outlook is expected to continue into the state budget cycle in 2024-25. They predicted staffing shortages in the tight labor market will continue to boost workers' wages, and said U.S. employment would recover to pre-pandemic levels by mid-2022. Economists also expect inflation to slow by late 2022.

Spending changes in the latest forecast are relatively small, state budget director Ahna Minge said, with predictions down $364 million. Lower than expected student counts in E-12 education are the primary cause for the estimated drop in spending. The pandemic affected enrollment in the last budget cycle, but declining birth rates are a key factor in the shrinking education spending going forward, Minge said.

Tuesday's review was the first deep dive into the state and national economic outlook since February, and the first full update on state revenue and spending trends since then. The strong forecast triggers an automatic allocation of funds to the state's budget reserve, increasing the reserve to more than $2.6 billion.

However, the budget update did leave out some pieces of the state's economic picture. It focuses on changes to the state's general fund, and doesn't include federal pandemic relief dollars, Management and Budget officials noted. Inflation isn't included in estimates of most state expenses, a particularly notable omission as prices rise.

"The last couple of years have been tumultuous," Schowalter said. "Today's forecast shows the state's economy is emerging in a good place."

Budget forecast by the numbers

$7.7 billion: Predicted state budget surplus

$52 billion: Size of the state's two-year budget

$364 million: Drop in expected state spending

$2.6 billion: Sum in the state's replenished budget reserve

Source: Minnesota Management and Budget