Minnesota's budget surplus grows to $1.65 billion

Minnesota's healthy economy is powering projections of a hefty $1.65 billion budget surplus, but uncertainty about federal policy under the new Trump administration has state officials warning about "significant risk" that it could decline.

Fueled largely by forecasts of higher-than-expected tax collections, the projected surplus that state budget officials announced Tuesday was welcome news for DFL Gov. Mark Dayton and Republican legislative leaders. Both claimed credit for the forecast — which saw the projected surplus rise by $250 million over a December forecast — while offering different visions for what the state should do with the money.

While Republicans urged tax cuts and spending on core state services like schools and roads, Dayton said the state should combine targeted new spending with "extreme caution and restraint" to cushion the state against the possibility of an ­economic downturn.

"We worked hard to achieve these budget surpluses, and they must be preserved," Dayton said.

The budget forecast sets the terms of debate for much of the rest of the legislative session, where Dayton and the GOP legislative majorities must agree on a new, two-year spending plan for state government. Dayton will use the new information to tweak a $45.8 billion budget blueprint he released in January, which proposed using a portion of surplus dollars to expand prekindergarten programs at public schools, increase funding for public universities and raise enrollment in the state's MinnesotaCare public health program.

Republicans have not yet laid out their own budget priorities in as much detail; those should emerge in the coming weeks. House Speaker Kurt Daudt said Republicans want to prioritize spending in areas like health and human services, education and transportation, especially on roads and bridges.

But Republicans are also poised to push for what Senate Majority Leader Paul Gazelka, R-Nisswa, called a "significant tax relief package" that could include tax breaks for small businesses, agricultural interests and college students paying off loans.

"We'd like to leave a little more money on the bottom line of Minnesotans," said Daudt, R-Crown. "We think we should give some of that back, reinvest in Minnesotans, put Minnesotans first."

The new forecast showed higher-than-expected tax revenue and a brightening financial outlook nationwide based on employment levels and consumer and business spending. It included more spending on health care and education due to rising costs and expected higher student enrollment.

The projections reflected expectations that Trump and Congress would implement tax breaks and increase spending on major infrastructure projects. But it did not consider the implications of major shifts in trade policy and other areas.

Dayton and his top budget officials praised Minnesota's strong position relative to other states, with about half facing budget deficits. But they warned that the combination of uncertainty about federal policy and the likelihood of an economic downturn after an unusually long period of growth could easily snap Minnesota's recent streak of budget surpluses.

Dayton, who was in Washington, D.C., over the weekend for a meeting of governors, said conversations with Trump administration officials prompted what he called an "unprecedented" amount of anxiety and confusion when those officials were unable to provide details about the direction of federal spending and other major issues affecting state finances.

Meanwhile, Minnesota Management and Budget Commissioner Myron Frans reflected on what he said were past missteps in the state's financial management. In 1999, after a run of positive surpluses, the Legislature implemented broad income-tax cuts just before an economic downturn — and ended up with a nearly decadelong string of budget shortfalls.

Frans urged legislators to save some of the surplus rather than spend it all on programs or give it away in tax breaks.

"It did not work in 1999, and it will not work now," he said.

That caution was echoed by DFL leaders in the Legislature. Senate Minority Leader Tom Bakk, DFL-Cook, said he'd like to see the additional $250 million forecast for the surplus to be stashed away as savings, replacing money spent over the past few years. He said he's particularly concerned that changes to the Affordable Care Act could shift more of the burden of health care funding to states.

Gazelka disputed DFLers' cautions, noting that growth in spending by consumers and businesses indicates that the state has room for optimism. He said he's certain that the Legislature and the governor will be able to find common ground, as they have already this session on issues like health care premium relief.

"Our numbers might not look exactly the same, but I'm pretty confident we can get things done in a timely manner," he said.

Erin Golden • 612-673-4790