Minnesota's projected surplus rises to $1.5 billion, setting up spending battle

Minnesota lawmakers can anticipate an extra $1.5 billion in state coffers as they make tax and spending plans for the next year, although state budget officials also said Thursday that the financial impact of the spreading coronavirus remains uncertain.

DFL Gov. Tim Walz and Republican and Democratic lawmakers have offered competing priorities for the expected surplus, which was up slightly from the previous estimate of $1.3 billion in November. Walz advised restraint Thursday on any new tax cut or spending proposals.

"I'm going to urge caution here," Walz said, adding that budget numbers show just a small improvement in the overall budget picture. "Especially where we see yellow flashing lights in an economy … There were already reasons to be cautious." The new forecast does not show a dramatic change in the state's financial trajectory since the Legislature passed a $48 billion two-year budget last year. However, the $181 million increase in the projected budget surplus could alter the contours of lawmakers' supplemental budget plans this year.

One of Walz's top priorities is ensuring that a rainy-day fund is flush in preparation for a predicted economic downturn. Last session he and the Legislature agreed to withdraw $491 million from Minnesota budget reserves as they worked to reach a deal on the budget. The governor said he would like to return that amount to the reserves, which are currently at nearly $2.4 billion. Walz also said he will prioritize spending on education, farmer safety, the depleted disaster aid fund, insulin access and a coronavirus response.

"We do believe it's wise for Minnesota to have a rainy-day fund so if there's an economic downturn we're ready for it, but there are also some other priorities we want to weigh out," said Senate Majority Leader Paul Gazelka, R-Nisswa.

For Senate Republicans, Thursday's increased revenue estimate bolstered their argument for a tax-cut package. Pieces of their proposed $1 billion plan include eliminating the state tax on Social Security income, reducing the lowest income tax rate and fully conforming with federal tax law on business expenses.

Sen. Ann Rest, DFL-New Hope, offered a sharp rebuke to the GOP tax plan. "We're at a good point now, but we shouldn't waste it with reckless tax bills," she said.

But House Speaker Melissa Hortman, DFL-Brooklyn Park, said any agreement on how to use the $1.5 billion surplus will need support from both Democrats and Republicans. The DFL majority in the House is looking to use $500 million of the surplus to support young learners. That would include expanding early learning scholarships and the state's child care assistance program.

The Legislature is also trying to reach a deal this session on a bonding bill to authorize state borrowing for public construction projects.

"It's also really important, with the potential of a downturn in the future, that we invest big in the bonding bill," Hortman said.

Hortman and Walz both have argued that the state should take advantage of the strong economy and low interest rates as they seek to finance long-term bonds. Walz has proposed a $2 billion general obligation bonding bill; House Democrats have suggested they were open to $3.5 billion, far above the figure Republicans want.

"We're not setting a hard and fast limit on what [the number] should be," said House Minority Leader Kurt Daudt, R-Crown. "Is there a chance we could go above $1 billion? There's a chance we could. Is there a chance we could go above $2 billion? Probably not."

Minnesota Management and Budget officials said the higher surplus estimate came from a combination of increased corporate tax revenue and decreases in education spending as growth in the state's student population was lower than anticipated.

Despite the larger surplus, Budget Commissioner Myron Frans warned that budget estimates don't account for inflation, which is estimated to grow by $1.1 billion over 2022-23. Some House members have suggested factoring inflation into future forecasts.

Officials also highlighted the state's employment picture, which shows a greater number of job openings in the state than there are job seekers. As employment growth slows and wages accelerate moderately, workers' incomes are predicted to grow by roughly 4% each year through 2023.

While national economic growth is stable — continuing the longest expansion in U.S. history — a slowdown is expected late next year, Thursday's report states. And state officials warned of the risk from coronavirus.

The new revenue figures do not fully account for the potential financial impact of the disease, officials said. They relied on data released three weeks ago by the consulting firm IHS Markit. Since then, the virus has spread further across the globe and driven down stocks. Walz and federal officials have said it's inevitable that it will spread within the U.S.

"Every day brings new understanding of the public health effects," state economist Laura Kalambokidis said. "If the impact of the outbreak becomes more prolonged or widespread than it appeared at the time IHS constructed their February outlook, U.S. economic growth could be slower than forecast."

Staff writer Briana Bierschbach contributed to this report.

Jessie Van Berkel • 651-925-5044