Modest budget surplus calls for caution

Opinion editor's note: Editorials represent the opinions of the Star Tribune Editorial Board, which operates independently from the newsroom.

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Minnesota has yet another budget surplus — $2.4 billion this time — but its size should serve as a cautionary sign that the times are changing.

Much of the economic news in the recently released state forecast is good. Jobs are plentiful, and a recession that had been predicted didn't materialize. Inflation appears under control, and the state's budget reserves are brimming.

That is due partly to higher-than-expected consumer spending and business investment.

As Gov. Tim Walz noted when the forecast was released, "We're in a solid place." And he's not wrong. However, whether it stays that way will depend on the actions taken in this upcoming legislative session, which starts in February.

Minnesota Management and Budget Commissioner Erin Campbell understands the duality of the task ahead and the careful management of funds that will be required.

By the end of fiscal 2027, she said, the state's surplus could be as low as $82 million. That, she said, "provides little cushion when you consider the size of our projected state budget. Such a small balance, together with a structural imbalance, suggests policymakers will need to be very thoughtful when making budget decisions this next year."

Spending most of the projected $2.4 billion surplus could drive the state toward an a projected deficit of $2.3 billion. A note about that projection: This budget forecast is the first in years to include inflation on both sides of the ledger, the result of action taken by the DFL-dominated Legislature and Walz to bring greater transparency to the budget. Without it, the shortfall would have been closer to $1.5 billion but would have included the same willful refusal to recognize inflation as a fact of life.

A mind-boggling amount of funding washed through this last legislative session, thanks to a once-in-a-millennium $17.5 billion surplus that was a combination of one-time and ongoing revenue. In addition to massive new spending programs, the Legislature also pushed through several billion dollars in tax relief: rebates and other tax changes that boosted several credit programs and raised the exemption for state taxation of Social Security income.

Democrats are gambling that those changes will attract workers to this state, spur economic growth and drive future revenue and, Walz said, "historic job creation." But job creation does not appear to be among this state's problems at the moment. Rather, it is the shortage of labor across the spectrum that is hindering economic growth and business expansion. That has given the workforce a rare upper hand as a sought-after commodity. But the worker shortage also has constrained growth, as have tightened lending standards and higher borrowing costs. An aging population has added to labor market pressures.

So many changes were made in the last session that it will take time to determine the full impact — and the full costs. Already the move to fully fund free school breakfast and lunch programs, initially budgeted to be $400 million over the next two years, is projected to cost $81 million more over the biennium. There may be other surprises as well.

The Dec. 12 editorial on Minnesota's budget forecast incorrectly reported the increased projected cost of the new universal school meals program, which was initially budgeted at about $400 million over the next two years but is now estimated to cost $81 million more over the biennium.

All of which means Democrats should temper their expectations regarding more spending — however worthy or desired — such as assistance with child-care expenses.

"We'll be having that conversation, because as the economy continues to grow, we have record employment, we have low unemployment, some people are still struggling," said Senate Majority Leader Kari Dziedzic, DFL-Minneapolis. "And so how do we help lift everybody up?"

The unpleasant fact is that given limited resources, that may not be possible. What is more important is to ensure that the many worthy changes already made are sustainable into the future, avoiding disruptions that already mark the lives of those who rely on government programs.

Walz signaled that some of those programs should remain untouchable. "I'm not cutting meals for kids or services to our most vulnerable," he said.

Of course, the lowered expectations apply to Republicans as well, and their ongoing desire for more tax cuts. Rep. Kristin Robbins, R-Maple Grove, an assistant minority leader who sits on both the Rules and Committee and Taxes, acknowledged reality when she told MPR News that "Spending is expected to exceed revenues to deficit, my friends, and so that's what we have to get a handle on."

Stability and sustainability would be good watchwords for the upcoming session. One item that could use a slight spending bump: More and better supervision of funding grants. Far too many audits have been pointing to patterns of lax monitoring. Taxpayers have a right to demand a rigorous accounting of the funds spent on their behalf, and the results could stretch existing funds a lot further.