Minnesota has a $3.7 billion surplus, but budget officials warn against spending it all

Minnesota lawmakers will have more money available this year than previously expected as officials on Thursday projected a $3.7 billion state budget surplus.

That’s an increase of $1.3 billion from projections in December, driven by higher-than-anticipated tax collections over the past few months as spending estimates remained mostly unchanged. Minnesota also has about $2.9 billion in its rainy day fund.

“Our economy is humming along,” DFL Gov. Tim Walz said Thursday, touting the Legislature’s spending last year on a free school meals program, a child tax credit and a sizeable infrastructure bill. “The forecast doesn’t change our focus for this session. We’re focused on implementation and infrastructure.”

Last spring, Minnesota lawmakers passed a two-year $70.5 billion budget and spent nearly all of a $17.5 billion surplus. The main job for lawmakers this year is passing a package of construction projects in a bonding bill, but individual DFL lawmakers have already pitched some new spending on child care, schools and other priorities.

While the state’s surplus has improved, officials urge caution. A potential shortfall of about $1.5 billion could occur in the coming years if lawmakers don’t leave some of the surplus on the bottom line.

“If they spend more than $2.2 billion, it would then be projected to dip into the negative,” said Minnesota Management and Budget Commissioner Erin Campbell.

The imbalance has shrunk since the most recent forecast in December. That report showed a $2.4 billion surplus this year, followed by a deficit of nearly equal size in the next budget if the surplus wasn’t left completely intact.

Republican legislative leaders were less optimistic about Thursday’s surplus news. They said Minnesota remains at risk of a deficit in the near future.

“Republicans have been warning since last session that this rampant spending will only hurt Minnesotans, and this forecast proves that,” said House Minority Leader Lisa Demuth, R-Cold Spring.

Budget officials said they expect the state’s economic outlook will improve this year and into the next. Minnesota’s unemployment rate is below the national rate, and economists expect inflation to continue dropping. Corporate profits and tax revenues are also expected to grow over the next two years.

State Economist Laura Kalambokidis said conflicts overseas or a possible federal government shutdown could shift the positive outlook.

Since the current session convened Feb. 12, top Democratic legislative leaders have preached caution to avoid a deficit in the next state budget. They continued to do so Thursday while signaling some openness to one-time spending.

“I don’t want to dismiss that there’s more that we can do, but I think it’s important to have a systematic, long-range approach to this,” Walz said of his spending approach this year.

House Speaker Melissa Hortman, DFL-Brooklyn Park, said Minnesota has “surpluses as far as the eye can see” under Democratic leadership. But, she said, “we certainly are cognizant of that structural imbalance.”

Hortman said the House DFL members will focus on affordability for child care, housing and health care. She said lawmakers could use some of the additional surplus to fund infrastructure projects with cash instead of bonds. The economic forecast released Thursday assumes lawmakers will pass an infrastructure bill that would borrow $980 million.

Senate Majority Leader Erin Murphy, DFL-St. Paul, said some of the surplus could be used in a bill that would spend $120 million on the state’s emergency medical services (EMS) system.

The Coalition of Greater Minnesota Cities called for that spending Thursday, saying in a statement that the state’s EMS system is at a “breaking point” with some communities unable to afford local ambulance services.

“It will be among the things that are considered as we move forward,” Murphy said.

Demuth criticized Democrats for what she said was wasteful spending on items such as state commissioner pay raises and a costly renovation of the State Office Building adjacent to the Capitol.

Senate Minority Leader Mark Johnson, R-East Grand Forks, lamented that the state no longer has enough money to fully eliminate Minnesota’s tax on Social Security income. He and Demuth rebuked Democrats for not doing that last year when the surplus was larger.

And Johnson said he isn’t convinced Democrats will leave any of this surplus intact.

“They spent $17.5 billion of our surplus,” he said. “Their rhetoric does not always match the actions.”