Minnesota's $900M budget surplus is lower than expected

Minnesota political leaders' visions of tax cuts, road repairs and early childhood education got an abrupt jolt Friday when a new economic forecast shrank the state's projected budget surplus to $900 million.

"This should give us all pause in terms of our plans," Gov. Mark Dayton said after the release of the report.

The new surplus number will frame the upcoming budget fight at the Capitol, where legislators will convene March 8. Dayton and legislators have already been staking out political turf over how to carve up the extra money, a battle that will become all the more heated in an election year.

Minnesota's twice-annual budget snapshots offer a detailed look at state and national economic trends, as well as an in-depth analysis of state spending over the two-year budget cycle.

State budget officials said the state's economy remains relatively healthy, but there are signs the national economy will weaken.

While consumer spending and homebuilding were healthy, the agency cited three negative influences: a glut of business inventory, depressed oil-related investment and the drag on global trade from the stronger dollar.

Growth in employment and income is expected to remain modest this year and next.

A bright spot in the forecast is a reduction in state spending on health care. Budget officials predict the state will spend $129 million less on health care than was forecast just last November, due in part to an increase in federal money.

Minnesota has seen a series of strong budget forecasts since digging out of the Great Recession, which brought a string of multibillion-dollar projected deficits. As the state's economic fortunes rebounded, state officials repaid money borrowed from public schools and refilled the budget reserves to their highest levels in history.

Some state leaders were expecting the surplus to match or exceed the $1.2 billion projected late last year, so the reduction is throwing some proposals in question and tempering expectations for others.

Dayton had proposed borrowing $1.4 billion for new statewide building projects, but now a bonding package of that size seems less likely.

"I think everything got a little harder," said Senate Majority Leader Tom Bakk, DFL-Cook.

Dayton said he would rework his budget proposal in coming weeks, but will not relent on his signature initiative — state-paid preschool. "If we're not going to expand pre-K now, I don't know when we will," the governor said.

Budget Commissioner Myron Frans praised the state for its careful financial management after seeing years of deep deficits. But he said political leaders must be mindful of how to balance spending proposals this year with their financial impacts in the following biennium, when the economy will be even less certain.

"We need to talk about ongoing spending items vs. one-time spending," Frans said.

Offering veiled support for DFLers, Frans noted that the $100 million proposal to expand broadband (pushed by the DFL governor) was an example of one-time spending, while permanent tax cuts (sought by GOP lawmakers) would have to be accounted for in spending plans for years to come.

Bakk cited concerns about the uncertainty in coming years when he questioned how the state would achieve his long-held priority of increasing aid to local governments.

"I don't know how much today, at least, we're going to be willing to commit," Bakk said.

Republicans pointed to the dimmer economic forecast as a reason to pass more tax cuts, a debate that promises to loom large over the session.

"Is anybody surprised that the Democrats' plan is it's OK to spend this money, but we can't give any of it back to taxpayers?" asked House Speaker Kurt Daudt, R-Crown. "We're collecting almost $1 billion more than the state needs."

Daudt said the forecast showed how higher taxes and regulation are "hurting Minnesota's economy … we need to take this as a sign that now is the time to address those."

But Bakk set the stage for a budget showdown, saying the Senate would not support tax reductions.

"The Senate is not going to take the strategy of … if we could just cut taxes we're going to grow faster," Bakk said. "It's not going to happen."

The spending debate is certain to get caught in the swirl of election-year politics at the Capitol. Republicans are looking to preserve their House majority, while the DFL aims to hold onto power in the Senate.

"The chances of a successful session have less to do with this forecast than they do with a dynamic of a Legislature that's entirely up for re-election," Dayton said.

Staff reporter Patrick Condon contributed to this report. Maya Rao • 651-925-5043