Dayton, Republicans have different visions for $1.9 billion surplus

Minnesota's predicted budget surplus has nearly doubled, leaving Gov. Mark Dayton and state lawmakers with $1.9 billion to spend, save or return to taxpayers.

DFLers and Republicans alike celebrated the forecast, which is based on the improving state and national economies.

"Minnesota's good economic news continues," Dayton said Friday. Republican House Speaker Kurt Daudt said: "Today is a good day for Minnesotans."

The agreement largely ended there.

The forecast surplus, which is $832 million more than expected just three months ago, lays the foundation for 11 weeks of intense negotiations at the Capitol. It also quickly revealed a gaping difference between Dayton and Daudt on what to do with the newfound gains.

"I propose that we invest our collective good fortune in our collective better future," Dayton said, specifically pointing to his proposals on education and transportation.

Daudt sees the surplus as evidence that the state has collected too much in taxes. He said Republicans will seek to return at least half the surplus — $900 million — to taxpayers.

"We need to give it back," Daudt said. He was less definitive about whether that proposal would mean wide-ranging tax cuts or rebates, or more targeted relief through tax credits or carve-outs to smaller subsets of taxpayers. GOP lawmakers already have introduced a number of targeted tax cuts, with business owners and farmers among those who stand to benefit.

Dayton, DFL priorities

Dayton, who will release an updated budget proposal March 9, said he will seek an additional $444.2 million in spending out of the $832 million newly added to the surplus. He is seeking universal pre-kindergarten for every Minnesota child, a two-year tuition freeze at all public higher education institutions and a $25 million bump in state grants for college students.

He also wants to restore funding in his revised budget to the Minneapolis Park and Recreation Board and the Minnesota State Colleges and Universities systems (MnSCU). In his earlier budget proposal Dayton would have withheld Park Board funding because of what he called obstruction of the Southwest light-rail project. He also said at the time that MnSCU would get no new money until it resolved its internal squabbles between administration and faculty. Both those disputes now appear headed for resolution.

Republicans also plan to spend some portion of the surplus, with Daudt noting public schools, nursing homes and road and bridge repairs as three likely recipients.

"We will be proposing spending but it will be spending targeted at results," said Senate Minority Leader David Hann, R-Eden Prairie. Hann recently backed a GOP Senate proposal to create a $1,000 nonrefundable tax credit for families with children under the age of 5 that would have no income eligibility cap.

Dayton, while not proposing any specific tax relief, said he would listen to Republican proposals. But leading Republicans also came out stronger than ever before against Dayton's separate $11 billion proposal to raise state taxes on gasoline and license renewals to pay for road, bridge and transit projects.

"I think this surplus means Democrats can stop talking about a gas tax in St. Paul," Daudt said.

But Dayton and DFL leaders say they will not abandon that push.

The state's aging transportation system needs long-term sources of new funding that keep up with population growth, DFLers say, not a one-time infusion of surplus money.

Improved outlook

The economic forecast, complied by Minnesota Management and Budget, attributes the better economic outlook to an improved labor market, lower gas prices and a stronger U.S. dollar.

State Economist Laura Kalambokidis said Minnesota's labor market is tightening. Unemployment is now at 3.6 percent — the state's lowest jobless rate since early 2001. A tighter labor market should drive future wage growth, which now is expected to increase 5.4 percent on an annual basis in 2015, she said. The Twin Cities area has the lowest jobless rate of any large metropolitan area in the country, at 3.3 percent.

The number of long-term unemployed and those who work part-time when they would prefer full-time also has fallen sharply.

Lower gasoline prices are freeing up considerable cash for consumers whose confidence has largely rebounded. Improved consumer confidence nationally "is buoying consumer spending, which is the largest driver of the U.S. outlook," Kalambokidis said.

Not all states are benefiting equally from improved national conditions. Wisconsin, for example, is facing a projected deficit of about $2 billion following an $800 million tax-cut package a year ago that was intended to spur economic growth. Minnesota officials said that since the November budget forecast, revenues are projected to rise an additional $616 million, or 1.5 percent in fiscal 2016-17, due mostly to more robust individual income tax revenues and higher sales tax receipts.

Meanwhile, projected spending for fiscal 2016-17 is down $115 million, or 0.3 percent. The projected savings comes mostly from E-12 education, including lower enrollments, fewer students in poverty and reduced special education costs.

"Today's news is very good news; over the last few years, we have righted the ship," said Myron Frans, who was recently appointed budget commissioner. In recent years, "we were facing large deficits as we began the budget process. By focusing on balanced budget proposals, we've paid back our schools, enhanced strong revenues for the state. … We've carefully managed our state budget."

Patrick Condon • 651-925-5049

Ricardo Lopez • 651-925-5044