ST. PAUL, Minn. — Minnesota will have a projected $1.5 billion surplus for the next two-year budget period, state officials announced Thursday, setting the stage for a spirited debate over taxes and spending in the legislative session that starts in January.
The healthy surplus gives Democratic Gov.-elect Tim Walz and the Legislature more room for spending initiatives, tax cuts or some combination of both, and all sides made it clear that they have different ideas. The forecast also gave retiring Democratic Gov. Mark Dayton a chance to contrast the state's fiscal picture now with how it looked when he became governor.
"It's a remarkable recovery from the financial shambles since taking office eight years ago," Dayton told reporters. He recalled that he inherited a $6.2 billion deficit, the state owed school districts $1.8 billion in delayed payments and the state had virtually no financial reserves.
But the governor pointed out that Thursday's forecast from Minnesota Management and Budget also said the state's rainy day fund has grown to $2 billion to guard against future downturns. Legislators would have to change current laws to tap any of that money.
Democrats took control of the Minnesota House in last month's elections, while Senate Republicans maintained their one-seat majority. The partisan split will force lawmakers and the governor to make compromises.
GOP leaders said the surplus shows there's no need to raise the gas tax to fund road and bridge improvements, as Walz has proposed. They supported tapping the surplus to fund those projects instead. Senate Majority Leader Paul Gazelka said possibilities for tax cuts include eliminating state taxes on Social Security income, giving a break for child care costs and lowering all income tax brackets.
"That's where the conversation is going to begin," he said. "There's going to be much more openness for that than there was prior to this forecast."
Dayton said the main reason for the turnaround is that Minnesota employers have added over 318,000 jobs in the past eight years, and unemployment has dropped from 6.9 percent in 2011 to 2.8 percent today.
"There are still too many in our state who have not achieved this prosperity. A disproportionate number of our farmers, minorities and recent immigrants are suffering economically. But overall our state's economic condition has dramatically improved," he said.
Walz credited Dayton for restoring financial stability. But he gave few specifics about what he plans for new spending or tax changes. He said his priorities will be education, increasing access to affordable health care and revitalizing local communities across the state.
The governor and lawmakers will get an updated forecast in February that will guide them through the end of the legislative session in May. Walz is due to release his budget outline by Feb. 19.
MMB officials told reporters the budget outlook remains sound despite slower growth expected through the 2020-21 budget period, which begins July 1. They said slower economic growth is projected to continue into 2023, resulting in a slowdown in revenue growth, lowering the projected surplus for the 2022-23 budget period to only $456 million.
That led incoming House Speaker Melissa Hortman to strike a cautious note, saying there is significant uncertainty in the forecast due to President Donald Trump's trade war with China. She also pointed out that the forecast doesn't take inflation into account.
"So it's not a forecast that allows us to go into session and talk about a lot of new spending and tax cuts," she said. "That would not be fiscally responsible."