Surprise $876 million state surplus raises Capitol spirits

  • Article by: BAIRD HELGESON and JIM RAGSDALE , Star Tribune
  • Updated: December 2, 2011 - 7:37 AM

$876 million eases deficit fears but makes small dent as it must go to reserves, while schools are still owed.

Minnesota's strengthening economy and previous budget savings leave the state with a projected surplus of $876 million, but the flash of good news comes with warnings that the respite could be brief.

News of the surplus Thursday morning stunned legislators who had been bracing for a potentially deep deficit and another brutal budget showdown come January.

"Surprise!" Minnesota Management and Budget Commissioner Jim Schowalter said as he announced the latest state economic forecast. After a four-year, unbroken cycle of deficits, he said, "Certainly, it's a good day."

The strong economic forecast came just five months after state leaders wrestled down a $5 billion deficit through a mix of service reductions, borrowing from public schools and private lenders, and an unprecedented 20-day state government shutdown.

"This forecast is terrific news for Minnesota," DFL Gov. Mark Dayton said.

Schowalter quickly warned that the new money barely dents the state's battered finances. State law dictates the surplus go to refill the state's cash flow account and tapped-out budget reserves. None of it will be used to repay public schools the more than $2 billion they are owed. It will take years of strong budget forecasts before rating agencies restore the state's tarnished credit.

Thursday's surplus projection was accompanied by a less welcome prediction: A $1.3 billion deficit for 2014-15, and a greater than normal chance of recession in 2012.

State Economist Tom Stinson framed Minnesota as a bastion of economic strength that is outperforming the nation. The state's unemployment rate of 6.4 percent is a couple of percentage points below the national average, and wages are ticking up. About 53,000 more Minnesotans are working now than during the depths of the Great Recession.

But Minnesota's recovery is decidedly fragile. IHS Global Insight, the state's economic consultant, said that oil price shocks, tepid employment growth and supply chain disruptions contributed to weaker economic growth. That was compounded, IHS said, by "a general decrease in the public's confidence in the ability of existing institutions to put the economy back on track."

The nation's economy faces more uncertainty with the debt crisis in Europe and the failure of the so-called supercommittee in Washington.

If Congress does not vote to extend the payroll tax reduction and unemployment benefits, the surplus will shrink.

"There is a real possibility that this could go bad," Stinson said. A second forecast is due in February.

Groups that suffered cuts were frustrated that there is no plan for them to be repaid or to have their funding restored.

"Schools and colleges have paid a pretty steep price for the state to have a slightly brighter future," said Tom Dooher, president of Education Minnesota, the teachers union.

Dooher said schools are owed almost $4,000 per student. "We've got to get our priorities right," he said.

Truly, a surprise

News of the surplus startled the most seasoned Capitol watchers.

Even in recent days, legislators and agency heads were bracing for another significant deficit, with some predicting more than $1 billion.

The economic forecast remains one of the state's most closely held secrets. It's an ironclad rule inside the budget office not to release the numbers early. Schowalter can't share them -- or even hint at them -- with the media, legislators or even the governor.

As late as Wednesday, no one outside Schowalter's inner circle envisioned a sizable surplus.

When Schowalter delivered the news 8:30 a.m. Thursday in the governor's office, Dayton and his staff were flabbergasted. Dayton later told reporters: "I am surprised, too."

The news knocked the wind out of some political arguments and strategies on both sides. Dayton said he is setting aside plans to reintroduce his proposal to raise income taxes on high earners, snuffing out a mantra that helped get him elected and that continues to poll well.

Republicans may have to do their own recalibrating. A significant chunk of the savings that created the surplus came from the administration's health care retooling and Dayton's embrace of President Obama's health care overhaul, which Republicans vehemently oppose.

Legislative leaders in both parties expressed no willingness to change state law to redirect some of the surplus to either services or tax relief.

"This isn't a victory, this is a good start," said Senate Majority Leader Amy Koch, R-Buffalo.

She had stern words for the governor's unsuccessful budget solution: "The Dayton tax hike plan is dead."

Said House Speaker Kurt Zellers, R-Maple Grove: "It's only November. There are a lot of things in there that could happen."

House Minority Leader Paul Thissen called the surplus an illusion. "Most Minnesotans understand that when you have some money in your savings account but you've maxed out your credit card, your savings account balance isn't real," said Thissen, DFL-Minneapolis.

With more time to tackle policy initiatives, Dayton and legislative leaders say they will renew their focus on government reform to ward off future deficits.

Stadium chances

Dayton and some legislators said the surplus could allow more time to consider a new state-funded stadium for the Minnesota Vikings.

Sen. Julie Rosen, R-Fairmont, the chief Senate stadium legislation author, said the positive forecast may have helped the stadium politically. "It just makes my life a little bit easier that we don't have to be cutting into health and human services, and building a stadium, and have to explain why," she said. A Senate hearing on Tuesday will comb through funding options for the project.

Sen. John Marty, DFL-Roseville, an outspoken critic of public subsidies for stadiums, said the forecast was unlikely to change many minds.

"The people who are supporting [the stadium] would support it no matter what the situation was," he said. "I don't think this fundamentally changes" anything, Marty said.

Staff writers Rachel E. Stassen-Berger and Mike Kaszuba contributed to this report. jim.ragsdale@startribune.com 651-925-5042 baird.helgeson@startribune.com 651-222-1288

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  • Management and Budget Commissioner Jim Schowalter got to announce the surprise.

  • Gov. Mark Dayton called the forecast of a surplus “terrific news for Minnesota.”

  • GOP legislative leaders Amy Koch, left, and Kurt Zellers urged caution.

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