Minnesota’s stable economy has left the state with a $1.4 billion projected budget surplus for the next two years, but slow growth and questions about the incoming Trump administration could blow a hole in the state’s economic picture.

A new state budget and economic forecast released Friday showed that the state took in slightly less tax money than expected in the last budget period, but the state made up for it with lower spending, particularly on health care.

“This forecast may sound boring to you all, but trust me, in this case boring is good,” said Myron Frans, commissioner of the Minnesota Management and Budget office. “Because boring today means our budget remains stable and structurally balanced.”

State economist Laura Kalambokidis said Minnesota’s economic outlook shows continued growth but warned tax cuts, new transportation spending or political upheaval under President-elect Donald Trump’s administration could alter the state’s economic picture. Friday’s forecast projections are for a two-year budget period that won’t start until next summer, and the national predictions were completed before Election Day.

The forecast noted that the country is in an economic expansion period well into its eighth year, and soon to be the third longest since the 1850s. Kalambokidis said the country’s long, slow recovery makes the “economy more vulnerable to shocks,” she said.

Gov. Mark Dayton offered a somewhat gloomy assessment as legislators prepare to convene in early January to begin crafting a two-year budget and figure out how to spend the surplus.

“We’re in a time of continuing economic insecurity,” Dayton said. “These projections occurred before the election and nobody knows what those impacts are going to be.”

Dayton and some legislative leaders want to guard against spending the entire surplus and then having the state slip into deficit if the economy sours. “To me, it means we need to be cautious and prudent and recognize that our economic growth is constrained by the national economic growth,” the governor said.

The twice-annual forecast gives a glimpse into the economic condition of the state and region, as well as state spending trends under existing law.

The surplus is likely to produce a clash between state lawmakers as they spar over tax cuts, health care costs and other spending priorities as they begin debate on a new two-year budget.

By state law, a third of the money left over at the end of the last two-year budget cycle — $334 million — is to be added to the state’s rainy-day fund, which now stands at roughly $1.9 billion. Dayton and legislators, however, are considering using that chunk of the surplus to help reduce health insurance costs for Minnesotans facing skyrocketing premium increases next year.

Dayton and legislative leaders said Friday they were close to a deal for a special legislative session later in December to provide aid to Minnesotans hit hard by soaring health insurance premiums, along with a menu of tax cuts and new spending on state building projects.

If an agreement can be reached, the special session would wipe away about half the projected budget surplus.

The governor said Friday that he is currently examining spending requests from state agencies and other groups. But he signaled that his budget proposal would likely be less ambitious than previous ones where he proposed universal preschool and a 10-year comprehensive transportation package that also funded expanded public transit. In the face of a diminished economic forecast, Dayton said he is not likely to propose any new big-ticket items.

Republican legislators, meanwhile, said they’ll be eyeing ways to save money and pay for priorities like health care, improving roads and bridges and perhaps offer some kind of tax reductions.

Dayton pointed out that the state had faced multibillion-dollar budget deficits before he took office and praised the stable economic outlook, but House Speaker Kurt Daudt, R-Crown, said he wasn’t as cheerful about the state’s financial position.

“I think it is a status quo forecast,” he said. “But I would not agree that we should be congratulating each other on a status quo forecast.”

Sen. Paul Gazelka, R-Nisswa, who will take over as Senate majority leader in January, said he hopes the new Republican majority in both houses of the Minnesota Legislature will be able to enact reforms expected to come out Congress, which is also under Republican control. Chief among his hopes: a repeal of the Affordable Care Act, a top priority for Trump during the campaign.

“No. 1 in the Senate is to fix the health care crisis,” Gazelka said. “It is truly a crisis in many places and if we do nothing we will not have fulfilled a promise that we meant to keep.”

Incoming House Minority Leader Melissa Hortman, DFL-Brooklyn Park, said legislators should turn their attention to economic disparities across the state.

“The work before us in the Minnesota Legislature is to make sure that for families who are still struggling to afford college education, and child care, and high-quality preschool opportunities for their children, that we make sure this budget surplus improves their lives,” she said.

 

ricardo.lopez@startribune.com 651-925-5044

erin.golden@startribune.com 612-673-4790