Minn. leaders expect to see a modest budget surplus Friday

State political leaders gearing up for a contentious budget battle at the Capitol next year expect a modest surplus to be reported Friday, when budget officials unveil their twice-yearly economic and budget forecast.

The budget number is a closely held secret until forecast day, but legislative leaders predict the surplus will likely be in the neighborhood of $729 million — the amount left on the bottom line after the last legislative session.

The report's release sets the stage for a political clash over tax cuts, health care spending and a renewed push for road-and-bridge funding. With both chambers of the Legislature controlled by Republicans next year, some expect a GOP agenda to dominate much of the debate once legislators return to St. Paul in January. DFL Gov. Mark Dayton and DFL legislators will face stiff resistance for any new spending proposals, GOP legislators said.

Weighing on Minnesota's economic picture is the effect of the still-emerging agenda of President-elect Donald Trump, who is filling out key Cabinet positions and other leadership roles. Economists and others are unsure how the economy might perform during a Trump administration. A trade war with other countries, in particular China, a global economic powerhouse, could hurt the economy. Others say tax cuts or fewer federal regulations could energize the economy.

"We're still in that period of uncertainty," said incoming Senate Majority Leader Paul Gazelka, R-Nisswa. "My perspective is: Move forward carefully. I don't think we should be adding any new big spending programs."

Gazelka said his priority will be to address skyrocketing health insurance premiums for many Minnesotans next year. Another top priority will be tax cuts, particularly after Dayton vetoed a $260 million tax cut package over a wording error that could have cost the state millions of dollars.

A borrowing package is also likely after legislators failed last year to reach an agreement on capital improvement projects around the state.

Myron Frans, commissioner of the Minnesota Management and Budget office, said the economic forecast will not include projections on how the economy might perform under a Trump administration, but those factors could influence the February forecast.

"It's so difficult when he's still putting together the Cabinet now. … It's difficult to see how this all comes together at that point," Frans said. "It will depend on how much is really known to the extent we can act on it. There may or may not be a lot of certainty at that point."

Since February, when the state budget office published its last forecast, the state's economy has mostly met expectations. The state's low unemployment rate — 4 percent in October — has held mostly steady, though some employers have reported labor shortages. The state's budget reserve of about $1.9 billion has reached a record level, and it's poised to grow larger if there is another surplus.

Dayton and other legislators have supported using some surplus money to pay down health insurance costs for Minnesotans facing skyrocketing premium increases in the coming year. Gazelka said he could support immediate, short-term aid to the 125,000 Minnesotans who purchase health insurance on the individual market but make too much to qualify for federal subsidies.

Frans said the governor's budget — likely to be released in late January — would also include other priorities he has previously championed.

State Sen. Dick Cohen, a veteran DFLer from St. Paul, said he does not expect DFL priorities to get much attention from the new GOP leadership. "Most of the governor's plans will not get much of a hearing from them," Cohen said.

State Rep. Jim Knoblach, R-St. Cloud, chairman of the House Ways and Means Committee, said Republicans will be closely examining the state budget to look for potential "savings," particularly in health care spending, one of the largest spending categories. "Every area will get scrutiny," he said.

Looking ahead, Knoblach said he's unsure how the economy would perform, but said that "with Trump being elected, there's a wide range of variation — wider than the usual range of forecasts."