Minnesota's economic outlook will ratchet up the political rhetoric

Minnesota's economic growth is ranked among the strongest in the nation. The state's unemployment rate is far lower than the national average. Tax revenue is pouring in, and once-depleted budget reserves are flush.

A state economic forecast, to be released Thursday, is expected to affirm Minnesota's rising fortunes and also touch off a fresh round of political maneuvering, as DFLers and Republicans try to claim credit for the upswing.

"Right now, the state is doing really well," said Minnesota Management and Budget Commissioner Jim Schowalter, who will release the new budget forecast. He credits "the discipline of the governor and the Legislature, both parties," to rapidly repay debt when the economy sinks and the budget comes up short.

The road to recovery has been long, slow and at times uncertain. A deeper look shows that even as both sides work to tie their ideologies to the upswing, both had a hand in actions they'd prefer to forget.

Under former Republican Gov. Tim Pawlenty and a DFL-controlled Legislature, the state drained its budget reserves and borrowed heavily from schools to balance the budget. They cut aid to local governments and trimmed increases to higher education spending. Tuition soared, and property taxes rose even as land values fell.

When DFL Gov. Mark Dayton took over and Republicans controlled the Legislature, the two sides drove the state into a 20-day partial government shutdown, in a bitter split over income tax increases for the state's wealthiest residents.

Ending the shutdown, Dayton accepted a final Republican budget offer that did not include the tax hikes he sought, filling the revenue gap instead through more school borrowing and the sale of $700 million in tobacco-backed bonds. All told, the state fell behind in payments to K-12 public schools by nearly $3 billion.

"It certainly was alarming, because the trend before had been to structurally balance the budget," said Kimberly Lyons, Moody's lead Minnesota analyst. "There was a lot of borrowing … and they were the only state to have an actual shutdown."

Minnesota was not the only state to endure fiscal hardship, nor the only state to rely on one-time fixes, "but in isolation, Minnesota hadn't taken action like that in a very long time," Lyons said.

Senate Minority Leader David Hann said all sides are to blame for past budget solutions. Republicans refused any budget agreement that included income taxes. They proposed higher K-12 borrowing to close the gap. When Dayton offered to push that borrowing even higher, Republicans balked and offered to include tobacco bonds. Eventually, the two sides agreed on a plan to delay another $700 million in payments owed to schools and about $700 million in bonds that would be paid from the state's tobacco settlement.

"It was the lesser of two bad things," said Hann, R-Eden Prairie. "The additional taxes would have been worse for people."

DFLers leveraged the budget showdown to win back control of the Legislature, seizing a rare moment of one-party control at the Capitol.

"It's sort of a perfect turnaround story," Lyons said. "They recognized where they went wrong, laid out a plan to turn it around and followed the plan."

That does not mean it is without political consequences. The last few economic forecasts have predicted surpluses, through the GOP-led budget that the rating agencies have criticized.

If the new forecast predicts a deficit, even a tiny one, Republicans will pounce.

"The Democrats have just passed one of the largest tax increases in state history, and it has had a chilling effect on Minnesota's economy," said House Minority Leader Kurt Daudt, R-Crown.

Dayton has said that if Republicans had dropped their earlier opposition to tax increases, the state would have emerged from the downturn with mammoth surpluses.

"The Legislature's job is to do things today to help in the future," he said. "I find this taking credit, taking blame, a little frustrating and beside the point."