Gov. Mark Dayton and some legislative leaders are expecting the state budget surplus to swell to more than $1 billion, which is likely to touch off a fierce battle at the State Capitol over how to spend it.

Minnesota budget officials on Thursday will release the state budget and economic forecast, a twice-yearly snapshot of the state’s budget, factoring in the latest trends in the state and national economy.

“Obviously, we’re already starting with a healthy bottom line,” Dayton said this week, referring to the $865 million left unspent after the last legislative session. “I expect it’ll add to that, but I don’t know how much.”

The budget number is a closely held secret until forecast day, but some predictions are already quite rosy. One legislative leader predicted that the surplus could approach $1.8 billion, based on the strength of the economy and robust tax collections that have outstripped earlier predictions.

Since February, when the Minnesota Management and Budget agency released its most recent forecast, the state’s economy has performed well and mostly met expectations.

There are signs of weakness, however; the pace of hiring has slowed in recent months, the housing market has been stymied by a significant share of underwater mortgage loans and the state’s manufacturing sector has softened.

Minnesota has added nearly 24,000 jobs in the past year, a growth rate of 0.8 percent — well below the U.S. growth rate of 1.9 percent over the same period. The state’s jobless rate in October was 3.7 percent — the same as the previous October — but it remains well below the national average.

Dayton cautioned that while the economy appears strong overall, there are pockets that are struggling, pointing out that hundreds of steelworkers are unemployed in northeastern Minnesota as taconite mines are idled amid turmoil on the global steel market.

Preschool on Dayton’s list

Thursday’s forecast will help form the governor’s legislative agenda next year. Dayton hasn’t gone into great detail on his priorities, but they are likely to include additional funding for early-learning education.

Dayton, who made a hard push for universal preschool earlier this year, said he would pursue the proposal again next year. The scale of it, however, will depend on the size of the surplus.

“We’ll have to see what the resources are,” Dayton said. He added: “There are no shortages of ideas. You have 201 legislators, most of them running for re-election, so they are going to have no shortage of ideas.”

Election-year politics will start to come into focus as the governor and legislative leaders come up with their spending proposals. Republicans who control the House are already facing mounting pressure from outside GOP groups, urging leaders to refuse any new spending in favor of tax reductions.

Dayton, who is not up for re-election next year, will assemble his budget blueprint based on Thursday’s budget figure, while legislators will build theirs with updated forecast figures released early next year.

Legislative priorities are already beginning to take shape. Among them are tax cuts proposed by House Republicans, additional spending on E-12 education sought by Senate DFLers, and a robust capital spending measure to pay for roads and buildings throughout Minnesota.

Hopes for tax relief

House Taxes Committee Chairman Greg Davids, R-Preston, seemed optimistic on the budget surplus, predicting that it could be as high as $1.8 billion. “I think it’s going to be a big number,” he said.

Davids is co-chair of a taxes conference committee that is expected to reconvene in March. He’d simply like to pass a tax measure that languished at the end of the last legislative session. “In my perfect world, we would just pull the conference report for the tax bill off the table,” Davids said.

The tax bill, he said, provides “middle-class tax cuts,” including a child care tax credit, a proposal that Dayton championed.

The proposed legislation also would cut property tax rates for homeowners and provide tax credits for residents with student-loan debt.

Davids said House Republicans also want a sizable bonding bill, between $800 million and $1 billion.

He called Dayton’s universal preschool proposal a “nonstarter.”

A priority: sex offenders

Sen. Dick Cohen, DFL-St. Paul, chairman of the Senate Finance Committee, said that while there are various competing priorities, one that will likely become a “must do” for legislators will be court-ordered reforms to the Minnesota Sex Offender Program.

After a federal judge ruled that the program was unconstitutional, the state nonetheless has argued that it is and has filed an appeal. Cohen, however, said he believes that an appeal is not likely to be successful.

“If we don’t act on his order, we might find ourselves in a position where we have no choice,” he said.

The federal judge already has ordered that several hundred sex offenders undergo evaluations and that those deemed to be at a lower risk to reoffend could be placed in less-restrictive settings.

“The judge talked about setting up a system for evaluations, and also has talked about community placement [as part of his reforms],” Cohen said. “To fill both of those directives will cost some money.”

Cohen, first elected to the Senate in 1986, also cautioned that legislators may do well to temper their expectations for an expansive agenda.

“You can go through a list and eat up the money very quickly,” he said.