"We worked hard to achieve these budget surpluses, and they must be preserved," said Minnesota Gov. Mark Dayton.

CHICAGO – Minnesota Gov. Mark Dayton and lawmakers got the good news Tuesday in a fresh revenue forecast that adds $250 million to the state's more than billion-dollar surplus.

The state expects to close out fiscal 2017 on June 30 with a balance of $743 million. That's $87 million more than the $656 million predicted in MMB key November forecast thanks to $75 million more in revenues expected as a result of improving economic climate and $12 million in reduced spending estimates.

The added revenue bolsters the state' beginning balance as it heads into the fiscal 2018-2019 budget cycle. The additional balance coupled with an improving economic picture prompted the state to raise by $250 million to $1.65 billion its November surplus estimate of $1.4 billion that's expected in the next two-year budget cycle.

While the estimates show no slowdown in the state's economic momentum, it was tempered with caution that federal policy unknowns create significant risk, the report warns.

"The uncertainty surrounding this budget forecast demands extreme caution and restraint from my administration, the legislature and various affected interest groups," Dayton said. "We worked hard to achieve these budget surpluses, and they must be preserved."

That's due to "considerable uncertainty" over U.S. economic policy changes that lay ahead, according to the report citing data from state consultant IHS Markit.

"IHS does not feel there is enough clarity regarding changes to trade policy, immigration policy, health care policy, and business investment incentives to incorporate those into the outlook," the report says. "Until those changes become more clear, their impact on key economic sectors —including manufacturing, international trade, and health care—remain sources of forecast risk."

Revenues are expected to grow $321 million above the November estimates but expected spending growth and a small increase in a stadium reserve account partially offset the revenue gain. That results in the $250 million hike over the November estimates.

Improving individual income, general sales, and corporate tax revenues offset lower forecasts for state general property and other tax revenues. The long term view of state coffers also remains positive with a $2.1 billion surplus expected in the fiscal 2020-2021 biennium based on current spending patterns.

The state publishes formal revenue forecasts in November and February with the first used to help craft a state operating budget in odd years and a major capital budget in even years. The second offers updated estimates of anticipated revenues and expenditures to complete work on budgets.

The state's cash flow and budget reserve accounts hold $2 billion.

The latest estimates set the stage for more haggling in the coming months over how to allocate the extra cash amid the state's divided political leadership. A budget vote is expected in May.

Dayton, a member of the Democratic-Farmer-Labor Party, has proposed a $46 billion spending plan for the next fiscal biennium that is up 10% from the current budget. It provides an additional $371 million to fund a 2% increase in per pupil student aid, $318 million more for higher education, $75 million more for early education, and $280 million in tax relief for farmers, child care and in other areas.

Republicans, who control both houses of the legislature, want to use more of the surplus to reduce taxes.

Dayton is also pressing lawmakers for action on increased transportation funding to address what's estimated as a $6 billion shortfall over the next decade. He wants lawmakers to support a 6.5% increase in the state's gasoline tax. He also has pitched a $1.5 billion capital budget known as the "bonding bill." Political differences killed a capital program and transportation package last year.

After years of using one-shot revenues to tackle red ink amid divided state government, the state began to turn the corner after adopting an income tax hike on top earners in 2013 when Dayton enjoyed DFL legislative majorities. He has since lost those majorities. The February forecast marked the eighth in a row with a positive balance projected.

Minnesota won back one of its triple-A ratings last year when Fitch Ratings raised its rating to AAA from AA-plus. Moody's Investors Service and S&P Global Ratings rate it at the Aa1/AA-plus level.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.