Minnesota surplus blossoms as risks loom

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Minnesota’s projected budget surplus grew by nearly $200 million to $1.5 billion, setting the stage for a debate over how to use the money projected in a forecast that comes amid growing economic concerns over the impact of the COVID-19 outbreak.

The state’s annual February forecast released at the end of the month showed a slight increase in projected revenues and decrease in spending estimates, which puts the surplus at $1.513 billion.

"We must exercise caution and protect our fiscal stability. We must pay back the budget reserves," Minnesota Gov. Tim Walz said after announcing the state's latest forecast puts its surplus at $1.5 billion.

That’s up $181 million from the annual November forecast. The November forecast is typically used to craft the state’s biennial operating budget in odd years and infrastructure package known as the bonding bill in even years. The February figures allow officials to finalize legislative plans.

The reserve remains at $2.36 billion although existing law reduced it by $491 million at the start of the next biennium July 1, 2021. The state also additionally has a cash flow account that carries a $350 million balance.

The surplus means the state can afford a substantial bonding package and should restore the $491 million to reserves heading into the next biennium, Gov. Tim Walz, a member of the state’s Democratic-Farmer-Labor Party, said. Walz has pitched a $2.6 billion bonding bill that relies on $2 billion of general obligation borrowing. Republicans, who control the state Senate, argued some of the surplus should be returned to taxpayers.

“We must exercise caution and protect our fiscal stability. We must pay back the budget reserves," Walz said. "We must listen to what our communities are telling us. And they are urgently telling us that they need our support to increase access to safe drinking water and affordable housing, fix local roads and bridges, improve safety infrastructure, and protect their lakes and rivers.”

The House’s Democratic majority say the state can afford an even larger bill and wants to raise spending on early childhood education. Senate Republicans have proposed a permanent cut in taxes of $1 billion that includes lowering income tax rates and eliminating state income taxes on Social Security benefits.

Revenues are projected at $48.75 billion, $96 million more than in November. A higher forecast for net corporate tax revenue more than offsets lower forecasts for the individual and general sales taxes. In the biennium if no changes are made, revenue is expected to exceed base level spending by $465 million.

“As in November, the economic outlook is stable but a slowdown remains in the forecast,” the Minnesota Management and Budget documents report. “The small budgetary improvement continues into the next biennium and the structural balance is improved, but budget challenges remain.”

Slowing growth remains on the horizon according to economic data from IHS Markit that influences the state’s projections. The impact of the coronavirus that causes COVID-19 is not currently expected to impact the state’s economic prospects but officials acknowledge it poses a risk.

The MMB report notes that IHS on February 21 said despite a flight to safety in financial markets U.S. economic fundamentals remained healthy and the economic impacts were still expected to be modest in the context of the large U.S. economy. IHS also noted that to date, Federal Reserve policymakers had said a policy response to the disease outbreak is unlikely. After the market slide last week, there’s growing beliefs that policymakers may act.

“If the nature of the epidemic changes, or the impact of the disease becomes more prolonged or widespread than it appeared at the time IHS constructed their forecast, U.S. economic growth could be slower than forecast,” MMB reported.

MMB Commissioner Myron Frans acknowledged the risk and uncertainty. "There seems to be always an issue or two, and this is a very serious one, and we'll just have to wait and see,” Frans said.

All 201 legislative seats will be on the ballot next November, and the upcoming election will loom large in whatever action the Legislature takes.

Fitch Ratings and S&P Global Markets affirmed their AAA ratings of Minnesota ahead of a sale last summer and Moody’s Investors Service affirmed the state at Aa1. All assign stable outlooks.

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