CHICAGO— Fiscal pressures have eased on Minnesota Gov. Mark Dayton and lawmakers with the state’s annual February forecast wiping out previously projected red ink.

The Minnesota Management and Budget’s annual forecast that comes as the legislative session gets underway projects a $329 million surplus in the biennium that began July 1 and runs through June 30, 2019. That’s an improvement from the annual November forecast that warned of a $188 million deficit.

Revenue id estimated to total $44.8 billion, up $353 million from the November forecast with improved estimates across all major tax types, including sales and income taxes. “This forecast reflects increased U.S economic growth arising in part from short term stimulus from federal tax law changes,” the report says.

At the same time, projected spending for the biennium was trimmed by $167 million. That’s due primarily to the federal government’s reauthorization of the Children’s Health Insurance Program, freeing up funds the state would have set aside in the absence of federal funds.

Minnesota Management and Budget Commissioner Myron Frans
Minnesota MMB commissioner Myron Frans said the state budget is back on track but cautioned against overspending.

“With this budget forecast, Minnesota’s budget is back on track,” MMB commissioner Myron Frans said during the Wednesday presentation of the update.

The state opened the biennium with a $3.3 billion balance and has nearly $2 billion in reserves.

The forecast also projects a balance of $313 million at the close of the next biennium that would run through June 30, 2021 based on a projected $48.1 billion in revenues and $47.8 billion of spending accounting for inflation of between 2.1 to 2.8%

The surplus news prompted he Democrat-Farmer-Labor Party minorities to call for more spending on education and other initiatives. Republicans said the figures showed the state can afford the tax breaks they pushed through last year and supports further tax reforms. Leaders from both sides of the aisle said action to shore up the state’s public pension funds is a priority. Efforts on that front stalled last year.

With the budget completed last year, lawmakers will tackle the capital budget known as the bonding bill in the current session. The DFL governor has proposed a $1.5 billion bond-financed package.

Whether Dayton and GOP majorities can put the acrimony of the last session behind them remains to be seen. Dayton signed the budget with tax cuts despite his opposition to its size in order to prevent a government shutdown. In an effort to force Republicans back to the bargaining table, Dayton vetoed the legislature’s appropriation.

The GOP sued claiming the veto was unconstitutional and the case went to the Minnesota Supreme Court which upheld the governor’s powers. The veto prompted some concerns, however, over the fate of payments on state debt that financed the Senate office building and is repaid under a lease agreement with the funds coming from the legislative appropriation.

The legislature passed a new $130 million appropriation when they convened last month and Dayton opted to drop his fight and sign it. “I am glad to put this matter behind us, so that we may turn our attention to the issues important to Minnesotans that require us to work together,” Dayton said in a statement last week.

Minnesota carries a AAA rating from Fitch Ratings while Moody's Investors Service and S&P Global Ratings rate the credit Aa1 and AA-plus.

The latest fiscal figures underscore a recent Nuveen Asset Management report, “Minnesota well-regarded in the municipal market.”

“Minnesota enjoys a diverse economy with wealth metrics typically trending above national averages. The state benefits from a highly educated workforce, moderate debt and pension burdens, improved budget reserves and relatively low reliance on federal spending,” wrote authors Chris Drahn, a senior vice president portfolio manager, and Soo Antoine, vice president research analyst.

State GO bonds consistently trade within 10 basis points of national AAA benchmark yields. “We expect Minnesota municipal debt will continue to see strong demand due to favorable credit perceptions and relatively high state income tax rates,” the report read.

The state’s healthy finances are offset by pension pressures and its divided leadership that has led to budget gridlock and rating agency warnings. Funded ratios have declined to 62% from healthier ratios. The state’s annual pension contributions are determined by statute, and remain below the actuarial required contributions, the Nuveen report said.

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