Minnesota Gov. Mark Dayton and lawmakers have more to spend in the coming biennium.

CHICAGO – Minnesota's coffers have surged to twice the previously projected balance, prompting a new round of debate over how to spend the extra funds with a focus on tax cuts, education, and transportation.

The state's formal November revenue forecast released Thursday estimated a balance of $1.87 billion, up from the previous projection of $865 million. About $594 million of the balance will go to reserves and $71 million to environmental funds, with $1.2 billion left to spend.

Gov. Mark Dayton's administration will use the numbers to craft the next biennial budget, which begins July 1, with updated numbers used by the Legislature to finalize the budget coming out in the annual February forecast.

Dayton highlighted the turnaround from five years ago, when the state confronted a $6 billion deficit with reserves low and $2 billion in school aid payments being delayed. Dayton, with the support of his fellow legislative members of the Democrat-Farmer-Labor Party, pushed through an income tax hike on top earners to help bridge the gap. The GOP now controls the House so agreements are harder to come by.

"Now, five years later, we have a $1.871 billion surplus, we paid the schools, and other debts, in full, we're adding $594 million to the reserve to create a fund of almost $2 billion in the reserve and cash flow accounts, leaving a remaining budgetary balance of $1.206 billion," Dayton said.

Republicans are pushing to use the surplus for tax cuts, which has some support from Dayton and other DFLers. There's also pressure to spend more on transportation and education. Dayton said he would unveil a new education plan early next year.

Dayton's previous road funding plan, which relied on a gas tax increase, failed to pass the legislature last year, so he's leaving it to lawmakers to devise a new plan. Dayton said in his statement that he would support "a permanent middle-income tax cut, and a permanent transfer of general fund revenues to the dedicated highway trust fund" as long as the amounts are not "so large as to jeopardize our future fiscal stability."

Dayton also wants to spend $100 million to expand broadband access in the state.

Total revenues in fiscal 2016 and 2017 are now expected to reach $42.7 billion. Under state law, 33% of any new balance from the November forecast goes to reserves until they hit a recommended level of $2.032 billion for 2016-17. With the infusion of $594 million from the new surplus the reserve will rise to $1.6 billion, or 3.8 % of fiscal 2016-17 non-dedicated revenues.

The state's improving revenue picture comes even as the overall national economic outlook has deteriorated, the state report says. "Exports weakened by the stronger dollar, along with slower capital investment in the wake of falling oil prices, have helped restrain overall economic activity this year," the report reads.

Individual income taxes are coming in lower than forecast, but higher sales and corporate tax collections offset the loss. Spending isn't growing at the previously projected pace in some areas, with human services costs being lowered by more than $400 million.

In another positive sign, the state expects a structural balance of $2 billion in fiscal 2018/2019 when spending is not adjusted for inflation.

The latest news could translate into good credit news if the state stabilization holds steady. Standard & Poor's earlier this year revised its outlook on the state's AA-plus rating to positive from stable.

The rating, which was released on the same day the state sold its largest single general obligation issue to date in a $1.1 billion competitive transaction, is supported by the state's deep and diverse economy, improved financial results, moderate debt levels, and elimination of a structural budget imbalance.

The rating agency did warn that challenges remain to maintaining the state's budget improvements as divided political government in the past has resulted in the state's heavy reliance on non-recurring revenues to erase red ink and drove the state's loss of its former top credit marks.

"Should the state continue to demonstrate a strong commitment to structural balance and avoid using payment deferrals or shifts, while managing budget growth pressures, we could raise the rating," the rating agency said.

Fitch Ratings earlier this year affirmed the state's AA-plus rating and stable outlook and Moody's Investors Service affirmed its Aa1 and stable outlook.

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