Minnesota surplus sets up debate on spending

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CHICAGO – A $1.5 billion surplus headed into the next biennial budget cycle will take center stage as Minnesota Gov.-elect Tim Walz and the new legislature are seated early next year.

The annual revenue forecast offered good news for the state’s already flush coffers as it came in $1.2 billion above the prior forecast in February, sparking debate over how to spend the funds and whether it means lawmakers should take a possible gas tax hike for transportation projects off the table.

The forecast released Thursday by Minnesota Management and Budget officials and Gov. Mark Dayton, who did not seek a third term in the November race, will provide the foundation for Walz to craft his next budget due in February.

The annual February forecast released in early March will shore up the figures as the budget is reviewed by lawmakers and the GOP and Democrats promote their own versions.

Dayton used the occasion to highlight the state’s fiscal turnaround since he took office with a $6 billion projected deficit and little in reserve.

Dayton, a member of the state’s Democrat-Farmer-Labor Party, won an income tax hike in 2013 when he enjoyed a legislative majority, paving the way for the state to structurally balance its books. The economy also soared, aiding revenue growth. It came after years of divided leadership, during which the state turned to one-shots to close gaps.

“Today, in addition to these healthy forecasted surpluses, we will have over $2 billion in hard cash deposited in our reserve fund," Dayton said at the news conference. "We have paid off entirely our school debt and increased their state funding by $2 billion. We have restored our state's credit rating to AAA with two of our three rating agencies."

The forecast projects a $1.544 balance available in fiscal 2020 and 2021 which begins July 1 due to stronger revenue growth and lower health care costs. Statutes require that about $500 million go into the state’s rainy day account which will hold $2.1 billion once the deposit is made.

“Slower economic growth is projected to continue into fiscal year 2022-23, resulting in a slowdown in forecast revenue growth,” documents read. “This leaves forecast revenues exceeding base expenditure estimates by only $456 million for that biennium.”

Economists also said tariffs and uncertainty over trade policies may take a toll on the economy.

Republicans pointed to the surplus as evidence of their “prudent” fiscal management. After the 2013 tax hike, Republicans won back full control of the legislature, leading to clashes with Dayton. The state’s flush coffers insulated it against any ratings backlash.

In the November race, Democrats won back the House but the Senate remains in GOP hands.

Senate GOP leaders said the additional cash should go toward one-time spending on transportation and put to rest discussions over raising the gas tax and tax relief should also be on the table in the upcoming session.

“Democrats predicted doom-and-gloom when we passed our tax bill last session, but instead our state’s budget picture is stronger than ever,” House Republican Leader Kurt Daudt R-Crown said in a statement. Dayton opposed the size of the tax relief.

The incoming Democratic governor has his own ideas. He said he would consider putting more funding toward a list of priorities including education, health care, housing, and local aid, and a gas tax should remain on the table.

The state’s fiscal gains including a pension reform package adopted this year prompted S&P Global Ratings to restore the state’s AAA last summer. It lost the top grade in 2011.

Fitch Ratings affirmed the state’s AAA rating and stable outlook and Moody’s Investors Service affirmed its Aa1 rating and stable outlook over the summer, before a state general obligation sale.

In addition to the rainy day account, the state has an additional $350 million cash flow account and $40 million in the stadium reserve account and $1.6 billion in a budget reserve.

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