Minnesota’s budget surplus grew, a lot, with the new economic and revenue forecast teased by the office of Minnesota Management and Budget (MMB) Monday morning.
The increase in the surplus for the current two-year budget grew from $7.75 billion to $9.25 billion. That $1.5 billion increase since December matches what past surpluses have been in total.
While the full – and lengthy – forecast document will be released this afternoon, MMB usually releases the topline number in the morning. It said the projected surplus for the next biennium – the one that begins July 1, 2023 – remains strong but didn’t grow. That makes this increase in what is available to spend this legislative session more-likely to fuel one-time spending rather than ongoing spending or tax cuts.
And MMB warned that inflation and “geopolitical conflict” – a reference to the Russian invasion of Ukraine – create uncertainty that the forecast will be borne out over the next 16 months of the current budget.
“ A higher income, consumer spending, and corporate profit forecast results in an improved revenue projection while spending is slightly lower in E-12 education and Health and Human Services,” MMB stated in its release.
The new estimate of tax collections for the rest of the two-year budget period and how much it exceeds approved spending sets the formal number for 2022 budget talks. The current budget will spend $52 billion over its 24 months.
Minnesota is not alone in seeing large surpluses. Like most states it has seen a steady improvement in economic growth since the deep but brief pandemic recession in the spring and summer of 2020. Both federal stimulus spending and the fact that many workers could work from home and continue to pay income taxes and sales taxes quickly turned deficits to surpluses across the U.S.
Inflation helps and hurts state budgeting. While it increases costs of some goods and services purchased by government, it can also bump up sales tax collections, which are based on sales and sales prices. The former shows up on the spending side and the latter shows up in the revenue forecast.
There was some suggestion of a decline in the surplus when MMB released its quarterly economic update. In that report, the state’s national economic forecast vendor IHS Markit downgraded its national economic forecast from the November forecast that drove the $7.75 billion surplus projection. That November forecast was based on a rather robust prediction for the national economy that IHS Markit determined was too optimistic. The International Monetary Fund also downgraded both global and U.S. growth projections in January.
That does not appear to have impacted the 18-month string of positive forecasts and tax collections reports.
The December surplus projection was a near record, based not only on its size but on its relationship to state spending. Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, wrote that the February 1999 surplus amounted to 15.6 percent of the projected spending. The December surplus of $7.75 billion was 14.9 percent. But if the $1 billion in unspent federal money from the American Rescue Plan, the state’s available cash is 17 percent of the two-year spending plan.
That record was smashed Monday morning.
Already the governor and legislators have been proposing ways to spend the surplus as set in December. Gov. Tim Walz, for example, has proposed a one-time batch of tax rebates along with spending proposals that spent much of the current budget surplus and much of the next budget’s surplus as well.
Majority Republicans in the state senate have some new spending in their emerging plan but most is one-time only payments for items such as police recruitment and signing bonuses for hard-to-hire jobs in law enforcement and long-term care. The bulk of the Senate GOP plan is for tax cuts, specifically caring for the lowest tax bracket – that every taxpayer pays all or some of their taxes in – from 5.35 percent to 2.8 percent.
While not yet unanimous, there is support from Walz and lawmakers from both parties to use up to $2.7 billion of the surplus to pay back a loan to the federal government that was used to maintain jobless benefits during the recession and refill the unemployment trust fund.
Even Monday as the forecast was being released, House DFLers were promoting using $300 million of the surplus to extend rental assistance as a federal program is ending.
In addition to record surpluses, Minnesota also has a record rainy day savings account which grew to $2.656 billion.