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$1.65 billion surplus sets up fight over spending priorities at the Legislature

Dayton is urging “extreme caution and restraint” when it comes to the budget, while the Republican-controlled Legislature plans to introduce a substantial package of tax cuts. 

Gov. Mark Dayton said there are too many factors out of state control that could negatively affect the economy going forward.
MinnPost photo by Greta Kaul

Minnesota lawmakers are getting used to good news. 

The state’s economy continues to outperform expectations, according to an economic forecast released Tuesday. It showed increased revenues and a $1.65 billion budget surplus in 2018 and 2019, which has grown since last December, when the surplus was expected to hit $1.4 billion. It’s the eighth positive budget forecast in a row for Minnesota at a time when 24 other states are facing deficits. And the good news is projected to last into 2020 and 2021, with another expected surplus during that budgeting year.

Even so, DFL Gov. Mark Dayton cautioned legislators not to just look at the numbers. 

He said there are too many factors out of state control that could negatively affect the economy going forward: International trade, inflationary costs and the rate of growth in state government, to name a few. But the biggest uncertainty, he said, is what policy and fiscal changes are coming down from President Donald Trump and his administration.

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“[There are] significant risks with this forecast not factored into the actual numbers of the forecast,” Dayton said. “The effects of those uncertainties are presently unmeasurable, however their potentials for seriously negative impacts on our state’s economy and fiscal well-being are enormous.”

Dayton and the Legislature must move along regardless, with a constitutional deadline to pass a budget before the next fiscal year starts in July. Dayton released a nearly $46 billion budget proposal last month, but the forecast kicks off the budget-making process in earnest. He must now revise his proposal with the updated budget numbers, while Republicans will start gathering individual bills into larger, so-called omnibus bills that will make up the state’s total budget. 

The tension between those two budget visions is already showing. Dayton is urging “extreme caution and restraint” in the budget, while the Republican-controlled Legislature plans to introduce a substantial package of tax cuts. “When you look at where the revenue comes from, it comes from Minnesotans,” said Republican House Speaker Kurt Daudt, who did not detail how large or what kinds of tax cuts or credits Republicans will propose this year. “It comes from Minnesotans doing better.”

The tensions aren’t just around tax cuts. Republicans pushed back on Dayton’s proposed budget, which includes a 10 percent overall increase in state spending. Dayton said the increases are due to new investments he wants to make in early education, college students, clean water and other state programs, as well an increase in the overall cost of running state government.

That level of spending is going to be a tough sell to the Legislature. “He still intends to increase spending by about 10 percent,” Daudt said. “The governor continues to want to grow state government faster than the economy is growing. I think that’s out of touch with what most common sense Minnesotans would expect from state government.”

Responses to the forecast number were light on details and heavy on politics, with both sides claiming credit for the state’s strong economic picture. Dayton pointed to prudent fiscal policy and strategic revenue increases that brought the state to where it is today, while Republicans took credit for holding the line on proposed spending increases. 

But all sides left the door open to putting money aside to handle unpredictability at the federal level, the biggest one being what’s going to happen the state and federal health insurance exchanges. Minnesota’s budget reserve is the highest it’s ever been, at $1.6 billion, not including its cash flow account, but Dayton said it could be larger. 

“That’s something I’ll consider with uncertainties ahead,” he said.

For Senate Majority Leader Paul Gazelka, the new forecast doesn’t change much. His top priorities are still funding road and bridge projects, tax cuts and major health care reform. And things have been going well so far between Dayton and the Republican Legislature, with several major issues already signed into law, including healthcare premium relief and energy policy. 

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“It gets real now, but I don’t see any reason why the tone has to change,” Gazelka said. “We’re going to keep communicating and the governor, I hope, keeps coming to the table and if we do that, we should get done on time.”