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

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

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.

“[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. 

“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.”

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Comments (13)

  1. Submitted by Ron Gotzman on 02/28/2017 - 04:58 pm.

    Tax and spend….

    ” Dayton is urging “extreme caution and restraint” in the budget”

    However, such extreme caution and restraint are not Dayton’s priorities and history when it comes to taxing and spending.

    • Submitted by richard owens on 03/01/2017 - 12:20 pm.

      Did you forget Governor TPAW?

      We did try Republican Management methods to
      . Spend everything we have including the tobacco settlement and including the “rainy day fund”
      . Borrow from the schools and shift costs to local property taxes while cutting local tax revenues

      .Create Tax-Free Zones in small towns forgiving all property taxes sales taxes on materials for those “improvements” but denying revenues to the local government.

      .Cut LGA to towns deemed unworthy.

      And then came Governor Dayton.

      Now we fight over money instead of fighting to deny there are needs.

      I like the honesty Governor Dayton has brought to State Budgets, and love the maintenance of the Capitol and new office spaces.

      We’ve come along way baby, and TPAW found a banking job! No one could’ve predicted such success.

  2. Submitted by Nick Foreman on 02/28/2017 - 05:21 pm.

    Don’t forget the last time

    That Pawlenty and republicans gave too much back and then the economy tanked; then they had to steal from schools and cut back everything else. 8 years of govt disaster. Not again!

    • Submitted by Edward Blaise on 03/01/2017 - 08:30 am.

      Exactly!

      Daudt needs to understand, as previous GOP leader did not, that a temporary surplus turned into a permanent tax cut is a recipe for disaster. And we should not forget the adult in the room the last time we went down this path: the Honorable Jesse Ventura who preferred a one time rebate vs DFL permanent spending and GOP permanent tax cuts.

  3. Submitted by Lee Rebuffoni on 02/28/2017 - 09:38 pm.

    Tax and spend?

    One can look to the formerly great state of Wisconsin to see what Republican tax policy looks like.

  4. Submitted by Bill Schletzer on 03/01/2017 - 07:27 am.

    Minnesota is one of 13 states…

    …that taxes social security. We seem to have big budget surpluses every year. I would like to see the social security tax removed.

    • Submitted by John Branstad on 03/01/2017 - 09:54 am.

      How quickly we forget…

      >We seem to have big budget surpluses every year.

      From the MMD Budget Reserve history (https://www.mn.gov/mmb/assets/Budget-Reserve-Background-July2014_tcm1059-126655.pdf):

      “The reserves were reduced to zero in the 2008 and 2009 legislative sessions as part of the budget balancing actions, along with Governor Pawlenty’s unallotments which also increased the K-12 school shifts.”

      “A decline in Minnesota’s economy and state revenues in the late 2000s and early 2010s lead to budget shortfalls and structural budget deficits.”

      Gov. Dayton inherited a financial mess left by the Pawlenty administration. Contrary to the doom-and-gloom predictions of the MNGOP, Dayton’s administration has led to significant increases in fiscal stability for the state. One needs look no further than a few hundred miles east (to WI) or southwest (to KS) to see the less-than-stellar effects of the opposite approach.

  5. Submitted by Ray Schoch on 03/01/2017 - 09:28 am.

    My 2¢

    …is a lot less than billions of them, but I still tend to side with Messrs. Foreman and Blaise (and Mr. Dayton) on this issue. Tax cuts are a long-term policy response to a short-term phenomenon in the form of a surplus. If the state has similar surpluses over the next couple of bienniums, THEN we should take a look at tax cuts. We should also be spending those accumulated surplus funds on the state’s infrastructure, which is badly in need of attention in both rural and urban areas. Meanwhile, should the economy go south again (and it won’t surprise me if it does with current Congressional leadership focused on a similar, though more cynical, short-term horizon), Minnesota could easily be up the proverbial fiscal creek without the proverbial fiscal means of propulsion.

  6. Submitted by Bob Petersen on 03/01/2017 - 01:00 pm.

    It is about the spending

    So much poo pooing what Pawlenty did in the past when he was merely limiting the increases in state spending when the people in the state were making less. Now we have the Dayton and the DFL extract $2 billion more in taxes because they need it to maintain old programs. The GOP said the higher taxes weren’t needed and they are totally being proven as correct.
    The raise in taxes was nothing but a ruse to spend more…10%?!? Whose family can afford that type of reckless behavior year in and year out. Then again, when you have other peoples’ money to use, you can do that.
    If Dayton and the DFL really cared for priorities, they would make tough choices with what they have and return the extra money they’ve conned our state out of. Remember, the rich already have their money. Taxes are on earnings, which penalizes people that want to make and keep more of their money.

    • Submitted by J. Kurt Schreck on 03/01/2017 - 02:16 pm.

      We’ve been donw this Republican road before…

      As a Minnesotan, I will forever be embarrassed and angry for the occasion of the legislature choosing to “un-fund” school districts, because they had recklessly raided state reserves and a reasonable “rainy day fund’. All that unproductive stress for schools, equally ill-equipped to weather the down-turn was unconscionable. I hope it was worth it, in allowing Republicans to puff out their chests and impress their cranky, insatiable voting base. Yes, look at what you did! A permanent, indelible black-eye for our great state’s fiscal reputation. Learning from past mistakes is a sign of wisdom and maturity. By my measure, feeding on the public’s appetite for tax-cut instant gratification is sleazy pandering. So they can to upgrade their cable TV… big deal. How does that sustain and expand our regional economy?

  7. Submitted by Bill Willy on 03/01/2017 - 01:50 pm.

    What’s not to forget?

    Since the main topic seems to be the “Democratic idea” of being cautious, prudent, level-headed, etc., versus the (perpetual) “Republican idea” that says we should “Give it all back,” I thought it might add a little clarity (to what Nick Foreman’s initial comment caused me to remember) to go back and take a look at the last time the Governor (J Ventura) and very excited Republicans decided that “Giving it all back” would be the best, most productive investment of the state surpluses the Clinton era economy was generating.

    Here’s a (near-Bigfoot-rare) snapshot of the Republican Dream actually Coming True in our real (Minnesota) world:

    “In all, from 1998 to 2002 about $7 billion was sent back to taxpayers in rebates and permanent tax cuts.”

    http://news.minnesota.publicradio.org/features/2003/03/10_mulcahym_howwegothere/

    Not to be rude, but did you notice that?

    SEVEN BILLION in “tax relief”!

    So what happened? Did those massive tax cuts lead to the economic growth, good-paying jobs, better incomes and more, “broader-based,” state revenue Republicans ALWAYS say they will? They sure SHOULD have, wouldn’t you say? If what Republicans always say is anywhere near true, $7 billion worth of tax cut investment SHOULD have been the equivalent of throwing jet fuel on the fire.

    Let’s see . . . Here are the “bottom line” figures (sometimes referred to as “facts”) for the state’s biennial budget forecasts for the years since the kind of massive tax cuts Republicans love and live for were signed into law:

    March 2000 (Result of Ventura’s first budget):

    “The surplus is now at $1.818 billion.”

    http://www.mnbudgetproject.org/research-analysis/minnesota-budget/outlook/february-2000-forecast-summary

    March 2002 (Last Ventura budget):

    “The budget-balancing task before Minnesota policymakers has become more difficult. For the current biennium (2002-03), the projected deficit has grown by $336 million to reach $2.289 billion.”

    http://www.mnbudgetproject.org/research-analysis/minnesota-budget/outlook/february-2002-forecast-summary

    March 2004 (First Pawlenty budget):

    “For the 2004-05 biennium, state general fund revenues are expected to be $160 million less than spending.”

    http://www.mnbudgetproject.org/research-analysis/minnesota-budget/outlook/2004-february-forecast-summary

    Feb 28, 2006:

    “The forecast shows a projected $181 million surplus.”

    http://www.mprnews.org/story/2006/02/28/budgetforecast

    Feb 28, 2008:

    “As expected, the economic forecast for Minnesota’s general fund budget is appreciably worse than it was just three months ago. Without remedial action, it will amass a $935 million deficit over the remainder of the current 2008-09 biennium and foster another $1.09 billion — $2.1 billion if you count inflation — worth of red ink for the 2010-11 biennium.”

    http://www.minnpost.com/politics-policy/2008/02/debt-now-debt-later-minnesotas-declining-economy-wreaks-havoc-state-budget

    Dec 2, 2010 (Result of Pawlenty’s last budget):

    “Minnesota is facing a $6.2 billion deficit in the upcoming biennium. The shortfall represents 16 percent of the state’s two-year budget.” (Plus $2 billion owed to schools.)

    http://www.mprnews.org/story/2010/12/02/state-budget-forecast

    Feb 29, 2012 (Result of Dayton’s first budget):

    “The new economic forecast shows a $323 million cushion for the current two-year budget cycle.”

    http://www.mprnews.org/story/2012/02/29/state-budget-forecast

    February, 2014:

    “The state projects a $1.2 billion positive balance for the 2014-15 biennium.”

    http://www.minnesotabudgetbites.org/tag/february-2014-economic-forecast/#.WLX2DMZNguA

    December, 2016:

    “$1.4 billion on the bottom line”

    http://www.minnpost.com/politics-policy/2016/12/minnesota-budget-forecast-14-billion-surplus

    Today:

    $1.65 billion “surplus” (don’t forget to figure in two years worth of inflation on $42+ billion to get the actual remaining surplus).

    So who should Minnesotans listen to, support, vote for?

    — The people who engineered, guided and worked hard to get Minnesota out of the $8+ BILLION “tax relief-dug” hole and back to the (hard to stay in) Land of Fiscal Stability, low unemployment and “superior” median incomes ($10,000 per household higher than Wisconsin); or

    — those whose ONLY fiscal management thought is, “Give it all back, right now!”

  8. Submitted by Gary Lo on 03/01/2017 - 04:29 pm.

    Future spending not adjusted for inflation

    The flaw with the forecasts is that they adjust future revenue for inflation (assuming growth in income, sales and other taxes) but do not adjust future spending for inflation.

    A 2002 state law prohibits it.

    Put simply, the forecast assumes that personnel, health care, rent and other costs stay flat. By excluding inflation in this way, the public and policymakers get a mistaken impression of the state’s economic future. The forecast might imply that the state has more resources available for new initiatives than it would be prudent to spend, or disguise a lack of resources to meet current commitments. Including inflation in the forecast helps decision makers understand whether fiscal decisions are sustainable.

    In forecasting, the state needs to provide accurate information about the cost of maintaining current services — and distinguish that from the budget choices about whether to fund those inflationary increases.

    Including inflation on one side of the ledger but not the other paints a confusing and inaccurate budget picture.

  9. Submitted by Joel Stegner on 03/01/2017 - 09:01 pm.

    Mix and match

    How about a composite plan. Republicans want roads and bridges, Democrats some money for transit. Two approaches to address the same problem. Done.

    Tax relief – but focused on small business and business start ups. Large corporations already do such a good job of tax evasion, they don’t need the help. For individuals, how about raising the size of defections and child care credit, property tax relief for low income seniors and a capped sales tax rebate. Not giving most of it back to the wealthy.

    Education. The deductibility of interest on higher education loans and more early childhood education. Additional money for rural school districts, where most graduates take their skills to the city. Rewards for universities that restrain cost increases, with no funds to support million dollar coach buyouts.

    Healthcare – a goal of not allowing anyone who wants insurance to be able to have it, regardless of federal action. That could have a big price tag.

    For other investments, only those things that demonstrate return on investment or support Minnesota quality of life in a measurable way,

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