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Four takeaways from Minnesota’s latest budget forecast

Gov. Tim Walz
Gov. Tim Walz said lawmakers could use some of the money to ensure a pair of tribal governments do not have to cover excess payments the Department of Human Services sent to them for addiction treatment drugs.

Minnesota got its first preview of the 2020 legislative session Thursday when state officials released a forecast predicting a $1.33 billion budget surplus and a healthy “rainy day” reserve account.

Republicans and DFLers said the extra cash showed that a strong economy has been responsibly handled by state officials. And while many cautioned the surplus may not stick around, Minnesota’s finances are in far better shape than a decade ago. Lawmakers in 2010 were staring at more than $1 billion deficits.

“Minnesota should feel really good about the budget reserves that we have,” said Senate Majority Leader Paul Gazelka, a Republican from Nisswa.

But in the state’s politically divided Legislature, the budget news also kicked off jockeying for how the surplus money should be spent come February, when the 2020 legislative session convenes. Leaders in both parties offered their opening pitch to the public on Thursday. 

Should the Legislature cut taxes? Award grants for affordable housing? Help fix overpayments to tribes for addiction treatment services? All, and more, are up for discussion. 

Here’s what we learned from the forecast — and the reaction to the numbers: 

The state’s budget is in good shape. For now.

The state’s budgeting agency, Minnesota Management and Budget (MMB), tracks the government’s spending and twice a year produces a budget forecast to project how much money the state will have in the future, numbers that guide many of the Legislature’s decisions.

Senate Majority Leader Paul Gazelka
MinnPost photo by Peter Callaghan
Senate Majority Leader Paul Gazelka
In May, lawmakers approved a $48.3 billion two-year budget. But MMB officials said the state has collected more taxes than expected from Minnesotans since then, largely because residents made more money and bought more things than the state projected. In total, the state is expected to take in $1.62 billion over earlier projections.

By law, a portion of that surplus is sent to a reserve account. This year, $284 million has been added to that rainy day fund, bringing it to $2.359 billion, which meets a state goal for emergency cash for the first time ever. 

That leaves lawmakers with the $1.3 billion budget surplus, at least for now. An updated forecast early next year will give the most accurate projection of the state’s money. 

But state officials estimated inflation will make continuing the state’s existing services more expensive, costing an extra $1.2 billion when lawmakers will write the next two-year budget in 2021. Citing those figures, House Majority Leader Ryan Winkler, a DFLer from Golden Valley, said Minnesota shouldn’t treat the budget forecast as a windfall, and should even prepare to raise new taxes or cut government services in the future because of the rising costs.

“Our surplus story really is a fiction,” he said.

You can credit, or blame, Trump for the numbers

Minnesota’s short-term surplus is powered largely by the U.S. and Minnesota economy. While the state’s economic outlook has improved recently, officials have projected a slowdown over the next few years.

Laura Kalambokidis, the state’s top economist, said in the short term, the stronger forecast can be attributed in part to rising incomes, falling gas prices, lower interest rates and overall rising household wealth. She noted the Trump administration’s Tax Cuts and Jobs Act “fueled” above average national GDP growth in 2018. “When wealth grows,” Kalambokidis said, “consumers tend to spend more.”

That trend is at risk, however. The economy could decline if wealth declines, or if “policy uncertainty” — such as Trump’s ongoing trade war with China — continues, Kalambokidis said. She noted a downturn in manufacturing has already hurt the U.S. economy and it could spread elsewhere. “Not knowing what the future trade policy playing field will look like makes business owners postpone expansion plans and hold off on investment,” Kalambokidis said.

State Economist Laura Kalambokidis
MinnPost photo by Greta Kaul
State Economist Laura Kalambokidis
The wave of retiring baby boomers is also likely to cause a labor shortage and hurt U.S. growth in the future, she added. Minnesota already has a tight labor market. There are more job vacancies than there are people seeking work across the state, and unemployment has increased gradually since last June after hitting an 18-year low of 2.8 percent.

Immigration has often helped Minnesota add workers, but Kalambokidis said Trump’s immigration policy has crimped the number of people coming to the U.S. from outside of the country. 

Still, there are economic bright spots, MMB said. For instance, for the second year in a row, more people have moved to Minnesota from elsewhere in the country than left the state, reversing a long-time trend of losing residents to other states. 

Minnesota gained 7,941 more new residents from other states than it lost in 2017 and added another 6,796 in 2018. Indiana was the only other midwestern state to gain residents from domestic migration between 2017 and 2018. “It’s great to be getting people from other states,” Kalambokidis said.

Lawmakers have plenty of ideas for how they could use the money

Gazelka, the Republican Majority leader, said he wasn’t expecting such a positive forecast and ticked off several ideas for how he’d like to see the budget surplus used.

Lawmakers, he said, could end a tax on income from social security, cut car tab fees or award money to public schools to make safety upgrades. Meanwhile, House Minority Leader Kurt Daudt, a Crown Republican, said the Legislature should cut or eliminate a tax on medical providers that DFLers fought to preserve in the 2019 session.

The tax is levied on hospital stays and medical bills, and pays for health care programs for low-income residents, such as the coverage plan called MinnesotaCare. The 2 percent tax was set to expire in 2019, and the GOP said ending the tax would lower the cost of health care. The Legislature ultimately voted to continue it at a 1.8 percent rate.

“Let’s use the money (taxpayers) have given us and directly put it to reduce their health care costs,” Daudt said.

MinnPost photo by Peter Callaghan
House GOP Leader Kurt Daudt
DFL Gov. Tim Walz bristled at that idea. While he said he tries not to “shut the door on anything,” he wouldn’t give “false hope” to those who want to cut the provider tax. “Yeah, that’s not happening,” he said. 

Gazelka said the Legislature is unlikely to revisit the provider tax debate, but he also said he would not entertain another push from the governor to raise the gas tax. Republicans rejected that idea earlier this year.

Some Democrats did have a wishlist for the 2020 surplus, though. Walz said lawmakers could use some of the money to ensure a pair of tribal governments do not have to cover excess payments the Department of Human Services sent to them for addiction treatment drugs. And Sen. Ann Rest, a DFLer from New Hope, said some of the money could be spent on grants for affordable housing.

The 2020 bonding bill is likely to be ‘robust.’ Or ‘healthy.’ Or maybe just a ‘nice size’

Winkler, the DFL majority leader, said the budget surplus doesn’t change the “primary” focus of the upcoming session, funding a package of construction and renovation projects around the state in what’s known at the Capitol as a “bonding bill.” 

In odd-year sessions, lawmakers typically try and pass a capital budget that’s paid for mostly by borrowing money through 20-year general obligation bonds. The bonds are tax exempt and require low interest payments.

Commissioner Myron Frans
Commissioner Myron Frans
Both Republicans and Democrats generally support bonding bills, although DFLers are aiming for a bigger one than Republicans this year. State agencies and local governments have requested a total of $5.3 billion in projects this year.

The actual bill won’t cover all of that, of course, though Winkler said House DFLers were “exploring” a $3.5 billion bonding bill, while Walz and MMB commissioner Myron Frans both called only for a “robust” capital budget. 

Bonding bills need a 60 percent majority to pass, which means the minority parties in the House and Senate can influence the legislation. Gazelka called for a “healthy” bonding bill, but said more than $2 or $3 billion could saddle the state with debt that could hurt the state’s credit rating and lead to higher interest rates. 

Daudt, the House minority leader, said he would shoot for a “nice size” bonding bill, but that it would be smaller than the governor’s. “It’s not going to start with a ‘two,’ I can assure you of that,” he said. 

Comments (22)

  1. Submitted by Andy Briebart on 12/06/2019 - 11:46 am.

    No need for a gas tax.

    And remember, this spring is a “Bonding Bill” year. Not a new law free for all.

    Watch in the coming weeks lots of stories about “crisises” we need to spend money on.

    • Submitted by Henk Tobias on 12/06/2019 - 01:43 pm.

      If a person pays even the slightest attention they know that there are multiple crises ongoing. Ever since the Timmy Pawlenty 35W bridge collapse folks have been sounding the alarm about the number of bridges in the state that are structurally deficient. 709 is the current number or 5% of the bridges in the state. Overall Minnesota’s infrastructer has been given a C grade. I guess not as bad as some, but not great. Our schools are under funded, rural areas are losing their hospitals…

      The reality is that we have no surplus, we are just refusing to spend money on things that need fixing in this state.

      • Submitted by lisa miller on 12/07/2019 - 03:39 pm.

        Totally agree. They glean over more people moving here and downplay the costs of adding schools, housing, road repairs, etc.. Besides much of the money will go to the DHS debacle.

  2. Submitted by ian wade on 12/06/2019 - 12:11 pm.

    It just confirms what I already know. I’d rather have the DFL running things rather than Republicans.

  3. Submitted by Bob Petersen on 12/06/2019 - 12:23 pm.

    We went through the largest tax increase in our history passed by Dayton and a total DFL Legislature and have shown nothing but large surpluses since then. That’s not the state’s money. That’s our money.

    Add to it that Winkler says it’s not really there and wants to be ready for more taxes. How much is enough???

    • Submitted by Dennis Litfin on 12/06/2019 - 03:09 pm.

      History has proven that one does not want to let Daudt or any other republican close to financial decisions. Lest your memory has faded, lets go back to the disaster years of the republican/Pawlenty era whereby the republicans/pawlenty stole money from education to finance their folly.

    • Submitted by Frank Phelan on 12/06/2019 - 08:16 pm.

      What you and others fail to note is that during the Pawlenty deficit years, the law was changed so that forecasts incorporate inflation on the revenue side but not on the spending side.

      When inflation is taken into account, the “surplus” becomes nil.

      I know conservatives like to use the “kitchen table” budget model, even though it has nothing to do with pubic budgets, but I’ll play along.

      Bob, would you tell me it’s a good idea for me to count on a wage increase in 2020 & figure my expenses will not increase? It would make my budget look good. (I’ll just ignore the Don Trump Tax increases, cleverly disguised as tariff increases, which have been raising the cost of consumer goods.)

    • Submitted by Dennis Wagner on 12/07/2019 - 10:06 am.

      You do know Bob, that the state and us we are basically one and the same, right pocket/left pocket, Or are you really saying that, “We the People of the United States, in Order to form a more perfect Union” ….
      is a bunch of hooey? The Minnesota state governemnt, contrary to certain right wing rhetoric is not the enemy any more than the local fire department or library.

  4. Submitted by David Mann on 12/06/2019 - 03:31 pm.

    There is a long standing tradition, continued in this article, that says that projections showing predicted income being greater than predicted expenditures is a “surplus”. This is only a surplus in a very, very narrow way but that word leaves the impression that our resources exceed our needs. This is a real problem given the housing, education, health care, infrastructure, etc needs of the state – things that have yet to be addressed fully in the state budget. We still have a deficit of funding to meet the needs of the people of Minnesota.

  5. Submitted by Al Andresen on 12/06/2019 - 03:36 pm.

    Overtaxation by force of government is nothing to celebrate.

    • Submitted by Frank Phelan on 12/06/2019 - 08:09 pm.

      So during the Pawlenty years of continuing deficits we were under-taxed?

      Got it.

      • Submitted by Rory Kramer on 12/07/2019 - 05:38 pm.

        You seem to forget that during the Pawlenty years the nation was going through an economic crisis.

        • Submitted by Dennis Wagner on 12/08/2019 - 12:38 pm.

          Well guess we aren’t in crisis now, or are we? Thus why the $T deficits at the federal level? Good or bad financial management?

        • Submitted by Frank Phelan on 12/08/2019 - 12:54 pm.

          Ah, sort of.

          The Pawlenty deficits pre-dated the Bush Recession. But you seem to miss your own point.

          During downturns, deficits rise. During expansions, like the current years old Obama expansion, surpluses rise.

          Enacting permanent tax cuts during an expansion is like tossing out your light bulbs when it’s high noon and sunny. We did that with Jesse, and T-Paw could never figure out what happened.

  6. Submitted by Frank Phelan on 12/06/2019 - 08:56 pm.

    Using sound accounting practices, Minnesota can easily pass a $3B bonding bill. We’ve somehow been wedded to the idea that anything over $1B is too much, even though we’ve been in that place for over ten years and inflation, though tame, has whittled down what $1B buys.

    • Submitted by Al Andresen on 12/09/2019 - 04:19 pm.

      What justifies spending $3B on the backs of an already overburdened taxpayer? What is in your list of “projects” that warrants that sort of spending?

      Americans need to look at the big picture….in every direction this country and its’ people are heavily in debt. Federal government, State Governments (if not unfunded liabilities, then long term bonding) , Local Government taxing entities (schools, counties, cities), Credit card debt, corporate debt, Mortgage debt, School Loan debt and more. The bubbles are larger and more expansive than 2007/2008. When the construction boom slows (and it will) and the federal safety net ponzi schemes start failing, the 2008-2010 might be considered “good times”.

      We’ve learned nothing from history in this country — only how to play a faster game of “kick the can”.

  7. Submitted by Tom Crain on 12/07/2019 - 09:33 am.

    Is there a better moment to pass a large bonding bill in MN?
    *By all accounts there are many worthy projects
    *Interest rates will never be lower
    *The state’s finances are on solid footing
    Even myopic pols like Kurt Daudt are finding it hard to make a cogent argument against it.

  8. Submitted by Gary Fifield on 12/08/2019 - 11:39 am.

    It always amazes me that one-time projection leads to proposals for on-going income reduction like a tax cut. We have unmet needs. If there really is a little extra money, our money, we should address those needs. Housing, schools, infrastructure. It makes sense.

    • Submitted by Edward Blaise on 12/13/2019 - 10:29 am.

      And historically, we can look at, brace your self, the real adult in the room during and earlier surplus:

      Jesse Ventura!

      The R’s said “Lets have a forever tax cut on this good news”

      The D’s said “Lets create on going new spending commitments”

      And the “Rainman” of executive leadership said:

      “Definitely, just a rebate, definitely”

      Jesse always was my example that professional politicians are no better than anyone else in these executive positions. Unfortunately, I have now revised that to:

      “Mr. Trump, we knew Jesse Ventura, Jesse Ventura was a friend of ours, and your sir, are no Jesse Ventura!”

  9. Submitted by Paul Udstrand on 12/09/2019 - 08:27 am.

    Getting back to Mr. Phelan’s comment, what IS the REAL surplus spending inflation is part of the calculation? And why doesn’t the legislator fix this accounting gimmick so every time we get a budget forecast we don’t have to adjust it accordingly?

  10. Submitted by Tom Anderson on 12/09/2019 - 09:15 pm.

    Governor Walz offered a budget of 49.35 billion dollars, the House offered a budget of 49.8 billion dollars, and the Senate offered a budget of 47.6 billion dollars. The final result, due to the Senate, was a two year budget of 48.4 billion dollars. The difference between the House and the final budget was 1. 4 billion dollars, .1 billion more than the “surplus”. The “surplus” is 1.3 billion dollars, which the House would have spent.House

    “Majority Leader Ryan Winkler, a DFLer from Golden Valley, said Minnesota shouldn’t treat the budget forecast as a windfall, and should even prepare to raise new taxes or cut government services “.

    Under Rep. Winkler’s reasoning, had the House budget been passed and the State budget still been balanced, it would have been underfunded due to inflation by…the surplus. Thankfully, the State budget is essentially even through the biennium (as of now) since a responsible budget was passed this past spring.

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