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Four takeaways from Minnesota’s latest budget forecast

Reactions to the announcement that Minnesota has a $1.33 billion budget surplus offered a preview of the 2020 legislative session. 

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. 

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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.”

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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.

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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.