What Minnesota’s $1.5 billion budget surplus means for the rest of the 2020 legislative session

Minnesota budget staff updated the formal prediction of revenues and spending Thursday — and a lot of things were the same.

The budget surplus grew by $181 million to $1.51 billion, but in the context of a $48.3 billion budget, that falls into the range of a rounding error.

Despite increasingly panicky responses from Wall Street, the coronavirus does not appear to be dimming the short-term outlook of slowing but still steady economic growth in Minnesota. Workforce shortages not a lack of jobs continues to be the reason for slowing employment gains. 

As Senate Finance Chair Julie Rosen said: “It’s a relatively consistent, somewhat boring, change in the forecast.”

In the state capitol ritual of successive press conferences — first by Gov. Tim Walz’s budget staff, then by Walz himself, then legislative DFL leaders, then legislative GOP leaders — the messages remained mostly the same as after the last forecast. 

The DFLers warned that the surplus is a phantom because inflation isn’t included, but they also didn’t let that limit their suggestions for some increased spending. The GOPers worried less about inflation calculations, noting that the state government still manages to grow more than cost-of-living indices, and returned instead to their demand that surpluses go back to taxpayers.

Same drill, just with (slightly) different numbers.

If you squint, though, you can now see how the 2020 session of the Legislature — the second with the DFL and GOP sharing power — might end. Both House Speaker Melissa Hortman and Senate Majority Leader Paul Gazelka said that final deals usually mean both get something out of it.

“Any end-of-session deal on using the projected positive balance will have to have some things that make Republicans happy and some things that make Democrats happy,” Hortman said.

“The two sides collide,” Gazelka said. “That’s where we have to figure out what is the solution moving forward. I do believe we’ll find a solution just like last year, when we produced a budget that balanced. We took care of all of our needs and provided for tax relief then.”

Given the differences in priorities for the GOP Senate and the DFL House, those comments suggest there will be some (but not too much) new spending and some (but not too much) tax cutting. Neither leader ruled out such a final chapter.

Walz too softened a previous position that said he was only open to hearing proposals for one-time spending to boost early education and child care.

“I’m certainly open to listening to it, yeah,” Walz said. “If I close the door on things with an emphatic ‘no’ it precludes our ability to do what we did last year, which is compromise.” 

The coronavirus threat

Strong tax revenues in Minnesota are due to the U.S. entering the 11th year of its longest ever economic expansion, as well as the state’s better than average performance during that recovery. It has among the lowest unemployment rates in the country, though that number has ticked up lately because workers who had been on the sidelines are once again reentering the workforce. Consumer spending is strong, and Minnesota is one of the few states in the Midwest holding its own on population increases, with migration from within the U.S. compensating for slowing immigration from other countries.

“In this forecast, consumer spending growth is supported by rising incomes, falling gas prices, lower interest rates and rising household wealth,” said Laura Kalambokidis, the state economist. “When wealth grows, for example from rising home values or rising financial asset values, consumers tend to spend more.”

She and other economists call this “the positive wealth effect.” But she also had this advice: Don’t spook the consumer.

Since much of the state’s economic strength is due to strong consumer spending, anything that deters that will have a negative effect on revenue, Kalambokidis said. If the financial markets do poorly, consumers react to that. So too with trade wars that make people fearful for jobs. 

But the big threat hanging over the latest state forecast is the coronavirus.

The national economic forecast that the state relies on was sent on Feb. 6, well before more frightening news about the virus began to reach consumers. And while an update last week continued to predict a temporary and modest impact, Kalambokidis said it remains a concern. Even if the coronavirus doesn’t sicken large numbers of Americans, U.S. businesses rely on supply chains that include Asian manufacturers.

Commissioner of Minnesota Management and Budget Myron Frans called coronavirus “a dynamic situation that changes daily” but said all forecasts have unknowns. “These numbers always have an asterisk on them.” 

The work begins

The February forecast is the day when the real work of a legislative session — at least the budget portion of the work — can begin. Within a few weeks, the budget chairs of the House and Senate will release targets for how much can be spent. Then after each side puts their stakes in the ground by passing disagreeable positions, the end-of-session dance can finally begin.

Here’s what Republicans and DFLers seem likely to agree on: $30 million to refill the state’s disaster relief fund; $30 million to build out rural broadband connections; $50 million to fill a rural loan program; and more money for school safety grants.

But there are also some big disagreements: DFLers have proposed some big-number plans, including $500 million for early education scholarships; increased slots for subsidized child care; and increased pay for child care staffers. They’ve also proposed $150 million for one-time projects to boost solar and other energy usage.

The GOP’s tax plan would take $1 billion from the surplus. It includes a total exemption of social security income from state taxation, some income tax rate cuts and a alignment with federal tax reform that will allow small businesses and farmers to save money. 

Legislators don’t have to pass a supplemental budget — or really anything — this year. The two-year budget adopted last May, a compromise between Republicans and DFLers, remains in balance. A supplemental budget could also simply make a few emergent fixes that have wide support.

But the forecast release Thursday forecast may only add to the psychology at play at the Capitol: that some new spending and some new tax cuts are affordable and — in an election year — popular.

What’s going on with the bonding bill?

The forecast did not appear to change the starting positions on the traditional work of even-year legislative sessions: adopting a capital budget that uses the proceeds from bond sales to fund construction projects around the state. 

Walz said the additional surplus of $181 million matches the amount of new principal and interest payments that would be needed to service the more than $2 billion in borrowing he proposed in his bonding package. House DFLers have argued that the state can afford up to $3.5 billion in new debt while GOPers say that the so-called bonding bill rarely exceeds $1 billion.

Hortman uses the term “robust” to describe the capital budget her caucus would like to pass. GOP Rosen uses the term “reasonable.”

The bonding bill is one of the few instances at the Legislature where the minority caucuses have clout, since most of the bonds require a 60 percent majority vote of both houses to pass. 

“Is there a chance we could go above a billion?” said House Minority Leader Kurt Daudt.  “There is a chance we could. Is there a chance it’s near $2 billion? Probably not.”