Five ways of looking at Minnesota’s $9.25 billion surplus

Monday’s release of what is known as the February Budget and Economic Forecast is an official act, a legal requirement for state fiscal managers to tell the Legislature how much money it will have to spend during the current session.

It is also the unofficial start of the session, which convened a month ago but couldn’t really move into budget work until it got the number from Minnesota Management and Budget. And what a number it was — $9.25 billion in surplus revenue, allowing Gov. Tim Walz and legislative leaders to spend even more than they had been planning to spend. And they were already planning to spend a lot.

As legislators begin budget negotiations, here are five ways to look at Minnesota’s massive budget surplus.

1. Yes, it’s a lot of money, even for government.

Minnesota has had a run of growing tax collections and revenue going back to the recovery from the Great Recession. Having surpluses appear in the midst of two-year budget periods has been the norm. But there is a big difference — literally and figuratively — between the $1.6 billion surpluses that used to be common and a $9.25 billion surplus.

The state of Minnesota’s two-year spending plan is about $52 billion, or $2.1 billion a month. This surplus is 18 percent of that — by far the biggest anyone living can recall. If you compare the surplus to what remains of the 24-month spending period it is 26.6 percent of spending.

But to get the full picture of what kind of cash Gov. Tim Walz and the Minnesota Legislature has to play with, the unspent money from the federal American Rescue Plan should be included — $1.1 billion. That means the surplus is 19.9 percent of the 24-month spending total and 29.9 percent of the remaining 16 months of the biennium.

2. Even good news can be bad news when it serves the parties’ agendas.

The Minnesota economy is red hot, not just compared to where it was at the depths of the COVID recession, but hot compared to other expansions. A state doesn’t have surpluses the size Minnesota has without employment, incomes, consumer sales and corporate profits growing so fast that very skilled economists and very sophisticated software continue to underestimate its production.

Corporate profits and wages are both growing at high rates. Unemployment is at 3.1 percent and is beneath national averages. While some are struggling, the economy overall is doing well.

But to back up their policy priorities, the legislative leaders searched for and found weak spots.

“Minnesotans are feeling the pinch of record inflation,” said House Minority Leader Kurt Daudt (R-Crown). “If we stand here and don’t admit that Minnesotans aren’t seeing the same kind of surpluses in their family budgets then we are tone deaf.” Daudt at one point described the surpluses that run into the next budget period as well as “a problem.”

“This problem can only be solved by reducing taxes on Minnesotans permanently,” he said.

House Speaker Melissa Hortman (DFL-Brooklyn Park) noted the growth in corporate profits which were underestimated by state economists more than their projected growth in other taxes — though all tax categories have been exceeding forecasts for a year and a half.

“Now it is the job of state leaders to address the challenges that people are facing and to ensure that workers and families are benefiting from the economic growth they are helping to create,” Hortman said.

3. Policymakers might not have to decide.

When surpluses are in the $1.5 billion range, elected officials have to choose. Does the state cut taxes, does it pay debt, does it save or does it increase spending on programs or schools? Those either/or questions are often what divides the parties.

But surpluses of this size permit those same politicians to move from either/or toward yes and yes. In December, when the surplus was expected to be $7.75 billion, Gov. Tim Walz supported spending $700 million on tax rebates. Monday, he not only suggested tripling those checks but including some on-going tax cuts.

Senate majority Republicans had ridiculed rebates as an election-year gimmick and instead supported a tax-rate cut that would save all taxpayers some money and the elimination of taxes on social security. Monday, GOP leaders said residents would prefer a tax cut that would reduce withholding every paycheck over a one-time check of $500 per taxpayer as Walz suggested Monday.

But Daudt also said “what we should do is do the one-time money and the ongoing structural reductions in taxes.”

Both parties have spending proposals as well that will likely show up in some form in end-of-session negotiations.

The first spending battle appears to be over something both GOP and DFL leaders favor — some use of the surplus to pay a federal loan and then replenish the state unemployment trust fund and some use of the surplus for bonus checks to frontline workers. While the DFL favors less for the unemployment trust fund and more for bonuses, the GOP hasn’t budged much. But surpluses this large have the potential to close partisan gaps, both sides willing. Yet Hortman raised the possibility that the 2022 election might get in the way.

“They are so convinced that their fortunes are going to be so good in November, 2022” that Senate Republicans might prefer to wait until next year to spend all the money as they wish, Hortman said.

Senate Majority Leader Jeremy Miller (R-Winona) Monday even seemed to walk away from an earlier deal to spend $250 million on bonuses but only for nurses, long-term care workers and first responders who worked in person during the shutdown. That would have the Legislature picking winners and losers when all workers are essential, Miller said. The GOP tax cut would benefit them all, he said.

Bonuses for essential workers was one of four uses of federal American Rescue Plan Act money referenced in the law.

4. COVID made forecasting hard.

It has been a while since Minnesota’s economists have gotten a forecast correct. When the COVID-19 pandemic first emerged and many businesses were closed, the national and state economies plunged into recession. Forecasters warned of a deep budget deficit by the time lawmakers returned in January, 2021. Instead, they faced the first of a series of surpluses. A growing economy doesn’t need to produce surpluses if forecasters accurately predict that growth. But how quickly different sectors would get back to normal and the economic impacts of Congress plowing $6 trillion into the economy — $73 billion in Minnesota alone — were uncharted.

When the 2020 session began, the Legislature had a $1.33 billion surplus. The grew to $1.51 billion in February of that year when COVID was barely mentioned in the forecast. A special update in May showed a $2.42 billion deficit. In November, 2020, that was replaced by a $641 million surplus, followed by a $1.6 billion surplus in February, 2021 and a $7.75 billion surplus last December.

The forecast released Monday shows that national and state forecasters are still suffering from the effects of COVID-19, two years after it first infected the economy.

5. So does inflation and global warfare.

As staffers with the office of Minnesota Management and Budget were putting the final numbers together for this economic and revenue forecast together, Russia invaded Ukraine. The impacts on the global economy of that move are uncertain as are how it might affect income tax collections and consumer spending in Minnesota.

“It’s a challenging time to issue a long-term forecast,” said Jim Schowalter, the commissioner of MMB, adding that it doesn’t compare to the challenges now facing Ukrainians in the path of the Russian invasion. But Russia is a major energy producer and disruptions could further increase the price of gasoline and natural gas. Both nations are major exporters of wheat and other commodities.

“The state’s economy continues to recover … although inflation continues to be a concern and the unfolding invasion of Ukraine introduces new uncertainties into the forecast,” Schowalter said. “We’re having a hard time understanding what’s gonna happen next month, much less three or four years from now.”