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Minnesota Officials Urge Fiscal Caution Despite $3.7B Surplus

Estimates increased $1.3 billion from projections released in December. The state also has about $2.9 billion in its rainy-day fund. However, officials warn of a potential $1.5 billion shortfall in the coming years.

Gov Tim Walz speaking at a dais in front of a projection that says "budget and economic forecast"
Gov. Tim Walz rected to the February budget forecast presented by, on the right, MMB Commissioner Erin Campbell, State Economist Dr. Laura Kalambokidis, and State Budget Director Ahna Minge.
Glen Stubbe, Star Tribune/TNS
Minnesota lawmakers will have more money available this year than previously expected as officials projected a $3.7 billion state budget surplus on Thursday.

The surplus increased $1.3 billion from projections released in December, driven by higher-than-anticipated tax collections over the last few months while spending estimates have remained mostly unchanged. Separately, Minnesota also has about $2.9 billion in its rainy day fund.

"Our economy is humming along," DFL Gov. Tim Walz said Thursday, touting the Legislature's investments last year in a free school meals program, a child tax credit and a sizeable infrastructure bill. "The forecast doesn't change our focus for this session. We're focused on implementation and infrastructure."

Last spring, Minnesota lawmakers passed a two-year budget and spent nearly all of a $17.5 billion budget surplus. The main job for lawmakers this year is passing a package of construction projects in a bonding bill, but individual DFL lawmakers have already pitched some new spending on things such as child care and schools.

While the state's surplus has improved, officials are still urging fiscal caution. A potential shortfall of about $1.5 billion could occur in the coming years if lawmakers don't leave some of the surplus on the bottom line.

"If they spend more than $2.2 billion, it would then be projected to dip into the negative," said Minnesota Management and Budget Commissioner Erin Campbell.

The imbalance has shrunk since the last economic forecast released in December, which showed a $2.4 billion budget surplus this year, followed by a deficit of nearly the same size in the next budget if the surplus wasn't left completely intact.

Republican legislative leaders were less optimistic about Thursday's surplus news, saying Minnesota is still at risk of a deficit in the near future.

"Republicans have been warning since last session that this rampant spending will only hurt Minnesotans, and this forecast proves that," said House Minority Leader Lisa Demuth, R- Cold Spring.

Budget officials said they expect the state's economic outlook will improve this year and into the next. Minnesota's unemployment rate is below the national rate and economists expect inflation to continue to drop. Corporate profits and tax revenues collected by the state are also expected to grow over the next two years.

State Economist Laura Kalambokidis said conflicts overseas or a possible federal government shutdown could shift the positive outlook.

For weeks since the session convened, top Democratic legislative leaders have been preaching fiscal caution to avoid a deficit in the next state budget. They continued to do so on Thursday while also signaling some openness to reasonable one-time spending.

"I don't want to dismiss that there's more that we can do, but I think it's important to have a systematic, long-range approach to this," Walz said of his spending approach this year.

House Speaker Melissa Hortman, DFL-Brooklyn Park, said Minnesota has "surpluses as far as the eye can see" under Democratic leadership, but "we certainly are cognizant of that structural imbalance."

Hortman said the House DFL will focus on affordability for child care, housing and health care. She said lawmakers could use some of the additional surplus money to fund infrastructure projects with cash instead of bonds. The economic forecast released Thursday assumes lawmakers will pass a $980 million infrastructure borrowing bill this year.

Senate Majority Leader Erin Murphy, DFL-St. Paul, suggested the money could be used on a bill that would invest $120 million in the state's emergency medical services (EMS) system.

The Coalition of Greater Minnesota Cities called for that investment in a statement Thursday, saying the state's EMS system is at a "breaking point" with some communities unable to afford operating their local ambulance services.

"It will be among the things that are considered as we move forward," Murphy said.

Demuth criticized Democrats for wasteful spending on items such as state commissioner pay raises and a costly renovation of the State Office Building adjacent to the Capitol.

Senate Minority Leader Mark Johnson, R- East Grand Forks, lamented that the state no longer has enough money to fully eliminate Minnesota's tax on Social Security income. He and Demuth rebuked Democrats for not doing that last year when the surplus was larger.

And Johnson said he isn't convinced Democrats will leave any of this surplus intact.

"They spent $17.5 billion of our surplus," he said. "Their rhetoric does not always match the actions."

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