Updated 12 p.m.
Minnesota’s projected budget surplus has grown to $17.6 billion, Minnesota Management and Budget said Tuesday.
Strong tax collections and lower-than-projected spending added to the surplus, MMB said. Economic headwinds are expected to lower expected growth, but the large leftover surplus and healthy net revenues have added to projected total, the agency said.
The economic forecast sets the table for how much DFL lawmakers and the governor can spend on the state’s next two-year budget, and on their priorities, including a new paid family leave program, education and additional child care programs.
Lawmakers at the divided Capitol left more than $7 billion in surplus funds unspent when they closed out the 2022 legislative session in May with much of their work undone. Since then, the state has reported bringing in more revenue than economists expected month after month.
“We’re starting from an incredibly strong place,” said Minnesota Management and Budget Commissioner Jim Schowalter, before the Tuesday release.
National and international economic forecasts project a potential recession on the horizon. The Russian invasion of Ukraine, high inflation and Fed’s actions to raise interest rates have weakened Minnesota’s real GDP outlook and a mild three quarter recession is expected, Laura Kalambokidis, Minnesota’s state economist, said following the release of the budget numbers.
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Still, officials said the state was well situated to manage a downturn. Minnesota’s rainy day funds are brimming and expected to get topped off again using any new surplus, as required by law.
The state’s economy has also outperformed expectations, posting the lowest ever unemployment rate earlier this year. State budget officials have also tracked higher than expected income and sales tax revenues.
Those factors, along with Minnesota’s diversified economy, gave Gov. Tim Walz hope that the update would show a “relatively stable, kind of status quo” look ahead.
“Minnesota has, as we said, a very tight labor market but we’re also very productive. We created 17,000 jobs last month,” Walz told reporters last week. “I would suspect that this will come in a relatively stable kind of status quo.”
The information will help Walz craft an initial budget proposal, but lawmakers will look to another economic forecast in February for updated information before passing a final more than $52 billion spending plan.
After winning majorities in both legislative chambers at the Capitol and keeping a hold on the governor’s office, DFLers will determine how the surplus dollars get spent.
Democratic leaders have said they’ll weigh some ongoing tax cuts, such as eliminating the tax on Social Security and adopting additional credits for renters and parents, but they said plans for more wholesale income tax rate cuts were off the table.
After leaving many pieces of important legislation unpassed in the last session, Senate Majority Leader Kari Dziedzic said DFLers would focus funds on areas where Minnesotans have expressed the most need. Among them were school mental health services, nutrition assistance and more funding for day care, she said.
“I think we will be looking to see what can we all agree on? What are we all agreed on? Because we’ve talked to so many Minnesotans across the state that agree on so much. And they want us to get the work done,” said Dziedzic, DFL-Minneapolis. “And so that’s what we’re going to be looking for.”
House Speaker Melissa Hortman, DFL-Brooklyn Park, said Democrats would also prioritize one-time spending for child care, starting up a paid family and medical leave program and sending out emergency funding to police departments around the state.
But some of the DFL wish list might have to be scaled back if projections show darker economic times ahead, she said.
“I think what we will focus on is what Minnesota will be proud of,” Hortman said. “There will be some things we aren’t able to get that we don’t have the votes for, or we don’t have the money for, because we may have a budget surplus, but it might not be big enough to do all the things that people think are important.”
Walz told reporters that he supports taking a careful budgeting approach but didn’t want to avoid spending increases in the name of playing it safe.
“Being cautious and prudent is not an excuse for not making the investments that are actually fundamental to the growth of that economy,” Walz said. “We can’t get so nervous and so cautious that we’re not willing to fund our child care because we’re thinking about what would happen because that becomes a self perpetuating loop of spiraling down if we’re not doing those things.”
The governor said additional funding for child care and public schools should be top concerns when lawmakers kick off the legislative session in January.
Republicans, meanwhile, have pushed to return some of the surplus through ongoing tax cuts.
“We’ve had a surplus for a number of years and to me, that means we’re taking in too much of Minnesotans’ money, that it would be better left with them,” incoming House Minority Leader Lisa Demuth, R-Cold Spring, said.
After the release of the budget surplus numbers Tuesday, Demuth put out a statement saying, “Minnesotans are being massively overtaxed and we should spend most of the next session working to give as much of it back to Minnesotans as possible.”
The view was echoed by incoming Senate Minority Leader Mark Johnson, R-East Grand Forks. “We are being battered with high property taxes, rapid inflation, rising energy costs, and a looming recession,” he said in a statement. “We need real relief that all Minnesotans can count on for years to come.”
MPR News correspondent Brian Bakst contributed to this report.