Minnesota has biggest budget surplus in its history

Minnesota budget officials reported a record $7.7 billion projected budget surplus on Tuesday, an eye-popping sum that sets the stage for state lawmakers to debate how to spend the money, the result of increased consumer spending, higher corporate profits and better-than-expected tax collections.

“This is what responsible policies look like,” Gov. Tim Walz said. “This is a golden opportunity for Minnesota.”

But with a divided Legislature that has recently failed to agree on how to give away $350 million in federal money to essential workers, it’s possible political gridlock could stymie efforts to spend the surplus on new government programs or pay for tax cuts.

Budget observers and lawmakers had been expecting a surplus, but the figure reported by Minnesota Management and Budget is unprecedented.

The state has seen sizable positive budget balances before, but the scale of the current estimate is vastly different. The next largest budget surplus ever reported was $4.05 billion in February 1999, without adjusting for inflation.

For instance, Minnesota currently has $3.1 billion in the bank, far eclipsing past reported budget surpluses.

Here are key takeaways from Tuesday’s budget forecast:

Recent forecasts have been incredibly volatile

If you are experiencing whiplash watching recent budget projections emerge from MMB, you are not alone. In February 2020, as COVID-19 was a speck on the nation’s radar, the state’s budget agency projected a modest surplus of $1.5 billion. In a matter of months, that swung to a $2.45 billion deficit, reported in a one-time emergency budget forecast in May 2020. By the November 2020 forecast, that deficit had shrunk to $637 million before MMB revised that estimate to a surplus in the next forecast.

In fairness to economists, predicting how the global economy will perform amid a once-in-a-lifetime pandemic is tricky business. A series of federal stimulus packages also helped prop up the state’s budget and their impacts could not be accounted for until after unemployment checks went out, and small-business loans and other aid hit people’s pocketbooks.

“This is very fluid,” Senate GOP Finance Chair Julie Rosen said. “The rate of inflation, we have to watch how that is going up.”

MMB Commissioner Jim Schowalter alluded to how the country and the world are operating in a new normal as the pandemic enters its second year, fueled by variants that are more transmissible.

“As our hospitals remind us, COVID-19 is still here and still dangerous, however our economy is learning how to adapt,” Schowalter said.

Rainy day fund is full again

Under state law, a portion of any surplus reported in the November budget forecast (a misnomer, since the forecast is actually published in early December), must automatically be diverted to the state’s budget reserve. Lawmakers dipped into the reserve in recent legislative sessions, but the rainy-day fund is now fully replenished, to the tune of $2.7 billion.

With the short recession caused by the pandemic over and the economy moving again, it’s unlikely lawmakers will draw from the rainy-day fund, given how much money is in the bank. Schowalter said Minnesota is sitting on $3.1 billion in cash, which doesn’t consider how much more the state might take in during the rest of the  two-year biennium that ends June 30, 2023.

Infrastructure bill impact is considered, but not looming Build Back Better legislation

One reason the state’s economic picture has brightened significantly is because of the $1.2 trillion federal infrastructure package that President Joe Biden recently signed into law. State economist Laura Kalambokidis said the national economic forecast Minnesota considers did not include the impact of a proposed Build Back Better agenda being negotiated in the U.S. Senate.

The massive social-safety and climate change legislation might not have the same stimulus impacts past stimulus packages had, Kalambokidis said.

“If it’s not deficit-financed, then it might have less of a national fiscal stimulus effect than what we saw prior,” she said.

Education spending is down

The state’s budget picture was helped by a drop in education spending during the first year of the pandemic, when many schools pivoted to remote teaching.

Forecasters on Tuesday said the state still projects a drop in education spending, but not because of the continued effects of the pandemic. Instead, it is due to a miscalculation by state budget officials that has been corrected, said Ahna Minge, the state’s budget director.

“New data and improved methods have resulted in refined estimates,” she said. (Rilyn Eischens will drill into this for the Reformer.)

Inflation distorts the impact of the surplus

There is one big caveat in any Minnesota budget forecast: By law, MMB cannot factor in inflation when making estimates on state spending, even if it does so in its economic forecasting.

The Minnesota Council of Economic Advisors included a cautionary note in the forecast.

“Minnesota’s current practice of excluding projected changes in the prices of goods and services from a majority of the spending estimate is fundamentally misleading,” they wrote. “It is inconsistent with both sound business practices and (Congressional Budget Office) methods, and potentially encourages legislators and the public to regard the state’s financial position more optimistically than the facts warrant.”

Divergent priorities

Walz and DFL legislative leaders noted they wanted to spend the surplus on government services and programs to help those most affected by the pandemic. They outlined a need for paid family and medical leave, as well as finding ways to help reduce child care costs.

Republican lawmakers called for the surplus to be returned to taxpayers, hammering on the rising inflation rate and higher energy costs.

Political parties are split as well on whether to increase payroll taxes or spend surplus money to pay back $1 billion still owed for federal relief  to pay for unemployment benefits during the pandemic.

As some lawmakers noted, legislative debate over how to spend surpluses can be more difficult to find agreement on than debating how to balance a budget amid a deficit.

“It’s certainly possible that we end without using this surplus to do anything meaningful, but I think it would be terribly irresponsible for all of us to arrive at that outcome,” House Majority Leader Ryan Winkler, DFL-Golden Valley, said.