REGIONAL – Minnesota legislators have an even larger budget surplus than anticipated to work with this session. The Minnesota Department of Management and Budget (MMB) released its February projections last Thursday showing a $1.3 billion increase, to $3.7 billion.
It’s a significant uptick from previous estimates, indicating that the state’s vigorous economic rebound from the COVID pandemic recession continues. MMB reported that the boost came from higher-than-expected consumer spending and corporate profit growth.
“The numbers speak for themselves of a humming economy,” Gov. Tim Walz said. “It is morning in Minnesota. We’re coming out of the pandemic, a global recession. Minnesota is well positioned for the future economy.”
However, the optimistic short-term outlook for the current biennium ending in 2025 was tempered by projections of a budget shortfall of $1.5 billion in the next biennium. MMB Commissioner Erin Campbell and State Economist Laura Kalambokidis emphasized the importance of fiscal restraint by legislators in the face of numerous factors that could depress the state’s revenue.
“This is welcome but a cautious, optimistic scenario that we’re in,” Kalambokidis said.
The DFL-majority Legislature, having passed a $72 billion two-year budget in the 2023 session, will prioritize supplemental budget bills and construction projects this session, according to House Speaker Melissa Hortman. Hortman expressed concern that legislators should avoid overcommitting surplus funds and ensure that expenditures align with sustainable revenue streams.
Nonetheless, the surplus does give legislators some room to consider issues such as additional funding for emergency medical services. And the Minnesota Hospital Association was quick to ask for a piece of the pie, claiming that the surplus exists in part because Minnesota has underfunded reimbursement to health care systems, noting that hospitals lost $800 million last year providing care to beneficiaries of state-sponsored Medicaid programs. It’s a political reality that when extra money is available, special interest groups will clamor to get in on the surplus, and the Legislature will have to deal with those competing demands again this session.
As in the last legislative session, with its huge $17.5 billion surplus, conversations are swirling around the state’s tax policies and spending priorities. Republican lawmakers, critical of the DFL’s fiscal management, are again advocating for tax rebates and spending reductions to hedge against future deficits. Some counter that the extra revenue generated from corporate taxes undercuts arguments that the corporate tax system acts to potentially stifle economic growth.
“Democrats continue to entertain more spending this session, while state officials, as we heard today, are urging caution on our state spending,” Senate Minority Leader Mark Johnson said, claiming Republicans will take a more responsible approach. “This session we will hold the line on new spending and support a modest, common-sense bonding bill, given that it doesn’t max out the state’s credit card.”
“Today’s forecast shows that we are still on the verge of a deficit,” said House Minority Leader Lisa Demuth. “Despite a continually growing economy, there still isn’t enough tax revenue to meet the DFL spending demands.”
Beyond the budget surplus, Minnesota’s economic forecasts suggest a period of gradual but decelerating growth. The state’s economy, characterized by strong labor market indicators and corporate profitability, seems poised for a period of adjustment aimed at stabilizing growth and curbing inflationary pressures.
Such economic adjustment is essential for maintaining a balance between job creation and wage pressures, according to MMB. Minnesota’s unemployment and labor force participation rates, both indicators of the state’s economic health, reflect a labor market that is adjusting to post-pandemic realities, according to the report.
“As policymakers grapple with these budgetary and economic intricacies, legislators must strike a balance in charting a course that leverages the current surplus for long-term stability. Decisions made this term on spending, taxation, and investments will shape Minnesota’s financial landscape, determining the state’s ability to navigate future economic challenges and opportunities.”
MinnPost contributed to this report.