Minnesota Budget Surplus Grows Slightly To $2.4B. But Officials Warn Of Potential Trouble Ahead

Minnesota Senate Minority Leader Mark Johnson, left, and House Assistant Minority Leader Kristin Robbins, of Maple Grove, react to a fresh budget projection during a briefing for reporters at the Minnesota Department of Revenue on Wednesday, Dec. 6, 2023, in St. Paul, Minn. State officials projected a surplus of $2.4 billion in the two-year budget period that runs through June of 2025. (AP Photo/Steve Karnowski)
Minnesota Senate Minority Leader Mark Johnson, left, and House Assistant Minority Leader Kristin Robbins, of Maple Grove, react to a fresh budget projection during a briefing for reporters at the Minnesota Department of Revenue on Wednesday, Dec. 6, 2023, in St. Paul, Minn. State officials projected a surplus of $2.4 billion in the two-year budget period that runs through June of 2025. (AP Photo/Steve Karnowski)
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ST. PAUL, Minn. (AP) — Minnesota's budget picture remains stable in the near term, with a slightly higher than expected surplus heading into the 2024 legislative session. But there are clouds on the horizon, officials announced Wednesday.

An updated forecast from Minnesota Management and Budget projects a surplus of $2.4 billion in the two-year budget period that runs through June of 2025. That is up $808 million from the estimate at the end of the legislative session in May. The bigger surplus still accounts for just a fraction of the $72 billion budget.

But budget officials also warned of potential problems for the next two-year budget period, which begins in July 2025. Higher estimates for spending for programs for disabled people, and for education, are the biggest drivers of a projected $2.3 billion shortfall.

Budget Commissioner Erin Campbell called it a “significant structural imbalance" and insisted "it is not fair to call it a deficit” because surpluses from previous years will blunt the impact and allow the state to maintain spending levels without going into a deficit. But she conceded that a deficit is possible in the future, depending on what lawmakers do in the upcoming session and what happens with future spending and tax collections.

Republican legislative leaders disputed her characterization, saying the potential $2.3 billion shortfall is a deficit no matter what Democrats call it.

But there was agreement on all sides that lawmakers won't have a lot of extra money to work with when they return to the Capitol in February, and that the potential shortfall farther out will limit their options.

“The underlying structural imbalance is something we need to continue to monitor and be mindful of when as we make budget decisions during the next legislative session and beyond," Campbell said at a briefing for reporters.

Democratic Gov. Tim Walz agreed that his administration and the Legislature “need to be measured” as they debate what to do with the current surplus. But he portrayed the slight rise in the budget surplus as vindication for the initiatives that he and the Democratic-controlled Legislature passed in the 2023 session.

“We’ve navigated the most volatile economic situation since the Great Depression, and we’ve done so by balancing the budget with (a) surplus while investing heavily in the middle class and cutting taxes for the middle class," Walz said.

Democratic House Speaker Melissa Hortman, of Brooklyn Park, said the state is already seeing the benefits of the last session, the first time in eight years that Democrats controlled the governor's office and both houses of the Legislature.

“The policies that we enacted with Democratic leadership in the House, Senate and governor’s office have resulted in economic success and stability,” Hortman said. “Policies like paid family medical leave, earned safe and sick time, and increased worker protections, whether you work in a warehouse or a refinery, gave workers the peace of mind they need to choose to participate in the workforce."

But GOP leaders accused Democrats of squandering the $17 billion surplus they had going into last session and setting up the state for future deficits.

“If we do nothing, we will just barely be keeping the budget in balance," said Rep. Kristin Robbins, of Maple Grove, an assistant minority leader. "And clearly there are all these requests coming in daily for new spending. We cannot afford it.”

Walz expressed pride that, for the first time in decades, under a change that lawmakers approved earlier this year, the forecast includes projections for how inflation will affect future spending. It amounts to a projected $880 million impact on the next budget.

One of the top issues for the 2024 session is whether lawmakers should approve a public infrastructure borrowing package commonly known as a bonding bill. Lawmakers passed a record $2.6 billion package in May. Campbell said the forecast assumes that the state can safely borrow $830 million for a new package.

The state got bad news this week when federal officials ruled that the $260 tax rebate checks that went out to Minnesotans earlier this year will be subject to $26 in federal income taxes. Walz expressed his disappointment with an expletive. He said he told White House Chief of Staff Jeff Zients that Minnesota was being treated unfairly because it missed a cutoff by 15 days, while states that acted sooner qualified.