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The November economic forecast released Thursday projects that the state of Minnesota will end the current biennium with an $825 million surplus. In the immediate afterglow, one note of consensus among major players was that the news should be taken with cautious optimism – though each cited different reasons for doing so.

November forecast looks to $825 million projected surplus

State economist Laura Kalambokidis's first economic forecast brought good news. (Staff photo: Peter Bartz-Gallagher)

State economist Laura Kalambokidis’s first economic forecast brought good news. (Staff photo: Peter Bartz-Gallagher)

After years of budgeting under the strain of current and future deficits, the November economic forecast continued Minnesota’s streak of glad tidings. The report, released Thursday, was the fifth straight (dating to November 2011) in which the state has projected a surplus for the current biennium. The November report predicts that the state will end the 2014-15 budget cycle with an $825 million net surplus.

In the immediate afterglow, one note of consensus among major players was that the news should be treated cautiously – though each cited different reasons for doing so.  Budget officials mentioned the vagaries of the market and numerous outside influences that could undo the state economy’s progress in emerging from the recession.

Democrats cautioned that it was too soon to commit the apparent windfall to any purpose, noting that the February forecast will be the basis for any eventual adjustments in the budget. Republicans said Thursday’s number reflects a growing economy that was years in the making, and could be undone by tax increases the DFL majorities and Gov. Mark Dayton approved earlier this year.

Minnesota Management and Budget (MMB) Commissioner Jim Schowalter chose to highlight one certainty out of the news: namely, that the state could pay down the final $246 million worth of remaining school shift debt, along with another $15 million borrowed from the state airport fund. He also warned against any rush to spend the new $825 million on the bottom line.

“This forecast shouldn’t be mistaken for money in the bank,” Schowalter said. “We’re still only in the fifth month of a two-year budget.”

Income tax revenues drive surplus

Thursday’s forecast report included a number of significant details about the state economy. Among them:

  • Minnesota’s economy is expected to grow in spite of relative stagnation of the American economy. The 4.8 percent unemployment rate is the lowest since the onset of the recession in 2007, and employee wages are projected to rise by 4.2 percent in the next two years.
  • Through four months, wage earners and corporations are driving the surge in the state’s coffers. Individual income tax collections are estimated to come in at $496 million (2.6 percent) over the February 2013 projection, and corporate income taxes are now pegged at $254 million (10.5) percent above the earlier estimate.
  • The size of the surplus also owes partly to a reduction in spending projections. Expenditures are expected to drop $247 million below the estimated total for the current budget cycle, with $110 million of that coming in the health and human services category.

Making her first solo presentation of the forecast, State Economist Laura Kalambokidis pointed out that the projections are the first since the implementation of the fourth-tier income tax bracket, which hits the state’s highest earners at 9.85 percent. Because those Minnesotans derive much of their income from non-wage sources, the timing and stability of tax revenues is harder to gauge.

“At this point, we appear to be collecting more revenue from sources that are harder to foresee,” Kalambokidis said.

Spending proposals

While each of Thursday’s first-blush responders heralded the forecast as positive, they had divergent ideas about what should be done with the surplus if it materializes. Schowalter urged that more money be dedicated to the state’s budget reserves, which currently stand at about $1 billion. The commissioner argued that setting aside extra funds is the best way to avoid the need for budgeting maneuvers like the school shift in the future.

When Gov. Mark Dayton took his own turn at the podium, he joked that “reserves” could be Schowalter’s middle name. For his part, Dayton’s top priority is the repeal of more than $200 million worth of business-to-business sales taxes which passed earlier this year. The governor also plans to push for the Legislature to pass a federal tax conformity bill, a move he touted as saving middle-income Minnesotans some $205 million over the next two years.

Even with those revenue cuts, the state would be left with $338 million on the bottom line, and Dayton is sure advocacy and lobbying groups have designs on where that money should go.

“It’s certainly going to whet the appetites of most of the people who spend their time here,” Dayton said. “But it’s a better problem to have than the opposite.”

For his part, Dayton said he will wait for the February forecast to set any additional spending agenda. Dayton also said MMB had informed him that the improved economic picture could add up to $200 million to the state’s previous $775 million debt capacity, meaning the 2014 bonding bill could safely approach $1 billion.

Dayton tried to distribute credit evenly among legislators from both parties, saying spending cuts made under Republican majorities combined with DFL tax increases to build the surplus. The various party caucuses were less willing to share recognition.

House Speaker Paul Thissen praised the Democratic majorities in the Legislature for prioritizing repayment of the school shift, and for balancing the budget through raised taxes.

“The result is that we now have choices,” Thissen said. “We have a chance to look ahead, the ability to make decisions that are going to benefit middle class Minnesotans for the long term.”

Thissen was guarded about what those choices and decisions might be, though he did point out that the House had passed a federal tax conformity bill during the 2013 session.

Republican leaders said the economic turnaround began under their control, which they had used to cut the budget without raising taxes. The good news about the state’s bottom line isn’t necessarily good news for Minnesota families, said House Minority Leader Kurt Daudt, who thinks new and higher taxes could still spoil upbeat projections.

“This budget forecast doesn’t really reflect anything about the historic tax increases that were put in place by the Democrats this last session,” Daudt said. “We don’t know exactly what the impact of those tax increases are going to be on the economy.”

The revenue impact of changes in the tax code will become somewhat clearer in three months, when state budget staffers prepare the February update. In the meantime, Schowalter repeatedly advised against making any promises that might prove hard to keep.

“We are counseling that this is just the first of four forecasts that will be in this biennium,” Schowalter said. “The February forecast will be just as – if not more – important for setting the course for this upcoming legislative session.”

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