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Leaders approach surplus with caution

Senate Majority Leader Tom Bakk echoed Gov. Mark Dayton’s guarded optimism about the budget, but reiterated budget commissioner Jim Schowalter’s warning about overestimating the surplus. (File photo)

Senate Majority Leader Tom Bakk echoed Gov. Mark Dayton’s guarded optimism about the budget, but reiterated budget commissioner Jim Schowalter’s warning about overestimating the surplus. (File photo)

As the fourth and final of Thursday’s economic forecast press conferences came to a close, Senate Majority Leader Tom Bakk approached the podium, where Republican leaders had just finished their engagement. Bakk shared a brief and, by appearance, amicable exchange with House Republican caucus leaders.

Think of it as one of many. Indeed, Bakk himself said that earlier that day, he and House Speaker-designate Kurt Daudt had already spoken once about the day’s news, saying the conversation should “make our job a little easier” as the 2015 session approaches.

Also making their jobs a little easier: the forecast itself. Minnesota’s revenues are expected to come in $556 million over projections for the current biennium, which runs through next June. Subtracting $183 million, which will automatically be fed into the state’s reserve account, and adding the remainder to an existing carry-forward amount of $600-some million, the state is sitting on a roughly $1 billion surplus heading into the next budget.

“It’s good news,” Gov. Mark Dayton said. “It means we have to be prudent, for sure.”

Dayton and other principal players observed repeatedly on Thursday that the situation is anomalous when compared to recent forecasts; not since 2006 has the state been unburdened by debt on the eve of an odd-year session.

Despite the good news, most first-blush feelings favored caution over celebration. Minnesota Management and Budget Commissioner Jim Schowalter pointed out that the total surplus figure is about 2 percent of the projected 2016-17 budget spending, and a fraction of the state outlay on subjects like education and human services. Schowalter added that the surplus was arrived at through a combination of one-time income tax proceeds, much of which can be traced to capital gains realized in late 2013, and an unexpected drop in health and human services spending.

“We are not offering a rosier economic outlook,” Schowalter said, comparing the current review to the forecast released in February of this year.

Daudt went further, saying the report included some alarming new elements, including MMB’s lowered overall revenue estimate for the 2016-17 budget cycle.

“I hope that’s not a trend,” Daudt said, “but there are things to be concerned about in this revenue forecast.”

The state economic team, and an analysis firm retained by MMB, have scaled back some expectations for future economic growth due to expected sluggishness in the U.S. economy. Minnesota’s 3.9 percent unemployment rate ranks the state fifth-best in the country, and is lower than any point during the 2002-2007 period of growth.

But wage increases have not matched earlier expectations, a factor that Daudt also highlighted as worthy of some anxiety, while Dayton said the state is limited in actions it can take on private sector salaries.

“With the minimum wage increase, I think we’ve done all we could at the lower end of the scale,” Dayton said.

Aside from their somewhat tentative reading of the forecast, leaders began to hint at different positions for how the carryover might be handled. Schowalter, as he has in the past, made the case for continuing to build up the state’s reserve. At present, Minnesota has just under $1 billion socked away in case of a budget shortfall, with another roughly $350 million in a “cashflow” reserve.

State Economist Laura Kalambokidis echoed that point, adding that revenue prediction is complicated by the state’s reliance on income tax revenues, especially from the new highest-tier bracket, which often sees much of its income from investments, bonuses, and other “non-wage” earnings.

“We do have a more volatile revenue stream than we used to,” Kalambokidis said, “which is part of the argument for having the budget reserve — and a budget reserve that depends on an analysis of the volatility.”

Dayton, meanwhile, seemed less eager to consign the overage to reserve accounts, saying he “[feels] good about what we left aside previously.” The $183 million amount skimmed from the surplus was an automatic, one-time move passed during the 2014 session, when lawmakers agreed to sock away one-third of any existing surplus come November.

Bakk echoed Dayton’s guarded optimism about the budget scene, but reiterated Schowalter’s point about the risk of overestimating the surplus. In the context of a nearly $42 billion budget, as is planned for 2016-17, the $1 billion figure is “a pretty small cushion,” Bakk said.

As for spending priorities, Dayton said the first on his list would be an expansion of the child care income tax credit. The governor’s plan would add an estimated 137,000 families to that rebate program at a cost of about $175 million, he said. Dayton also ticked off an expansion of early childhood education scholarships and more public funds for broadband internet access as possible spending targets, though he said he would welcome other suggestions.

“I’m open to anything,” said Dayton, who said he would consider all combinations of spending, tax cuts and contributions to the budget reserve.

Bakk has yet to discuss the surplus question with the Senate DFL caucus, though a meeting was scheduled for the following weekend. He guessed with some confidence that his members would be interested in passing federal income tax conformity, which is still being hashed-out by federal lawmakers, but said he did not know what the price tag on that measure would be. After a conformity proposal stalled in 2013, the Legislature passed a revised conformity package earlier this year, cutting some $226 from the state’s projected revenues.

Naming other subjects, Bakk said he planned to meet with Minnesota Supreme Court Chief Justice Lori Gildea next week to hear about funding needs in the court system, and also anticipated “significant costs” in the state corrections budget if Minnesota is forced to revamp its sex offender program.

“Money starts to disappear pretty fast,” Bakk said.

Daudt, the newest member of the leadership triumvirate, was also the least committal when it came to suggested uses for the leftover funds. Faced with a series of questions on possibilities, Daudt scarcely went further than saying his caucus planned to consider each path in turn.

Asked directly if House Republicans wanted to repeal the 2013 income tax hike on the state’s top earners, Daudt said, “I don’t know if that will accomplish what we want to. But we’ll certainly look at that.”

House Speaker Paul Thissen, who will soon hand over that title to Daudt, argued that the positive forecast gives the lie to Republican campaign rhetoric about the effect of DFL tax increases.

“This should be the final nail in the coffin to this notion that the fact we raised taxes was going to tank our economy,” Thissen said.

Of the key figures, Daudt seemed more positively inclined than others to use excess funds to help address needs in state transportation funding. Dayton said he would review proposals to spend some, or even all, of the surplus on transportation, but said his own plan will include new revenues through usage-based taxes.

Bakk, for his part, said he thought it was “interesting” that St. Louis County had just approved a half-cent sales tax to pay for local roads and bridges.

“They’re not waiting for the state,” Bakk said. He added: “The state is not showing the kind of leadership on transportation infrastructure that I think the public expects.”

Following the sequence of press statements, the forecast was due next as the topic of a Friday morning House Ways and Means Committee hearing. That meeting was to be chaired by Rep. Lyndon Carlson, DFL-Crystal, whose successor as chairman, returning legislator Rep. Jim Knoblach, R-St. Cloud, was on hand for each of the reaction press conferences, but did not speak.

Dayton urged patience, saying his first budget would arrive in late January, followed by a revised version after the February forecast, at which point legislative leaders would also begin to set their own final goals.

“This is greatly improved territory … but there are going to be many ideas for the use of this money,” Dayton said.

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