Minnesota's projected budget surplus balloons to $9.25 billion

28 February 2022

Minnesota budget officials predicted the state will have a massive $9.25 billion budget surplus, but cautioned Monday that “inflation and geopolitical conflict pose risk” to the outlook.

The latest projection for the current two-year budget cycle was largely compiled before Russia invaded Ukraine. The global financial impacts of the war remain to be seen.

“Sometimes it’s hard to even anticipate what’s going to happen next month, much less next year,” said Minnesota Management and Budget Commissioner Jim Schowalter. “Even as we put the final numbers together for this forecast, the news broke — the terrible news broke — of the Russian invasion of Ukraine. This news is also significant, and could put a dent in the anticipated forecast improvement.”

The forecast will drive spending decisions at the State Capitol over the next few months. Legislators and advocates have been clamoring for a portion of the state’s estimated budget surplus, which has grown since economists estimated a historic $7.7 billion in December.

“A higher income, consumer spending, and corporate profit forecast results in an improved revenue projection,” the Management and Budget office announced. “While spending is slightly lower in E-12 education and Health and Human Services.”

State spending estimates dropped by about .5%, largely due to lower than anticipated spending on education as student counts fell and special education transportation expenses dipped. Health and human service cost estimates also fell as an extension of federal assistance is expected to decrease Medical Assistance expenses.

Legislators on both sides of the aisle have been unveiling long lists of ideas for how to spend surplus dollars, as well as remaining federal pandemic relief funds.

DFL Gov. Tim Walz said the increased surplus projection means the state could triple his proposal earlier this year to give direct checks to Minnesotans. He suggested giving $500 to individuals and $1,000 to couples.

“I think the reason that the checks make such a difference now is you can put a significant amount of money in the hands [of Minnesotans],” Walz said, and cautioned that long-term tax cuts could put the state’s financial stability in jeopardy in the future.

House GOP Minority Leader Kurt Daudt called the checks “an election year gimmick” and said Minnesota is projected to have more than it needs not only in the current budget cycle, but in the following two years. Daudt says they need permanent tax cuts, and “anything short of that is a failure on our part.”

Last week Senate Republicans proposed spending $3.5 billion this year on permanent tax cuts. The proposal is estimated to cost $8.5 billion over three years.

“The massive surplus continues to get larger meaning the state government is simply collecting too much money from the taxpayers. It’s time to give the money back to the people with permanent tax relief for Minnesotan workers and senior citizens,” GOP Senate Majority Leader Jeremy Miller said in a statement Monday.

State leaders can have a discussion about tax cuts, Walz said, but said any change needs to be crafted to exclude wealthy Minnesotans in the state’s top tax brackets. Instead, he urged lawmakers to approve $2.7 billion to replenish the state’s Unemployment Insurance Trust Fund and $1 billion for workers on the front lines of the COVID-19 pandemic.

Miller said he he doesn’t want to be “pitting one neighbor against another” by providing bonuses to some essential workers, and instead said “every Minnesotan working in Minnesota right now is essential” and they want to focus on tax relief for all, including those in the top tax brackets.

Democrats want to put money toward paid family and medical leave, child care, affordable health care, good schools, bonuses for frontline workers and other needs, said House Speaker Melissa Hortman, DFL-Brooklyn Park. She stressed that $1,500 checks for essential workers are long overdue, and lawmakers should act quickly.

“The state and its people are under a lot of stress and they need to rebuild and recover from that,” Hortman said.

Both Hortman and Senate DFL Minority Leader Melisa López Franzen also said they want be cautious amid uncertainty. Hortman suggested putting a chunk of the money into reserves.

The war in Ukraine could exacerbate rising inflation and gas and oil prices in the United States, and will be a key consideration as Federal Reserve officials look to raise interest rates in March.

State budget forecasts largely do not account for inflation on expenses, which DFL legislators are pushing to change this session — the latest in a series of attempts to alter the accounting approach.

“When we do not consider inflation on the spending side, we’re misrepresenting what a surplus or potential deficit really is,” Rep. Jennifer Schultz, DFL-Duluth, said during a recent hearing on the bill.

Staff writers Briana Bierschbach and Emma Nelson contributed to this report.

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