Minnesota expects a $7.7 billion surplus in its current two-year budget, a dramatic turnaround from a year ago when red ink driven by the pandemic’s anticipated tax blows loomed.
The state’s November 2020 budgetary and economic forecast warned of a $1.3 billion gap in the fiscal 2022-2023 for Gov. Tim Walz and lawmakers to deal with in the next biennial budget.
The tide shifted as it did for many states later in the year as tax revenues rebounded from early pandemic lows and that gap then evaporated in the February 2021 forecast when a $1.57 billion surplus was projected heading into budget season.
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The $7.7 billion figure is a record surplus projection.
The latest figures show a $127 million fiscal 2021 ending balance and a $3.1 billion surplus from fiscal 2021 as final spending and tax collections were counted.
The projection is further fueled by economic recovery and growth that are expected to produce an additional $5.5 billion of revenue gains in the current biennium. Strong growth in income, consumer spending and exceptionally high corporate profits drove the revenue growth projections.
The numbers do not include any of the state’s $2.8 billion in American Rescue Plan Act relief.
Based on statutory requirements, a portion of the surplus — $870 million — goes into the state’s rainy day fund. The state had dipped into the fund to cover previous red ink. “With this forecast the budget reserve is again full” at $2.66 billion, Schowalter said during a Tuesday briefing with Walz and other state financial officials.
Another $111 million will go into a stadium reserve account leaving $7.7 billion for the governor and lawmakers to argue over in the 2022 legislative session. The state is currently operating on a $52.3 billion two-year budget approved last spring.
While economic uncertainty from rising inflation and supply chain problems and the pandemic poses significant risk to the forecast, the rosier outlook extends through the state’s planning timeline that covers the next fiscal 2024/2025 biennium.
State budget forecasters faced questions over the big swings in budget forecasts and asked when the state might be better able to predict revenues. State officials attributed the variances to volatility over the last couple years from the pandemic.
The forecast sets the stage for negotiations and debate about how to use the surplus and federal dollars in the coming session. Democrats have with past surpluses argued for more spending and the GOP has pressed for tax cuts. A mix of both may prove affordable.
Walz is a member of the Democratic-Farmer-Labor Party which controls the House and the GOP holds a Senate majority.
The two-year budget is adopted in odd years and a capital budget known as the bonding bill is taken up in even years. The $52.3 billion budget package won bipartisan support on the last day of the fiscal biennium June 30, a task not always seen given divided leadership and past battles over spending, bonding, taxes, and Walz’s emergency COVID-19 powers.
“This is a golden opportunity for Minnesota. It doesn’t need to be one choice over another,” Walz said during Tuesday's forecast briefing. He named lowering health care and childcare and heating/electricity costs as priorities.
The state typically borrows in the late summer and ahead of its $870 million general obligation sale this year the state won two improved rating
Moody’s Investors Service moved its outlook on the Aa1 rating to positive from stable. S&P Global Ratings moved the outlook on its AAA rating to stable from negative.
Fitch Ratings affirmed its AAA rating and stable outlook ahead of the sale.
