Minnesota budget surplus projected at record $7.7 billion

Dec. 7—The state of Minnesota will head into 2022 with a record $7.7 billion projected budget surplus for the current two-year budget cycle, state finance officials announced Tuesday.

The eye-popping figure — "staggering" was the adjective one veteran senator used — would be enough money to pay more than $1,000 to every Minnesotan, if the projection holds.

But that won't happen. Some of the money is already spoken for, and leaders of both political parties appear to have other plans for the rest — as do various interest groups that wouldn't mind a piece.

So how will it be spent, or will it be spent?

Impossible to say at this point.

The projection — and it's important to remember it is only a projection — set the pieces Tuesday for a chess match that will likely play out through May as the state's politically divided government grapples with what could shape up to be an unprecedented sea of riches in an election year.

On Tuesday, Gov. Tim Walz and fellow Democrats generally hailed the projected surplus as providing a historic opportunity to pay for programs and policies they've supported in recent years, such as creating universal paid sick leave and reducing the cost of child care. Republicans, on the other hand, urged caution, warning of the dangers of inflation and suggesting "tax relief" is in order to counterbalance the state's largesse.

WHY SO BIG?

The ballooning projected surplus — in February it was projected to be $1.6 billion — is part of a national trend for state and federal government finances that is resulting mainly from an increase in tax revenues amid a pandemic recovery that continues to surprise economists.

Some $5.1 billion of the projected surplus comes from increased collections from personal income, sales, and corporate income taxes, according to the budget forecast, which was produced by the state Management and Budget office in consultation with the state economist and a private economics firm. A relatively small amount, some $364 million, comes from lower-than-expected state spending during the pandemic, mainly from making lower payments to public schools, which saw reduced student enrollment during the pandemic.

Some $870 million of the surplus by law will be siphoned off to restore the state's budget reserve, also known as its "rainy day fund."

While massive federal spending programs, including coronavirus relief programs, have sent billions of dollars into state and local government coffers, those funds do not significantly contribute to the surplus, Management and Budget Commissioner Jim Schowalter said. However, the massive federal spending programs that made direct payments to people and businesses have played a major role in the economic recovery that led to the increased spending and income that, in turn, led to increased tax revenues for the state, State Economist Laura Kalambokidis said Tuesday.

The forecast lists a number of variables that make its projections inherently uncertain, including inflation, the problems with the global supply chain and the course of the coronavirus pandemic.

DEMS CLAIM VICTORY

While cautioning the pandemic isn't over, leading Democrats on Tuesday claimed the projected surplus was vindication for policies they've supported.

Walz, for example, revisited an argument he made in 2020, when Republicans criticized his unprecedented COVID-19 restrictions, which included shuttering schools and many businesses to in-person activities, as lethal to the economy. Walz has frequently maintained there was a "false choice" between the economy and pandemic safety — when properly targeted government spending was used to provide relief for those hurt.

"That's now been proven to be a fallacy," Walz said in statements to the media Tuesday. He and other Democrats emphasized that the recovery hasn't been equal and argued that the excesses from those who have done well — the surplus — should be directed toward those who remain struggling to return to work, find affordable day care, or access health care or housing they can afford.

House Majority Leader Ryan Winkler, DFL-Golden Valley, claimed victory more plainly. "The message from this forecast is that Democratic policies work," he said.

REPUBLICANS URGE CAUTION

Top Republicans disagreed flatly with Winkler's assessment. House Minority Leader Kurt Daudt, R-Crown, said inflation, especially rising gasoline and energy prices, is putting the squeeze on Minnesotans, and "all of those things are the result of Democratic policies."

Republicans hold the majority in the state Senate, so their support is crucial for any state spending plan to succeed.

On Tuesday, Senate Finance Committee Chair Julie Rosen, R-Fairmont, said it's "too early to tell" what posture Senate Republicans will take.

"We need to be very cautionary," she said.

Neither Daudt nor Rosen said they planned to push for tax cuts specifically for the wealthy or profitable large corporations, but they did use the words "tax relief."

Rosen didn't offer specifics. "I'm not going to commit to anything until we have a healthy robust discussion in our caucus," she said.

Potentially complicating matters politically: Walz is running for re-election, and two prominent Republican senators, Paul Gazelka, R-East Gull Lake, and Michelle Benson, R-Ham Lake, are seeking the Republican nomination, along with former state Sen. Scott Jensen of Chaska. In addition, every seat of the Legislature will be on the ballot next year.

House Republicans have also called for spending some state money to replenish the state's unemployment insurance trust fund that was drained to pay jobless benefits during the pandemic. The state borrowed more than $1 billion from the federal government and must start paying off that debt this month.

Businesses will face payroll tax increases if the state doesn't step in and pick up part or the entire tab. It could use some of its unused federal COVID dollars to address that debt.

Walz and the 2022 Legislature, which convenes Jan. 31, will decide what to do with the surplus. If they can't agree, nothing much will happen; the money would just sit there. Because the two-year budget to fund government operations was passed last year, there's no risk of a state government shutdown.