Video (01:56) : Minnesota's well-performing economy has left the state with a budget surplus of $1 billion, the Minnesota Management and Budget Office reported Thursday. Now legislators must figure out what to do with the windfall.

The ample cushion of dollars could help the DFL governor and state lawmakers avoid the kind of fight over tax increases and spending cuts that typically accompany a budget deficit. Dayton and leading lawmakers from both parties predicted the surplus — partly the result of an improved state economy — would make for a smoother session.

The 2016-17 budget forecast by state economic experts does, however, contain some red flags for both the Minnesota and national economy.

“I bring you good news,” Minnesota Management and Budget Commissioner James Schowalter said as he unveiled the forecast at a Capitol news conference. But, he said, “Most of today’s forecast news is about money in the bank. We’re not offering a rosier economic outlook.”

Among other cautions, homebuilding and home sales have slowed, partly because of an aging population, but also because many millennials are burdened with high college debt that keeps them out of the real estate market. Wage growth in Minnesota is also expected to slow compared to earlier predictions.

Republicans, who assume control of the state House of Representatives in January, seized on some of the warnings to note that not all Minnesotans have shared in the economic rebound.

Gov. Mark Dayton cheered the budget forecast, but also said, “We have to be prudent.”

“We know that Minnesota families really haven’t seen the sort of economic benefit or surplus in their own family budgets, and this is something that’s really concerning,” said Rep. Kurt Daudt, R-Crown, who takes over as House speaker in January.

Rep. Steve Drazkowski, R-Mazeppa, said that the surplus represented money the state “over-collected” and should be returned to taxpayers. “Our economy is still sputtering,” he said, “and it’s time to begin eliminating unnecessary state government burdens that threaten future economic growth.”

DFLers welcomed the surplus projection, but Gov. Mark Dayton said the accompanying warning signs also mean “we have to be prudent, for sure.”

Dayton said he likely will seek an expanded tax credit of $175 million that would help as many as 170,000 Minnesota families cover the cost of child care.

Other priorities include boosting broadband Internet access in rural Minnesota, securing state funding for early childhood education scholarships, and devoting more resources to maintaining and improving the state’s roads and bridges — a key issue that emerged during the governor’s re-election effort. Dayton’s two-year budget proposal is due Jan. 27 for the biennium which begins July 1.

A small cushion

Senate Majority Leader Tom Bakk, DFL-Cook, warned that inflationary pressures could consume much of the $1 billion surplus, due to the continually rising cost of supplies and labor used to operate state government. Under state law, the forecast counts inflation on the revenue side, but is prohibited from factoring inflation into its spending estimates. Even at its current low rate, Schowalter said inflation could swallow up as much as two-thirds of the surplus.

“I think everybody who has ideas to spend what seems like an incredible amount of money should maybe temper their expectations a little bit,” Bakk said. “A billion dollars is a pretty small cushion.”

Republican legislative leaders similarly downplayed the significance of the surplus.

Senate Minority Leader David Hann, R-Eden Prairie, chastised Dayton and Schowalter for what he called an unwarranted “celebration” of the surplus. “We should not focus on how to grow the state budget,” he said. “We should focus on how to grow the economy.”

November’s forecast surprised some because it downgraded the outlook of Minnesota’s economy, largely because of national and global economic pressures. A recent slowdown in China’s economic output and fears of another recession in Europe could have ripple effects that would eventually reach Minnesota, economists warned.

Over the past year, solid hiring gains by Minnesota employers have pushed the unemployment rate down to its lowest level in eight years, 3.9 percent. The rate of the long-term unemployed, those out of work for six months or longer, has been cut by more than half since its peak in mid-2010 and has dropped across age, gender and racial lines.

State economist Laura Kalambokidis said recent job gains have expanded to goods-producing industries such as construction and manufacturing, a positive development. Furthermore, falling gas prices are expected to boost consumer spending, a key driver of the economy as it comprises roughly two-thirds of the country’s gross domestic product — the total value of goods and services produced.

Minnesota’s fiscal picture is sound, even as revenue projections were reduced Thursday. The budget forecast showed a $373 million surplus for this fiscal year, which ends in June. That is after $183 million is diverted under state law to the budget reserve that has now grown to $994 million.

Schowalter said projections of tax revenues from the February forecast were reduced by $412 million, or 1 percent. That drop, though, will be largely offset by projections of lower spending on health care.

Budget officials said that a different composition of enrollees receiving medical assistance in 2015 will result in more than $440 million in savings on health and human services. Though the number of enrollees in medical assistance grew slightly from the February forecast, the uptick has been largely adults without children, while the rate of families with children and individuals with disabilities fell during that time, according to state budget director Margaret Kelly.





