State Economist Laura Kalambokidis talks about global economic factors changing Minnesota budget outlook as Myron Frans and Margaret Kelly look on. Tim Pugmire / MPR Photo

Budget projections showing a $900 million state surplus produced a dour reaction Friday from Minnesota leaders, who saw the amount at their disposal for the upcoming session slip considerably from a rosier report just a few months ago.

The mood was a noticeable shift from the jubilant tone in December, when a Minnesota Management and Budget forecast predicted $1.2 billion would pile up by June 2017.

Two-term Democratic Gov. Mark Dayton said the report was concerning and served as "a reminder that we need to protect the fiscal integrity we worked to achieve over the last five years." He said a big tax cut and a shift of general treasury money to transportation would put the state's finances at risk.

That was a broadside at two top Republican initiatives, and it cast doubt on the ability of Minnesota's leaders to find early consensus on a session agenda. The Legislature convenes March 8 and must conclude by May 23.

Referring to the persistent deficits during his early days in office, Dayton said, "I'm not going to let us get put in that box again."

Friday's report is the latest and last full look at state obligations and projected tax collections and sets the outer bounds for the debate over tax cuts, new school and transportation spending and other priority programs. Dayton and lawmakers could also decide to save some of the surplus to provide a bigger buffer if the economy turns south.

Minnesota Management and Budget Commissioner Myron Frans said there's no reason to panic.

"Minnesota is weathering the global slowdown well," he said. "Minnesota continues to be a success story."

Officials said there are ample risks on the horizon, from low oil and commodity prices hurting economic expansion to a tight labor market, making it harder for employers to fill jobs. They also said the strong U.S. dollar in comparison with other global currencies is a drag on trade-dependent sectors like farm goods.

According to the report, the state is slated to take in less in sales and income taxes than expected in the December forecast, and it is facing a slower-growing economy. Those downgrades were offset some by lower costs in public health programs, which are expected to save the state $129 million.

If nothing prevails in the upcoming session, the two-year state budget is on track to be $41.5 billion. Tax collections are on pace to approach $42.3 billion.

"Spending continues to grow year over year, but just at a slightly lower rate," said state budget director Margaret Kelly.

Minnesota has been riding a string of positive budget reports since confronting deficits at the beginning of the decade. As part of the march back to fiscal stability, lawmakers have also socked almost $1.6 billion into the state's rainy day reserve.

A Minnesota Management and Budget spokesman said it was the largest negative swing between the November/December forecast and the one released in February since 2007-08. Back then, a projected state deficit swelled by more than $550 million between the two reports.

Inside the $900 million surplus estimate there are caveats. Some of that is considered one-time money, meaning officials don’t expect the uptick in tax collections to last. That could favor proposed spending on programs needing temporary infusions, such as broadband grants, over those that would entail longer-term spending commitments.

Republicans, led by House Speaker Kurt Daudt, said they still want a decent share of the surplus for tax cuts and road construction.

On transportation, Daudt said he still thinks there’s an opportunity to pass a bill. But he said he’s not sure what it might look like.

Senate Minority Leader David Hann, R-Eden Prairie, said it's better to send money back through tax cuts than spend it all.

“It’s funny though that we urge caution in February, and in May all the money’s been spent," Hann said. "I just want to make one thing clear: Providing tax relief to people in Minnesota is not spending state money.”

Deputy House Minority Leader Erin Murphy, DFL-St. Paul, said the tax-cut approach is misplaced. She argued for more spending on early childhood education programs that supporters insist will pay future dividends.

"First and foremost for me we have to make sure we don't punch a hole in the budget by promising a tax cut that creates deficits in the future," Murphy said.

Senate Majority Leader Tom Bakk, DFL-Cook, said interest groups with lofty goals for the session will have to scale them back.

"Everything got a little harder," Bakk said.

Dayton said that expanded state-paid preschool for four-year-olds remains his top priority. On tax relief, Dayton said he prefers dependent and child care credits geared toward the middle class.

He intends to release his full plan for the revised surplus by March 15. Lawmakers have until mid-May to finish their work.

Minnesota Public Radio reporter Tim Pugmire contributed to this report.