Last month, Minnesota Management and Budget predicted state government will have a budget surplus of $1.3 billion. This set many a tongue wagging among legislators, economists, agencies and taxpayers as to what this will mean for the state. Specifically, what can Minnesota get out of such a windfall, or is it even a windfall at all?

Regardless, it does look like good news for the state. According to its report on the budget and economic forecast, Minnesota Management and Budget stated, “Minnesota’s budget and economic outlook has improved since the end of the 2019 legislative special session. A better than expected close to the last biennium, an improved revenue forecast and a small decrease to estimated spending create a forecast surplus of $1.332 billion in the FY 2020-21 biennium.” However, the report adds that while Minnesota’s economy and revenues continue to grow into the FY 2022-23 planning estimates, budget challenges remain for that biennium.

Those challenges haven’t stopped interested parties in ruminating on what can be done with this supposed early Christmas bonus.  Republican lawmakers and some taxpayers have been saying “give it back” and advocating for tax relief. Democrats feel it could do a lot of good elsewhere. These differences will more than likely crop up in the next session.

“Lawmakers, interest groups, state agencies and Gov. Walz will all have differing ideas on how to utilize the state’s substantial budget surplus,” said Rep. Sandy Layman (R-Cohasset). “While we will likely disagree on what the next steps should be, I am confident that it will be a respectful debate.”

However, one of the challenges that can put a crimp on all these wish lists from the “substantial” surplus can be summed up in one word: inflation. Starting with the Pawlenty administration, the state government’s expenditures have not been adjusted for inflation, but its revenue has. As such, said State Rep. Jennifer Schultz (D-Duluth), the average taxpayer doesn’t have a clear idea on the state’s spending, which will affect any surplus.

“The surplus isn’t exactly a surplus,” Schultz said. “I hate to disappoint people who think it is.”

Schultz isn’t alone. Her counterpart in the Senate, State Sen. Erik Simonson (D-Duluth), echoes her analysis. 

“Yes, the problem is that once you factor into the spending formula inflation, there is not a whole lot of surplus funds left to even consider ‘giving back,’” He said. “And out of what is left, it’s not projecting to be recurring funds, but one-time monies that are available. With projections beyond the next biennium signaling even leaner margins, I don’t expect there to be any appetite or ability to reduce revenues collected at this time.”

Layman admits it’s true that inflation is not factored into the forecast and so the forecasted number would be higher than the actual dollars that will be available. “A statement to that effect is most often disclosed to the public at the time of the forecast,” she says. “In the 2020 session, decisions about tax relief or supplemental budget proposals will be made following the February forecast.”

So, what exactly can the state expect as a surplus? Schultz estimated around $200 million. 

“There’s no debate over it, as the supposed surplus will be so little,” she said. “Remember, labor costs go up, supply costs go up, and we need to account for such things, just like any private corporation does. But it’s sort of a political game we shouldn’t be playing.”

Regarding how the one-time monies should be spent, Simonson said there is a long list of entities in need of additional funds. 

“Three important ones that are near the top of my list include resolving UMD’s structural budget deficit, holding St. Louis County harmless from funds over-paid to them by the State Department of Human Services and resolving the special education funding deficit facing ISD 709,” he said.

Layman and Rep. Dale Lueck (R-Cohasset), both Republicans, have a different priority.

“I’d like to invest in strong families and vibrant communities by seeing as much of the surplus returned to taxpayers as possible,” Layman said. “Families in my district would see continued benefits from being able to keep more of the money and would, in turn, reinvest a lot of that extra income into our local economy. The state and national economies are doing well thanks to tax relief. Why stop now?”

“The current budget surplus is not a bright shiny object that dictates rushing out to spend it on new stuff,” Lueck added. “We are collecting more tax revenue than we and the governor agreed is necessary to fund our state agencies. That included allowing for a modest 2020 bonding bill. We need to put those excess tax dollars back into our citizens pockets with rational, targeted long-term tax relief.”  

While such needs will be debated and addressed in the upcoming legislative session, another factor that Schultz and Simonson said is equally important is the fact that 2020 is a bonding bill year. The surplus means more money going into the reserve fund, which has already been healthy enough to warrant a AAA bond rating. This in turn, said the two Democratic legislators, means a larger bonding bill is possible this year, anywhere from $2 billion to $3 billion. They add that with the projected downturn in the U.S. economy, it would be financially sound to pass a larger bonding bill now rather than later.

“It would be a great stimulus for job creation,” said Schultz. “We need the support of businesses to push legislators, especially my Republican friends, to have a much larger bonding bill. It would be cheaper now to make the investments needed across the state for very important projects and assets.”

State Republican legislators have expressed a more conservative approach to the bonding bill.  House Minority Leader Kurt Daudt (R-Crown) was reluctant to specify a bonding figure, but said House Republicans will back a “reasonably sized bonding bill.”

“It’s not going to start with a two (billion), though. I can assure you of that,” Daudt said.

“In regards to the bonding bill, with that reserve account now fully funded at nearly $2.5 billion, there is no better time to really emphasize tax relief for Minnesotans,” said Lueck. “From senior citizens to veterans, healthcare consumers and beyond, there’s no shortage of opportunity to help out taxpayers in our state during the 2020 legislative session.”

Schultz pointed to several local lingering bonding projects that could benefit from a robust bonding bill, such as at UMD, Lake Superior College, the Lake Superior Zoo (where Simonson is CEO), the Duluth Depot and the wastewater treatment facility. 

“These are big projects that, if funded through the bonding bill, would help spur economic growth and create jobs here in Duluth, as well as preserve these assets we have,” Schultz said.

Layman says it will be a challenge to craft an agreeable bonding bill when there are $5 billion in bonding proposals. As a member of the House Capital Investment Committee, she has toured all corners of the state looking at project proposals, and there are a number of projects she considers as investment priorities needed to maintain public health and safety.

“Other priority projects will help overcome barriers to regional growth,” says Layman. “I do expect there will be enough votes to pass a bill in 2020. While bonding bills historically run $1 billion or less, I would not be surprised if the bonding bill passed in 2020 slightly exceeds the $1 billion mark.”

Another budget and economic forecast will be posted in February that will provide more up-to-date information.