ST. PAUL — State budget officials on Thursday, Feb. 27, announced Minnesota has a projected $1.5 billion budget surplus, a slight increase from what they'd forecast in November.

The announcement immediately kicked off a new wave of debates at the Capitol about how best to spend the extra funds, with Gov. Tim Walz pushing for a boost to the state's rainy day fund. Democratic lawmakers, meanwhile, made a bid for increasing funds for early childhood education initiatives and Republicans said lawmakers should kick back the money to taxpayers.

A boost to the state's general fund and a slight dip in state spending generated the extra $1.5 billion on the table, state officials said. And while economists projected a slowdown on the horizon, they said the state's outlook remains stable.

Corporate franchise taxes and increases in other revenues boosted the state's forecast for incoming funds. Meanwhile, individual sales tax and general sales tax figures were projected to come in lower ahead of June 30, 2021, when the state's budget is set to run out.

Minnesota budget officials and economists used a three-week-old report from economic firm IHS Markit to draft the state-specific forecast. They acknowledged that the assessment didn't significantly factor in the impact of the coronavirus on the state or U.S. economy.

News of the virus's spread earlier this week spurred a slide in global markets and sent federal and state health officials as well as hospitals into planning mode in hopes of fending off the disease's spread. But Minnesota officials said it wasn't immediately clear how the reaction would affect the state's economy.

"It is a fluid situation and it's not unusual for us to have an issue or two percolating at a time of the budget forecast, and this is no different," Minnesota Management and Budget Commissioner Myron Frans said. "There seems to be always an issue or two, and this is a very serious one, and we'll just have to wait and see."

Over the next two and a half months, lawmakers in Minnesota's divided Capitol will have to reach an agreement over how to spend the surplus — if they spend it at all — and what public works projects the state can afford to fund given the state's economic fitness.

Where should the money go?

The better-than-projected surplus figure almost immediately reignited arguments from Democrats and Republicans in Minnesota's divided Legislature about the best way to spend that surplus funding.

Democrats said they hope to put $500 million of that projected excess funding toward early childhood education scholarships and child care assistance program funding. Republicans, meanwhile, said the dollars in excess of what the state government needs should be returned to taxpayers through a cut in the lowest income tax bracket and making Social Security exempt from the state's income tax.

Minnesota Gov. Tim Walz on Thursday, Feb. 27, 2020, responded to the budget and economic forecast at the Capitol complex in St. Paul. Dana Ferguson / Forum News Service
Minnesota Gov. Tim Walz on Thursday, Feb. 27, 2020, responded to the budget and economic forecast at the Capitol complex in St. Paul. Dana Ferguson / Forum News Service

Lawmakers and the governor last year as part of budget negotiations agreed to pull $491 million from the state's reserves and Walz said the Legislature should restore that amount to the state's rainy day funds. The forecast projected a likely economic slowdown ahead for Minnesota in the next year or two and lawmakers should plan for that, the first-term governor said.

"I'm going to urge caution here," Walz said. "There were already reasons to be cautious, I think this reinforces things that I have been saying ... let's be smart about this and let's invest in things that make it better."

Minnesota Senate Majority Leader Paul Gazelka, R-Nisswa, on Thursday, Feb. 27, 2020, said lawmakers should return a projected budget surplus to taxpayers through tax cuts. Dana Ferguson / Forum News Service
Minnesota Senate Majority Leader Paul Gazelka, R-Nisswa, on Thursday, Feb. 27, 2020, said lawmakers should return a projected budget surplus to taxpayers through tax cuts. Dana Ferguson / Forum News Service

Republican lawmakers agreed that it was important to maintain state budget reserves, but said $1 billion in the excess funds should be returned to Minnesotans through tax relief. They said they'd aim to trim state spending to even out the ongoing impact to the state's budget moving forward.

“We do believe that it’s wise for Minnesota to have a rainy day fund that if there is an economic downturn we’re ready for it, but there’s also some other priorities we want to weigh out,” Senate Majority Leader Paul Gazelka, R-Nisswa, said. “Is it more important to get Social Security fully exempted, for example, is something we should at least have a conversation about.”

Democrats said they were open to proposals like potential tax cuts that would involve ongoing spending, but raised concerns about exempting Social Security income for wealthy Minnesotans.

"We can't afford the size of proposals, the spending that Republicans are putting forward," House Speaker Melissa Hortman, D-Brooklyn Park, said. "And we especially can't afford a proposal to cut taxes that tilts toward people who are wealthier."

Minnesota House Speaker Melissa Hortman, D-Brooklyn Park, on Thursday, Feb. 27, 2020, spoke with reporters in St. Paul about the state's budget forecast. Dana Ferguson / Forum News Service
Minnesota House Speaker Melissa Hortman, D-Brooklyn Park, on Thursday, Feb. 27, 2020, spoke with reporters in St. Paul about the state's budget forecast. Dana Ferguson / Forum News Service

Rosy outlook restarts asks for substantial bonding bill

A state debt capacity forecast also released on Thursday showed that the state maximum the state could borrow within debt guidelines is $3.5 billion. Democrats said they'd pursue a slate of projects with a price tag near that figure.

"I think we have an opportunity to do something pretty special and make a real difference in Minnesotans' lives across the state, but also we're looking at these opportunities where we can make a difference without putting us into structural deficit," Senate Majority Leader Susan Kent, D-Woodbury, said.

Walz said he'd keep his proposal around $2 billion, given the forecast report. Republican lawmakers said they'd aim to keep the borrowing plan closer to the average over the last two decades of around $1 billion, and look at individual projects that could benefit various regions.

“Is there a chance we could go above $1 billion? There is a chance we could. Is there a chance it’s near $2 billion? Probably not,” House Minority Leader Kurt Daudt, R-Crown, said.