ST. PAUL — Federal stimulus funding helped Minnesota's economy weather the coronavirus pandemic better than expected, state analysts said Friday, Feb. 26, leaving the state government with a $1.6 billion budget surplus.

A year after the state reported the first case of COVID-19 in Minnesota, budget analysts said the state's economic outlook had improved from November projections that didn't account for two sets of federal support payments and another set of stimulus funding possibly on the horizon.

Back then, Minnesota's Office of Management and Budget officials anticipated that the state would outspend revenues coming into state government, resulting in a $1.3 billion deficit. But updated national economic modeling from IHS Markit showed that consumer spending increased thanks to the stimulus funds.

While COVID-19 remained a source of uncertainty, national forecasts showed that an economic upturn was on the horizon as more people return to work and as consumers rev up spending as another round of federal funding rolls out or as the virus becomes less of a stressor.

At the same time, the state was expected to spend less than projected on medical assistance, since the federal government planned to continue chipping in, and schools saw spending drop alongside enrollment numbers as families opted to homeschool or move students to private school during the pandemic. And additional surplus funds from the current budget could also be carried over to help the state net a $1.6 billion surplus for the budget year that starts June 30.

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"Minnesota this is good news," Gov. Tim Walz said. "There is every reason to be optimistic about the future."

The outlook reset debates at the Capitol about how lawmakers would write a roughly $50 billion budget. And it spurred a word of caution from budget officials. While the models may seem positive, several unknowns could alter the outcome.

"While the sun is starting to shine, we are hardly in the clear and we continue to have uncertain times," Minnesota Management and Budget Commissioner Jim Schowalter said Friday, likening the last year to an unwelcome rollercoaster ride. "We know a lot of this is based upon anticipated federal pandemic response. That money is not in the bank."

Schowalter and others noted that budget projections typically don't make swings of $2.5 billion from one presentation to the next. But the pandemic and the government response had shifted the playing field.

And while some Minnesotans were minimally affected by the pandemic, certain sectors and workers bore an outsized impact, State Economist Laura Kalambokidis said. For instance, the state's hospitality sector saw roughly 44% of its workers lose their jobs as COVID-19 restrictions shut down restaurants, bars, theaters and stadiums.

Those individual job losses had substantial effects on individuals and families, she said, but because those workers had low pay compared to other groups, their lost wages didn't spur a devastating hit to the state's economy.

Walz pointed to the uneven impact of the pandemic and earlier this year put forward a $52.4 billion budget plan that included a tax hike on the state's top wage earners and corporations that he said had thrived during the pandemic. Under the proposal, lower-wage earners and families would see tax credits in the next two years.

Democrats along with labor unions, faith groups, and others have supported a proposal and said it should be incorporated into a final budget.

"We have many people who are doing just fine. Our working families, our students, our frontline and health care workers have sacrificed so much during this pandemic and they deserve to be in a future that is built back better than it was before," House Speaker Melissa Hortman, D-Brooklyn Park, said Thursday night at a virtual rally. "People are still hurting, the needs are still great and this isn't the time for the status quo."

Walz on Friday said he'd still pursue a "fair progressive taxation system" but was open to compromise.

Republican lawmakers and business leaders in the state on Friday said the new outlook signaled that businesses were bouncing back but warned they stood at a critical threshold. They urged lawmakers and the governor not to hike taxes.

“Today’s budget forecast shows that our economy is ready to start growing again, but many businesses across Minnesota are still in danger of closing their doors forever," Minnesota Chamber of Commerce President Doug Loon said in a news release. "It’s time for lawmakers to help struggling employers, employees and communities; not create permanent tax increases and barriers to growth."

Republicans also said they would prioritize using some of the surplus dollars to exempt Paycheck Protection Program funds from state taxes.

"We're going to make sure that small businesses that struggled through this whole pandemic that we have their backs and we take care of them," Senate Majority Leader Paul Gazelka, R-East Gull Lake, said.

Follow Dana Ferguson on Twitter @bydanaferguson, call 651-290-0707 or email dferguson@forumcomm.com. Follow Sarah Mearhoff on Twitter @sarah_mearhoff, call 651-290-0707 or email smearhoff@forumcomm.com.