Caution recommended as Minnesota budget surplus slips to $900 million

ST. PAUL -- A Minnesota economy and state budget report is a cautionary tale.

While the state continues to carry a surplus, which is good news for taxpayers, Minnesota economic growth is slowing from what was expected three months ago. The slowdown established a sour tone Friday when state financial officials released a report showing a state government surplus that dropped from $1.2 billion to $900 million due to lower tax revenues.

Taxes fell because of a national economic slow-down, as well as Minnesota economic bumps such as a steel industry crisis that affects the Iron Range, falling farm profits to overseas economic woes combined with an oversupply of corn and soybeans and a slumping manufacturing economy.

Even with the problems, the Friday report says that "Minnesota is weathering the recent global slowdown reasonably well, a reflection of its large and diverse economic base."

"Concerning news" is how Gov. Mark Dayton reacted to the report.

While Dayton and other state leaders said that a surplus is better than a deficit like Minnesota endured for years, their reactions sounded much like those deficit years.

"It should give us all pause," Dayton said. "I know I am going back and rework my planned budget."

The governor, Senate Majority Leader Tom Bakk and others said that they must be especially concerned about any new spending this year that would extend into future budgets. Dayton said that while in Washington, D.C. last weekend he heard economist predictions of a 2018 recession.

"We're still healthy, but in my view we don't have money to throw around," Dayton said.

Bakk, D-Cook, said the slipping budget surplus could mean major spending increases and tax cuts are out of the question during the legislative session that begins March 8.

Dayton said the report "absolutely" hurts his dream of expanding classes for 4 year olds, it hinders chances of passing a $1.4 billion public works finance bill and makes it difficult to finance a Republican plan to increase transportation funding.

Increasing state payments to cities and counties also is threatened, Dayton said.

Senate Tax Chairman Rod Skoe, D-Clearbrook, added that any new spending or tax cuts must be funded before the current state budget ends June 30, 2017, instead of being phased in over time.

Skoe's comments would seem to dim prospects of a Republican-pushed plan to gradually eliminate income taxes on Social Security benefits.

But House Speaker Kurt Daudt, R-Crown, said that and other tax cuts should pass.

"Investing in our seniors in the state of Minnesota is a very worthy thing to so," the speaker said.

Senate Minority Leader David Hann, R-Eden Prairie, added that lower taxes would boost Minnesota's economy.

Transportation advocates said some of the surplus should be used to fix roads.

"Today’s fiscal forecast showing a projected $900 million surplus provides lawmakers an opportunity to invest in our state's economic future," said Charlie Weaver, executive director of the Minnesota Business Partnership. "We urge lawmakers to use a portion of the surplus to improve our state’s transportation infrastructure and provide meaningful statewide property tax relief to businesses of all sizes across the state."

State Economist Laura Kalambokidis sketched a mixed picture of the economy.

The farm economy looks bleak, she said, after leading the state through the recession and peaking three or four years ago.

However, Kalambokidis said, economies in other countries are slowing, reducing potential markets, while corn and soybean farmers took in record harvests. That combination forced prices down dramatically.

Lower oil prices are a mixed bag for Minnesota.

Kalambokidis said that low oil prices are good for consumers in two ways: good gasoline prices and lower prices on goods made from petroleum products.

But the good oil news is offset, she said. Lower oil prices took a bigger bite out of the country's economy than expected, she said, which affects all states.

Some Minnesota businesses sell to North Dakota oil producers, but low prices have cut back those sales.

Demand for taconite, mined on Minnesota's Iron Range, has slowed dramatically because China is selling state-subsidized steel for low prices. About 3,000 Iron Range workers have been laid off.

The Iron Range produces about 75 percent of the country's taconite, which is used to make steel.

Minnesota manufacturing has cooled, Friday's report indicated, partially due to the same weak foreign economy that hurts farm products and taconite.

On the positive side, the report indicates that the Minnesota housing industry in 2015 had its best performance since 2005. With good wage growth reported, more couples are expected to form households, and they may look for homes.

Tax receipts fall

Here is a look at how predictions of Minnesota's major tax revenues for the current two-year budget have dropped in the past three months:

Individual income tax, down $95 million to $22 billion (-0.4 percent)

Sales tax, down $311 million to $11 billion (-2.8 percent)

Corporate tax, down $93 million to $2.6 billion (-3.5 percent)

Expected spending

Here is how much state tax money Minnesota would spend in this and the next budget cycle under current law:

2016-2017, $41.5 billion

2018-2019, $44.5 billion