State leaders temper surprising economic forecast with skepticism

Minnesota finance officials Thursday projected a budget surplus for the first time in four years. The economic forecast shows $876 million cushion for the current two-year budget cycle.

Even though most at the Capitol had expected another deficit, not many are celebrating — possibly because the forecast also shows a likely return to red ink in the following cycle.

The Big Story Blog is analyzing news about the state budget today.

Minnesota Management and Budget Commissioner Jim Schowalter has spent a lot of time in recent years discussing deficits, and most experts predicted the new forecast would continue the trend. Even Schowalter appeared caught off guard by the results.

"We're not quite sure what to say," Schowalter said. "My daughter, who's about eight years old would probably say it best, 'Surprise!'

The unusually good news, Schowalter said, is the result of revenues that came in $358 million better than expected, and spending levels that were $205 million below earlier estimates. Nearly all of the spending reductions came in the health and human services area.

Showalter said the total projected $876-million surplus will now go, as required by state law, toward replenishing the state's cash-flow account and budget reserves, which are both nearly tapped out. A bigger surplus would have allowed for repayment to begin on the school funding deferment that was part of last summer's budget agreement, which erased a $4 billion deficit, he said.

"We want to restore the fiscal stability of the state," Showalter said. "We want to take this good news, build on it, manage risks and hopefully keep on delivering government better, making sure we're not gyrating on this week's news."

Still, Schowalter warned of continued risks and concerns ahead. The forecast projects a $1.3 billion deficit by fiscal year 2014. There are also more immediate risks. State Economist Tom Stinson said this forecast assumes that Congress will continue payroll tax deductions and benefits for the long term unemployed.

"If that doesn't occur, somewhere between 0.6 of a percent and a 1 percent decline in the expected growth rate for the U.S. economy occurs," Stinson said. "That puts us down below 1 percent growth, which gives us really no cushion against any adverse shocks that might occur."

Republican legislative leaders offered a cautious assessment of the forecast. Senate Majority Leader Amy Koch said the surplus shows that the GOP budget mantra of "live within our means" is working. But the job is not done, she said. The surplus doesn't really change any of the plans Republicans have for the 2012 session, Koch said.

"Our agenda for the next session was about reforming and changing the way that government operates, to make it more efficient, more cost effective and more user friendly," Kosh said. "And we'll continue with that. It was also about private-sector job growth. It was about creating an environment that's friendly for the private sector to grow those wages and grow those jobs, and as this forecast demonstrates, that's what works."

Referencing last summer's state budget impasse, Koch also proclaimed that the new forecast should once and for all end the discussion of Gov. Mark Dayton's proposal to raise income taxes on top earners.

Dayton said there's no reason to revisit his proposed tax increase as long the budget surplus holds up, but he wouldn't speculate about the next budget cycle. Overall, Dayton views the forecast as "terrific news for Minnesota," and he was especially pleased with the reductions in health care spending. Dayton said he won't recommend any adjustments in the current budget until he sees the next economic forecast, which is due out in late February.

"I note that a year ago the predicted deficit changed by over $1 billion in just those three months," Dayton said. "I'm hopeful however that continuing improvement in that forecast will permit us to accelerate our schedule for repaying our schools the money borrowed from them last summer."

Another projected surplus will likely make for a far less contentious legislative session next year. Senate Leader Koch said she would even welcome a rare, early adjournment. The Legislature is scheduled to convene on Jan. 24.

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