Minnesota governor lays out plans for $17 billion state surplus

Minnesota lawmakers have a crowded agenda as they weigh tax breaks, a bonding bill for infrastructure, and a new two-year budget with a $17.6 billion surplus in play.

Gov. Tim Walz last week laid out his priorities in a $3.3 billion infrastructure package and a $65 billion biennial budget that provides targeted tax relief and includes the early payoff of bonds sold to subsidize the stadium for the National Football League’s Minnesota Vikings, which opened in 2016.  

Capital plan demands ballooned this year due to the failed passage last year of a “bonding bill.”

“This is a fair budget that will continue to create growth,” Minnesota Gov. Tim Walz said at a news conference.

Minnesota governor’s office

The state typically takes up a sizable capital plan in even-numbered years following passage of the operating budget in odd-numbered years and then a smaller package alongside with the operating budget.

Lawmakers mired in partisan bickering ended their last two sessions without passing a capital bill.

The dynamics are different now; Walz won reelection in November, and his Democratic-Farmer-Labor Party wrested control of the Senate from Republicans while retaining its House majority.

The governor’s $3.3 billion request would be the largest bonding bill in state history.

“Strong infrastructure is what allows Minnesotans to live safe and healthy lives,” Walz said in a statement. “The investments in our 2023 Infrastructure Plan will support the economic vitality of our communities, while creating thousands of good-paying jobs.”

While their new control of the state Senate gives the DFL and Walz an upper hand in budget negotiations, the party lacks the three-fifths supermajorities needed to pass new GO borrowing, so some Republican votes would be needed for the capital plan.

Walz’s blueprint relies on $1.9 billion of GO bonds, $250 million of appropriation-backed borrowing, and $900 million of general fund cash and other funds.

The proposed capital spending would direct more than $650 million to road, bridge, and water system projects with another $1.2 billion going to repair and replace state and university-owned buildings. About $133 million would go towards Minnesota Department of Natural Resources for its buildings, roads, trails, public water accesses, bridges, and recreational facilities.

Walz’ proposal would also spend $470 million on affordable housing including what the administration called “a historic” $250 million of housing infrastructure bonds.

Another $90 million would be spent on veterans’ home buildings. The plan would send $520 million to support local projects such as libraries and fire stations and $312 million for environmental stewardship projects across the state.

The state has three triple-A ratings after a Moody’s Investors Service upgrade in July and typically borrows in late summer.

A roughly $1.5 billion bonding package is currently making its way through the legislature with Republicans on board. It’s unclear how much additional spending the GOP would support as they voiced their opposition to the $3.3 billion package.

“The governor’s request would be a huge debt service to future taxpayers, on top of billions in tax increases he already proposed this week,” Sen. Karin Housley, R-Stillwater, who sits on the Senate Capital Investment Committee, said in a statement.

Democrats could pass additional spending for capital by tapping surplus cash instead of borrowing to fund more infrastructure work.

Walz’s proposed fiscal 2024-2025 general fund budget for the period beginning July 1 would spend a record $65.2 billion, leave $350 million in an existing cash flow account as well as $2.85 billion in reserves, and end the biennium with a $1.27 billion balance.  

The plan relies primarily on carrying over $14.8 billion from the current spending plan, $26.9 billion of income taxes, $4.4 billion of corporate income taxes, and $14.9 billion of sales taxes, the only tax of the big three with revenue expected to grow from the current biennium.

That compares to the current $52.1 billion general fund. Income taxes account for $32 billion of revenue, corporate income taxes $5.2 billion, and sales taxes $14.1 billion.

The proposed spending package would send $8 billion back to taxpayers through various relief proposals including one-time direct checks between $1,000 and $2,600 structured as an advance income tax credit that would cost the state $4 billion.

The plan would provide $1 billion in child care tax credits over four years with another $1.1 billion in child tax credits in the next biennium and then $1.2 billion in 2026-2027. The plan calls for a $219 million reduction in taxes on some Social Security benefits.

The plan would fund a one-time 2.5% cost of living adjustment for all retiree participants in Minnesota public pension plans at a cost of $78 million.

“This is a fair budget that will continue to create growth — reducing taxes on Minnesotans while improving all aspects of their lives,” Walz said at a news conference.

The budget would also provide a $722 million state match to leverage for federal infrastructure dollars for multimodal transportation projects. The budget would lift the general education funding formula by 4% in 2024 and 2% in 2025 that along with some other changes would increase education spending by $3 billion while an additional $1.5 billion would fund expanded access to affordable housing.

The budget relies on collecting revenue through several sources. It proposes a 1.5% surcharge on capital gains and dividends of individuals, trusts, and estates over $500,000 up to $1 million, and 4% on income over $1 million for individuals, trusts, and estates to raise $660 million in the next budget cycle.

The state would legalize recreational adult-use cannabis with the governor proposing a 15% tax on sales although some Democrats back a smaller levy.

The budget would levy a one-eighth of a cent sales tax for the seven-county metropolitan region around the Twin Cities for transit.

Republicans attacked the plan for the record level of new governmental spending and say it falls short of their demands for permanent tax relief. They also want the tax on Social Security benefits fully eliminated.

“In a time there is a record surplus, $17.6 billion, Minnesotans are expecting to have that back,” said House Minority Leader Lisa Demuth, R-Cold Spring. “Unfortunately, what we heard today is Minnesota is spending and it’s going to cost Minnesotans a little bit more to be here.”

With the stadium reserve expected to grow to $368 million in the current biennium and reach $684 million in the next, Walz has proposed retiring later this year the outstanding bonds issued for U.S. Bank Stadium ahead of the scheduled 2043 maturity. The move would save $200 million in interest, officials said.

The state sold $462 million in 2014 to cover most of its $350 million contribution and Minneapolis’ $150 million contribution toward the $1 billion project after establishing a new form of gambling, electronic pull tabs, to help repay the appropriation-backed bonds.

Revenue has surged beyond expectations allowing for the early pay off.

“I think this really gets us to a place that we couldn’t have anticipated just 10 years ago” after the pull tabs got off to a slow start, Minnesota Management and Budget Commissioner Jim Schowalter said. The plan would forgive $60 million in payments owed by the city to cover the bonds.

The budget could face revisions after release of the annual February forecast that’s released in early March. The annual November forecast lays the groundwork for spending plans but it’s the February forecast that guides the final legislation that lawmakers will consider.

In the November forecast, Minnesota’s existing and projected surplus through the next biennium soared to a record $17.6 billion due to a mix of factors that include higher near-term tax revenue collections than expected, lower spending, and the carryover of $7 billion that was previously left on the table due to political divisions over how to spend it.  

Minnesota Gov. Tim Walz wants an early payoff of bonds issued to subsidize U.S. Bank Stadium, the Minneapolis home of the NFL’s Minnesota Vikings.

Bloomberg News

Minnesota added another $6 billion of available revenue to the annual late-fall forecast from its prior February 2022 forecast.

“We’ve seen revenue collections exceed expectations” in recent monthly reports, Showalter said, as he cautioned that the numbers anticipate only a mild recession and don’t account for amplified inflation with slowing economic growth and a resurgence of the COVID-19 pandemic posing threats to the forecast.

“Economic headwinds are coming this way,” he said.

The House last week passed a bill that would require future state forecasts to account for inflation on both sides of the ledger: spending and revenues. The amended bill passed in a 70-60 vote and is now headed to the Senate. Schowalter testified that MMB supports the change as do state economic advisors.

Depending on the timing, the change would cut $1.55 billion from the 2024-25 biennium and $3.31 billion in the next budget cycle.

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