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State finance officials are projecting an upcoming budget surplus of $7.7 billion after a year of what's being described as "extraordinary" revenue growth.

The Commissioner's Office of Minnesota Management and Budget (MMB) released its latest budget and economic forecast Tuesday morning, detailing how much money the state has brought in, how much it has spent, and how much elected officials can expect to be left over in the 2022-23 fiscal year.

The projected surplus of $7.7 billion is a significant increase in comparison to recent estimates. In the summer of 2020, during the early months of the COVID-19 pandemic, MMB was warning of a $4.7 billion deficit. The February 2021 estimate provided some relief, putting the state back in the black with a $1.6 billion surplus

That projection has since skyrocketed, with MMB highlighting a couple of key factors.

First, that "extraordinary" revenue growth, which was driven by increases in three things: residents' incomes, consumer spending and corporate profits. Second, the spending forecast dipped slightly, with the state reporting lower-than-expected expenditures.

MMB warns there is still 'significant risk'

As evidenced by the swings seen in the most recent forecasts, the state's financial situation can quickly change. 

MMB says there is still "significant risk" with this projection due to the pandemic and "economic uncertainty." That includes potential disruptions to the supply chain, a drop in labor force participation rates and the threat of inflation.

There are also potential changes to consumer spending. For example, even though U.S. workers saw small wage and salary income growth, disposable personal income "increased substantially" — but likely due in large part to pandemic-related government payments, such as stimulus checks, which aren't recurring, long-term sources of revenue. 

If the assumptions made in the newest forecast don't come true, then "the economic outcome will differ" from the $7.7 billion predicted surplus, MMB warns.

Political negotiation begins

The budget forecast is a critical tool for state lawmakers and the governor as they look to craft a state budget. Within minutes of MMB's release Tuesday, legislators began staking out positions on what should be done with the excess funds.

Gov. Tim Walz held up the forecast as an indication the economy continues to grow, despite the challenges of the past 22 months. During comments Tuesday, the governor specifically mentioned using the expected funds to alleviate high health care and child care costs, expand paid leave, address climate change and energy costs, and tackle gun violence. 

GOP lawmakers quickly pivoted to taxes, with House Minority Leader Kurt Daudt (R-Crown) arguing the state "is flush with cash" at a time Minnesotans face financial uncertainty due to inflation, energy costs and more. 

Daudt also called on Walz to use the surplus (as well as the $1 billion in federal COVID relief funding still available to the state) to ensure small businesses don't wind up footing the bill for a $1 billion unemployment insurance fund deficit. The governor Tuesday said that would be addressed.

A few Republican senators, including Majority Leader Jeremy Miller (R-Winona), issued similar remarks about checking government spending, lowering taxes and the financial situation Minnesotans may face.

DFL lawmakers expressed similar concerns about supporting Minnesotans during uncertain times, with House Majority Leader Ryan Winkler (DFL-Golden Valley) noting "too many" are "are living paycheck to paycheck," while Rep. Rena Moran (DFL-Saint Paul) said residents are "counting on legislators to prioritize their economic security and build a stronger future."

But Winkler also pointed to the the forecast as evidence "corporations and rich individuals are better off now than ever before," promising they "will not cut taxes for big corporations and rich individuals at the expense of" other Minnesotans.

Said Sen. Nick Frentz (DFL-North Mankato): "This $7.7 billion budget surplus news is a big deal. Despite all the COVID hardships for our families, schools, workers, and small businesses, we are in a strong financial position as a state. Let’s talk about how we go forward."

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