February State Forecast Projects Increased Surplus

The surplus has increased from $825 million in November to the current $1.2 billion for the balance of the 2014-15 biennium.
(Published Mar 3, 2014)

Minnesota Management and Budget is now forecasting that the state will have a $1.2 billion surplus for the remaining 16 months of the current fiscal year (FY) 2014-15 biennium. The department released the state’s semi-annual budget and economic forecast on Feb. 28.

In November, the state was projecting an $825 million surplus for the remainder of the biennium. That figure was computed after the full repayment of the school shifts and the repayment to the state airports fund.

Most of the $408 million improvement from the November forecast was due to a $366 million increase in projected state revenues that are the result of stronger economic activity. State expenditures have been adjusted downward by $48 million for the balance of the current biennium. The revenue and expenditure improvements were offset by a $6 million increase in stadium reserves.

The forecast reports that the increases in projected tax collections for the balance of the current biennium are largely due to higher individual income tax collections (+$187.8 million) and general sales tax collections (+$167 million). Estate and gift tax collections were adjusted downward (-$32.5 million) as were mortgage registry taxes (-$19.1 million).

On the expenditure side, K-12 education expenditure estimates for the balance of the biennium were reduced by $28.9 million, which is due to a combination of a small increase in pupil units that was more than offset by minor changes in forecast compensatory aid and minor changes to other school aid factors. The other large projected expenditure decrease was in the broad category of property tax aids and credits, which were reduced by $23.6 million, largely due to lower projections on applications for the homestead credit refund and the renters refund program.

The economy
According to the forecast, the outlook for U.S. economic growth has improved since the November forecast. Since that time, Congress passed a federal budget for fiscal year 2014, avoiding further sequestration cuts and removing the threat of a government shutdown this year.

Congress also reached an agreement to raise the federal borrowing limit until March 2015. In addition, the forecast suggests that there is positive momentum underlying the acceleration in economic growth during the second half of last year that has set the stage for a stronger 2014.

Long-range forecast
The forecast also projects the state will have a surplus of $2.6 billion for the FY 2016-17 biennium, which begins on July 1, 2015. This projected surplus is based on projected growth in state revenues due to economic activity and spending adjustments only in forecasted state programs. However, official state expenditure estimates do not include any projections for the effects of inflation on the cost of state programs. According to the forecast document, inflation would reduce the FY 2016-17 surplus by nearly $1.1 billion.

The 2014 Legislature will be evaluating the projected $1.2 billion surplus and making decisions on how to address the surplus. The Legislature could increase state reserves, increase state spending, or cut state taxes with the projected surplus.

The House Taxes Committee began to shape their plan on Feb. 27 with the passage of a bill that would conform portions of Minnesota’s income tax to the federal tax system and also to repeal some of the sales tax changes that were enacted last year, including the sales tax on certain warehousing activities. That bill would use roughly $500 million of the projected surplus. The Senate has not yet developed a plan, but on Feb. 27, the Senate Tax Reform Committee considered several bills to repeal portions of the 2013 sales tax base expansions.

Gov. Dayton is expected to release a supplemental budget in the next week that will outline his recommendations to the Legislature on the use of the projected surplus.

The League will present a free webinar on March 7 to provide an overview of this state budget forecast and how it will impact cities.

Read the current issue of the Cities Bulletin

* By posting you are agreeing to the LMC Comment Policy.