The Associated Press December 1, 2011, 6:11PM ET

Good news: Minnesota expects $876 million surplus

The state of Minnesota's finances turned unexpectedly sunny Thursday when economists projected an $876 million surplus, just months after a bitter budget fight largely shut down its government for nearly three weeks.

The forecast covering the rest of the state's two-year budget cycle took state lawmakers by surprise. Many were ready for up to $1 billion in new red ink, and the possible repeat of the shutdown stalemate that briefly made the state a national model for political dysfunction. But state forecasters said income and corporate tax collections came in higher than expected, buoyed by an economy that has outperformed other states, and that recent changes in state and federal laws led to lower health-care costs than predicted.

It wasn't all happy news. Lawmakers can expect a $1.3 billion deficit when they convene in 2013 to pass a new state budget, the forecast said, and the state economist warned that a number of possible scenarios -- failure by Congress to extend the payroll tax cut or worsening financial instability in Europe among them -- could plunge the state right back into the red by the time of the next economic forecast, in late February.

In addition, forecasters predicted slower growth in the state's economy through 2013 even than what they had expected last February.

"It's not that we're doing as well as we should, it's not that there isn't a lot left to do," said State Economist Tom Stinson. "It's that we're outperforming the U.S. economy, and we're expected to continue to do that as well."

Still, Democratic Gov. Mark Dayton and Republican legislative leaders were jubilant at the state's first positive economic forecast since 2007.

Supporters of public funding for a new Minnesota Vikings stadium were likely to relish Thursday's news as well, given fears that another state deficit would have made it tough for lawmakers to back state money for a private businessman's project.

While stadium supporters had been hoping for a special legislative session for a stadium vote prior to the session set to begin Jan. 24, the forecast will leave more room for stadium politics in the regular session. Many feared the session would again be dominated by the fundamental dispute between the governor and GOP lawmakers over tax increases versus spending cuts as the best way to combat the state's perennial deficits.

"The Dayton tax hike plan is dead," Republican Senate Majority Leader Amy Koch said after the estimate was announced. And Dayton said he would indeed drop what had been his signature policy goal since the beginning of his 2010 campaign for governor: the push for income tax hikes on the state's wealthiest citizens.

"We have a surplus," Dayton said. "Assuming this holds up into next February's forecast, I'm not going to get involved in that debate again. They made their position very clear."

By law, surpluses are supposed to go into budget reserve accounts and be used as a cushion against future needs.

Republicans said the unexpected surplus showed the fruits of trying to reduce government spending in response to a struggling economy. "I think this is what happens when there's fiscal restraint," said House Speaker Kurt Zellers.

The last budget forecast, in February 2010, presented Dayton and lawmakers with a $5 billion projected deficit that didn't get resolved until the partial government shutdown reached its 20th day. In the end, Dayton and Republicans agreed to borrow on future proceeds from state tobacco settlement bonds, and delays in state aid payments to school districts.

It was a solution, House Democratic Leader Paul Thissen argued Thursday, that rendered the new surplus basically meaningless.

"I think most Minnesotans understand that, when you have some money in your savings account but you maxed out your credit card, your savings account balance isn't real," Thissen said. "That's exactly the situation we're facing today."

Still, the forecast left room for both parties to claim success for their favored policies. The document, prepared by economists at the Department of Minnesota Management and Budget, said two major factors fed the surplus: revenues that came in $358 million higher than expected, and spending that was $205 million below earlier estimates.

Most of the higher tax collections came through individual and corporate income taxes. Stinson said that's because Minnesota's economy is outpacing the national economy in most key measures: lower unemployment, higher wage growth and gross domestic product and a faster rate of adding back lost jobs.

At the same time, state spending for health care turned out to be lower, and is predicted to continue to be lower, than earlier estimates. State Budget Director Margaret Kelly said that's due in part to additional federal funding for Medicaid, and smaller enrollment in several new health programs for the needy than expected. Budget officials said they did not know why such enrollment was growing more slowly than expected.

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