State budget officials handed lawmakers bad news Friday: Minnesota’s projected budget surplus dropped from $1.2 billion to roughly $900 million.

Legislative leaders and Gov. Mark Dayton already had long wish lists for how to spend the larger sum based on earlier estimates from December. The drop, a result of slowing economic growth, will squeeze lawmakers’ plans to tap into the money for tax cuts, transportation funding and other spending proposals when they return to the Capitol early next month.

Despite several months of tax collections coming in over budget, the state is preparing for revenues to take a slide, with Minnesota Management and Budget Commissioner Myron Frans faulting a slowing U.S. economy for dampening sales tax collections. He said income and corporate tax revenues also are expected to see a smaller drop.

Democrats took the slipping surplus as a sign to scale back big-ticket proposals on Friday. Senate Majority Leader Tom Bakk downgraded the chances of funding a new statewide preschool program that Dayton has pitched, as well as one of his own top priorities: boosting state support to local governments.

“It urges caution that we don’t overcommit,” Bakk, a Cook Democrat, said of the smaller figure.

But Republicans pressed on with their hopes of passing tax relief to stimulate the slowing economy. Republican House Speaker Daudt said a proposal to cut taxes on Social Security income, estimated to remove about $500 million a year from the state’s coffers, should still be on the table.

District 27 Sen. Dan Sparks, DFL-Austin, said the surplus provides a good environment for the state to fund local bonding requests.

Local leaders presented requests to the Minnesota Senate Capital Investment Committee in October for four projects: the development of Bent Tree Trail, awater and sewer line connection to the Stables area, a Riverland Community College project and the development of the Blazing Star Landing.

Sparks, a member of the Capital Investment Committee, said he plans on working toward making the local bonding projects receive state funding once the Legislature reconvenes March 8.

Development of Bent Tree Trail would include an approximately 12-mile, multi-use trail that would span from Madison Avenue in Albert Lea to near Hartland. The trail would connect to the bike lane on Front Street that connects to the Blazing Star Trail.

The funding would be for a bridge on the west side of Albert Lea, other bridge rehabilitation, site grading and plan design.

The $7.43 million  Riverland Community College bonding request would go toward renovating outdated space to relocate truck driving and collision programs from Austin to Albert Lea and to integrate the programs into shared spaces with auto service and diesel programs.

The $1.35 million Stables bonding request would be to extend sanitary sewer and water to the Stables area north of the city.

The city of Albert Lea’s $15 million request for development of the Blazing Star Landing includes $3.5 million to move Front Street north to make way for lakefront development. Preliminary preparation work would occur north of the railroad. The city is requesting $11.5 million for the second phase of the project that includes the construction of a 115,000-square foot community center, plus additional work north of the railroad.

Sparks said the surplus should allow the state to enact tax relief and allow for the passage of a supplemental budget.

He said the surplus is a sign the state’s economy is strong, and advised keeping the surplus so the state won’t have to borrow from schools again if economic conditions change.

He said the state’s bonding rating has gone up, and he doesn’t want to jeopardize its financial status.

District 27A Rep. Peggy Bennett said the surplus means the state is taking in more revenue than it needs  and advised spending the surplus wisely and enacting business and individual tax relief.

Bennett, R-Albert Lea, stressed that lowering taxes will make the state more competitive with Iowa.

“We’re not going to be able to compete with Iowa for businesses until we make ourselves more competitive with them,” she said.

Bennett also advised spending some of the surplus on improving the state’s roads and bridges and said the GOP has a plan to transfer some surplus funds and transportation-related taxes to make the improvements possible.

One-third of the surplus has to be dedicated to the state’s rainy day fund, per law.

Bennett also supports phasing out taxes on Social Security and military pensions.

District 27B Rep. Jeanne Poppe, DFL-Austin, said the state budget surplus is good news for Minnesota, but it is still clear that the current economy is not working for every part of the state.

“In many pockets of the state everyday Minnesotans are still struggling to get by,” Poppe said in a press release. “We need to refocus our efforts to help middle class families.”

Minnesota House Minority Leader Paul Thissen, DFL-Minneapolis, said the economic forecast shows Minnesota’s economy and budget remain stable, but the outlook is uncertain.

He said the focus of the forecasted surplus should be on addressing the skyrocketing cost of prescription drugs, student debt and high-speed Internet access.

“We owe it to Minnesotans to move forward with an agenda that truly responds to the economic challenges they face on a daily basis,” Thissen said.

“If we listen to Minnesotans instead of the wealthy special interests, I am optimistic we can move forward with an agenda this session that creates more opportunity and a better chance at success for all Minnesotans.”

 

— The Associated Press contributed to this report.