Associated Press and Austin Daily Herald

ST. PAUL — State budget officials gave lawmakers unwelcome news Friday: Minnesota’s projected budget surplus has dropped from $1.2 billion to roughly $900 million, putting a squeeze on long legislative wish lists for tax cuts, transportation funding and other spending proposals.

District 27 Sen. Dan Sparks, DFL-Austin, said the forecast is a sign that Minnesota’s economy remains strong, adding that it shows the state should remain focused on passing responsible and balanced budgets to remain on a consistent path of financial stability.

“This forecast will inform our decisions as we now look to getting much-needed work done in 2016,” Sparks wrote in a statement Friday. “Together with my colleagues, I will be working to help pass a comprehensive transportation bill, a tax bill that supports hardworking Minnesotans, and a bonding bill that invests in critical public infrastructure.”

Gov. Mark Dayton and legislators took the news in stride, noting that the state is still sitting on a sizable surplus. But with no shortage of proposals for how to spend it and fears of a souring economy, having a smaller sum will complicate the Legislature’s task when it returns March 8.

“We’re still healthy, but in my view, we don’t have a surplus to throw around,” Dayton said.

The latest estimate comes after the state finalized a $42 billion budget last spring for the next two years. But the state constantly monitors how its income tracks with projections and whether spending initiatives cost less or more than the Legislature anticipated.

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.

Frans said Minnesota is primed to weather a global slowdown, and the budget is on track to build back up to a $1.2 billion surplus over the next three years. Savings from changes to how the state covers low-income residents on public health care programs like MinnesotaCare and Medical Assistance, the state’s name for Medicaid, helped offset a bigger drop this year.

But Frans cautioned against major spending initiatives and new programs that could burden the state with ongoing payments down the line, mentioning that the Legislature could opt to squirrel away more money into a rainy-day reserve that currently sits at $1.6 billion.

“Today, my theme is: Stay the course,” he said.

That decision is up to legislators.

Democrats took the dwindling 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.

Dayton conceded the latest number makes for a tougher path to funding his prized preschool initiative. The Democratic governor plans to release a concrete budget proposal in mid-March.

But Republicans held on to their aim of passing tax relief they hope would stimulate the economy. Republican House Speaker Kurt 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.

“No. 1 issue: Let’s figure out how we can return the surplus that we have to the economy of the people of Minnesota,” Republican Senate Minority Leader David Hann said.

Much of the existing surplus comes from money the two parties agreed to leave unspent last year in hopes of piecing together tax relief and transportation packages. Friday’s news makes both efforts more difficult.

Dayton said the prospect of a slowing economy casts doubt on a critical piece of the House GOP’s transportation plan, which would shift hundreds of millions of dollars in tax collections from car part sales and vehicle leases into a dedicated fund. Dayton said he’d resist that effort, saying it “would put us in a very precarious position if there is a downturn.”

And Bakk said the hefty tax cuts GOP lawmakers have in mind are a non-starter in the Senate, recalling major tax cuts passed in the 1990s that preceded years of multibillion-dollar budget shortfalls.

“We’re not going to repeat the same mistake and plunge ourselves into deficits for the next decade moving forward by some phony idea that somehow, if we cut taxes, the economy is going to grow,” he said.