Minnesota budget surplus forecasted at $616 million, but warning signs linger
ST. PAUL, Minn. — Minnesota is expected to have a $616 million surplus in the next two-year budget, state officials said Wednesday, but there is a looming $5 billion deficit in future years — teeing up a debate in the legislature about how to rein in spending to stave off that projected shortfall.
That surplus for the next biennium, which covers fiscal years 2026 and 2027, shrunk by $1.1 billion compared to what officials anticipated at the end of this year's legislative session. There is an anticipated structural imbalance — spending exceeding revenues — but a carryover balance blunted the impact and left some money on the bottom line for lawmakers when they put together the next budget when they return in January.
But in fiscal years 2028 and 2029, if the state keeps at this pace, it will see that deficit. Costs for special education and disability services are two drivers of increased spending, the forecast showed.
"Like many other states, Minnesota is facing some significant economic and financial headwinds," said Erin Campbell, commissioner of Minnesota Management and Budget, who cited a decline in COVID-era federal stimulus funding and related consumer and business spending, which boosted tax revenues in the state.
Campbell underscored that the decisions lawmakers make next year for the budget in the near term will impact the future years, so they should act wisely. Providing a budget forecast for a four-year window with this information allows them to course correct, she said.
"Not only do we have notice about a problem on the horizon, we also have ample time to take action and change the trajectory," she said.
Gov. Tim Walz told reporters "everything is on the table" to address the state's financial outlook when the legislature returns in January, this time with a divided government. The House now stands at a 67 to 67 tie, ending the DFL trifecta that defined the last two years.
Republicans in response to the forecast news were quick to place blame on Democrats for putting the state's finances on the brink. They noted how Management and Budget last year warned of the mismatch between the amount of money the state was spending compared to the revenues it was raking in.
"The results that we saw with this budget forecast that came out today is exactly what House Republicans have been warning for the last two years would be the case," said House Republican Leader Lisa Demuth, R-Cold Spring. "Democrats ignored those warnings from Republicans. They ignored the warnings from their own party's administration, and now again, we have that moving $5 billion deficit projected just a few short years."
Meanwhile, DFL leaders highlighted the state's robust rainy day funds that exceed $3 billion and tempered some concerns about the state's future finances, vowing a balanced budget and bipartisan work this year to get it done.
"I am confident that we will do what we have done over the previous cycles, which is to responsibly manage Minnesota's budget to leave long-term economic stability and surpluses," said House Speaker Melissa Hortman, DFL-Brooklyn Park.
Demuth pledged that House Republicans were sending out letters to all state agencies to get information about how many full-time positions for which they get a state appropriation are unfilled; the terms of leases on any buildings that may not be fully used due to hybrid work; and how many "DEI employees" have been added across each department.
She suggested the latter should be streamlined, so staff aren't doing duplicative work.
"Given the fact that we have a budget crisis on the horizon, we need to start working now to evaluate efficiency of our state programs and working to root out the hundreds of millions of dollars in fraud that is still likely going on across state government," she said.
The next legislative session begins Jan. 14. To see the full budget documents, click here.
