Minnesota is poised to have a $616 million surplus in the upcoming two-year budget cycle, but the state Department of Management and Budget warned Wednesday that a $5.1 billion deficit could come in the following two years if current revenue and spending trends hold.
The upcoming budget year’s surplus is down $1.1 billion from what the state had previously expected for 2026-27. The culprits are a projected drop in income and sales tax revenues combined with higher spending for long-term care for those with disabilities and special education.
Minnesota faces “significant economic headwinds” like many other states, MMB Commissioner Erin Campbell told reporters at a Wednesday press briefing at the Minnesota Department of Revenue in St. Paul. But she added there’s still plenty of time for state leaders to figure out how to address a future imbalance.
“Clearly, a deficit of this magnitude would prove to be a considerable challenge for future lawmakers,” Campbell said of the projected $5.1 billion shortfall projected for 2028-29. “But here in Minnesota, we have the benefit of forecasting over a four-year window, giving us access to an incredibly valuable resource, which is time.”
‘Structural imbalance’
While MMB projects a surplus for the coming two years, the state will be spending more money than it is taking in, something known in state budget talk as a “structural imbalance.”
So while Minnesota has about $3.7 billion in current reserves, it’s projected to spend about $2.2 billion more than it is taking in. With $926 million in inflation, the total surplus is brought down to $616 million.
That imbalance is forecast to grow into the 2028-29 fiscal year, when Minnesota will spend $3.5 billion more than it raises and gets hit with another $2.2 billion in inflation. That imbalance will result in a $5.1 billion deficit, according to MMB’s forecast.
State budget officials have warned of looming shortfalls since last December. While February projections showed the state still had a $3.7 billion surplus for the current two-year budget cycle, state lawmakers will have to limit future spending to keep the budget balanced, they said.
Falling revenue, rising costs
Minnesota is taking in close to a billion dollars less in general sales and income tax than originally expected earlier this year, according to Wednesday’s report.
State Economist Anthony Becker said a lower forecast for capital gains, wage growth and changes to the state’s internal models led to the decrease in projected revenue. The decline in sales taxes is tied to a shift in consumer spending away from taxable goods.
When budget officials first warned of looming shortfalls last year, the biggest rising costs were at the state education department and the Department of Health and Human Services.
That remains the case. The cost of long-term care for those with disabilities continues to grow, driving up HHS costs by another $388 million since the last estimate earlier this year. Education costs also grew by another $202 million — a trend driven by rising special-education costs.
Upcoming legislative session
MMB releases budget projections for the coming year each December as the Legislature prepares to convene in January or February. The projections give the governor and Legislature an early idea of the resources they’ll have to work with in the coming session. This coming year, they have to craft a new two-year budget.
It could be a challenge as state government is divided once again after two years of control by the Democratic-Farmer-Labor Party. If current election results hold, the House of Representatives will be split 67-67 between the DFL and Republicans. Meanwhile, the DFL holds the governor’s office and a one-seat majority in the Senate.
DFL-controlled state government last passed a more than $70 billion budget in 2023, which grew spending by nearly 40% from the last budget cycle and used much of the record $18 billion surplus.
Some of that was one-time spending, meaning current general fund spending is closer to $67 billion — still up from $52 billion in 2021.
Reaction from GOP
Republicans seized on the projected deficit to criticize DFL spending, saying the surplus should have been used to provide tax relief.
“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 Rep. Lisa Demuth.
“Instead of listening to those warnings, Democrats went on that spending spree, spending our $18 billion surplus.”
Demuth said House Republicans plan to seek sources of government waste and will be asking agencies about their budgets, unfilled positions and whether they have unoccupied buildings. They also plan to investigate how many diversity, equity and inclusion employees have been added at agencies across the state, something conservatives have called wasteful.
DFLers talk up reserves, accomplishments
Following news that the state could face a significant deficit four years from now, DFL leaders stood by their record running government for the last two years and emphasized that the state has an all-time high $3.5 billion in its “rainy day” reserve fund.
“This is not a rainy day. This is an over-the-horizon budget issue of growing costs in an aging population and more people accessing services,” said Gov. Tim Walz.
Walz said he could support budget cuts and tax increases to address the deficit, though ruled out a few fixes.
“We’re not going to fix it with our budget reserves, because it’s not a rainy day, and we’re not going to fix it by punishing state employees who are providing services,” he said.
Walz and legislative leaders stood by the DFL trifecta’s 2023 record, which included the creation of a paid family and medical leave program, free college for low-income students and child tax credits.
“The pro-worker policies in the last two years will benefit Minnesotans for years to come and ensure they have even more opportunities and tools to build better lives for themselves and their families,” said House Speaker Melissa Hortman, who also noted the size of the reserve fund. “We left Minnesota in really strong condition, and we are up to the task of managing these long-term risks in the future.”
