Minnesota has a projected $616M budget surplus, potential $5B deficit looming

Minnesota budget officials on Wednesday projected a modest surplus of $616 million for the next two-year budget cycle, and a multi-billion dollar deficit looming in the following years.

Minnesota Management and Budget (MMB) released the state’s latest economic forecast on Wednesday morning. Despite the small surplus projected for the next budget cycle, state officials say long-term care for people with disabilities and special education costs are the biggest drivers of a potential $5.1 billion shortfall for the 2028-29 biennium.

“As you can see, spending decisions that are made in this legislative session will have impacts on the planning years, and we are anticipating some challenges in those years,” state budget Commissioner Erin Campbell said at a news conference Wednesday morning. “It will be especially important for policymakers to take the long view when making budget decisions this year.”

Republican legislative leaders are already calling for spending cuts. House GOP Leader Lisa Demuth, of Cold Spring, said Republicans warned Democrats about spending most of the state’s previous $17 billion surplus.

”Now we have that looming $5 billion deficit projected in just a few short years,” Demuth said. “We have to stop the spending spree. We have to be responsible.”

Asked if any state programs will need to scaled back, DFL Gov. Tim Walz said, “we’ll take a look at everything.”

The more than half-billion dollar surplus projected to be left over at the end of the next two-year budget cycle is $1.1 billion less than previous estimates, the state’s budget office said.

In their forecast, state budget officials wrote that Minnesota’s slowing wage growth and cooling labor market are significant factors in their estimates.

The forecast predicts inflation, higher interest rates and slower economic growth if President-elect Donald Trump implements the tariffs he championed through his campaign, but the analysis does not include detailed predictions of how those tariffs, or taxes on imported goods, will hit Minnesota.

Already, inflation is one of the major factors pushing the state toward a projected structural deficit in the 2028-29 biennium, budget officials said in the forecast.

Projected inflation alone will increase the budget by nearly $1 billion in the next biennium, and state economists predict inflation could add more than $1.3 billion to the budget in the following two years.

State budget officials also expect lower revenue from income and sales taxes.

On the spending side of the equation, the biggest drivers are special education services for students with disabilities, and long-term care for adults with disabilities.

Special education costs are expected to rise more than $900 million in the 2026-27 biennium. Forecasters said the expense is rising because more students are being identified as needing services, and the cost of providing those services and transportation is rising fast.

Spending on general education is expected to decrease, however, because there are fewer children in Minnesota.

Costs of long-term care for adults with disabilities are also rising fast enough to be a major contribution to the smaller surplus in the next two years, and the structural deficit after that. Officials project a $190 million increase in the cost of those programs. The cost formulas for those programs are complicated, but budget officials observed more use of waivers that allow people with disabilities to receive more services than initial assessments provided for them.

Other major factors driving the projected deficit are more people taking advantage of tax credits such as the child tax credit and higher-value homestead tax credits, and rising interest payments on the state’s bonds.

Budget officials noted that more money is also going to local police and fire departments to cover their increasing costs.

The possible $5 billion structural deficit in the following biennium is not a certainty, officials wrote in the forecast.

“The planning estimates for FY 2028-29 should be used with caution,” the forecast warns. Longer-term projections are inherently more unpredictable.

The economic forecast sets the stage for Walz and legislators to craft the state’s next two-year budget in the legislative session that begins Jan. 14. An updated budget forecast will follow in February.

Walz, who will release his budget proposal in January, said he thought it was too early to discuss potential state tax increases.

“Those are really hard decisions that are going to have to be made,” he said.

Democrats held full control of the Legislature the last time it set a two-year state budget of nearly $71 billion in 2023, spending most of a historic $17 billion surplus. Republicans ended the DFL’s trifecta control of government in November by bringing the state House to a rare 67-67 tie, pending the outcome of a contested recount. A tied House will place a check on the agenda of Democrats who still control the state Senate and governor’s office.

“For state policymakers, it’s our job to look at these cautionary notes … and take those into account,” DFL House Leader Melissa Hortman said. “We are up to the task of managing these long-term risks in the future.”

This is a developing story. Return to StarTribune.com for updates.