Amid Deteriorating Budget Picture, Divided Minnesota Legislature Faces Difficult Budget Negotiations

At a Glance

• Minnesota’s budget and economic outlook has deteriorated since November 2024, with a smaller state surplus of $456 million now projected for the next biennium, and a larger $6 billion deficit projected for FY 2028-29.
• For the current biennium ending June 30, 2025, Minnesota Management and Budget (MMB) projects a surplus of $3.74 billion. Next biennium’s surplus is contingent on the legislature maintaining this surplus and applying it to the FY 2026-27 budget.
• While revenue is expected to grow during the next four years, MMB’s forecast does not consider potentially significant changes in federal funding currently being considered by the U.S. Congress and the new Trump administration, changes which could significantly impact Minnesota’s budget picture.
• With this information, the Minnesota House of Representatives (House) and Minnesota Senate (Senate) can now establish budget targets, and tax and spending priorities. This process will be challenging, particularly in a House that is now evenly divided 67-67 after this week’s special election. Whether and when budget targets are agreed to will determine whether the legislature can enact a biennial budget before it’s required to adjourn on May 19.

Minnesota’s budget and economic outlook for the next two years has deteriorated amid “significant near-term economic and fiscal uncertainty” according to Minnesota Management and Budget’s latest budget forecast. The state’s surplus for the FY 2026-27 biennium is now projected to be $456 million, $160 million lower than projected by MMB last November. The deficit previously projected for the FY 2028-29 biennium has increased to almost $6 billion, $852 million more than November estimates.

For the current biennium ending June 30, 2025, MMB projects a surplus of $3.74 billion. Next biennium’s forecast of a $456 million surplus is contingent on the legislature maintaining this surplus minus the structural imbalance forecast for FY 2026-27. The structural imbalance is comprised of revenues minus spending plus inflation.

The forecast anticipates revenues in FY 2026-27 to be approximately $64.5 billion with spending of $67.8 billion, of which $1.15 billion is inflation. In 2023, the legislature required that inflation be included in spending estimates. Inflation is considered “discretionary,” meaning the legislature could still utilize those funds for other priorities. If they choose to account for those costs later, the FY 2026-27 surplus would be $1.6 billion. The legislature could also consider utilizing their budget reserve and cash flow accounts, which total approximately $3.53 billion, to address any spending needs.

Revenues are expected to continue growing into FY 2028-29 to approximately $67.9 billion, $3.4 billion more than in FY 2026-27. However, expenditures are estimated to outpace revenues in the out years (future bienniums). Inflation is expected to increase expenditures an additional $2.4 billion, bringing total MMB expenditures to total $74.3 billion in FY 2028-29, $6.6 billion more than FY 2026-27. Unlike the FY 2026-27 biennium where the legislature is statutorily required to balance the budget, the legislature could adjourn without achieving structural balance in the out years.

Factors Taken Into Account

MMB’s forecast risks include policy uncertainty, including trade and tariffs, immigration, energy policies, disruptions from federal agency closures and contract suspensions, and U.S. fiscal policy uncertainties — expenditures and taxation, inflation, monetary policies, and the timeframe from now until the end of the biennium, roughly 28 months. Forecasters also expect the labor market to remain tight, leading to wage growth, in part due to baby boomers leaving the workforce and fewer international workers.

Federal Funding Decisions Potentially Complicate Minnesota’s Budget Picture

MMB’s forecast does not consider potentially significant changes in federal funding currently being considered by Congress and the new administration, changes which could materially impact Minnesota’s budget picture. Federal funding represents approximately one-third of the $119 billion in total revenue the state expects to spend in the current biennium. In the current fiscal year alone, the state has budgeted for $22.9 billion in federal funds, of which 56% supports entitlement spending. Medicaid, including Medical Assistance and CHIP funds, accounts for the largest share of federal funding at $12 billion, covering 1.2 million Minnesotans per month. Minnesota also utilizes federal programs to fund transportation ($3.1 billion in FY 2025), Supplemental Nutrition Assistance Program ($1.6 billion), MinnesotaCare ($590 million), as well as education programs like Special Education ($230 million) and School Nutrition ($430 million).

While the impact is currently uncertain, any federal cuts — such as proposed Medicaid reductions contemplated in the budget resolution passed by the U.S. House of Representatives last month — could significantly impact the state’s budget, as costs to maintain legally required services are shifted to the state. Federal cuts potentially complicate efforts to reach a state budget agreement and could lead to one or more special sessions throughout the year if these cuts occur after state legislators finally agree and implement Minnesota’s biennial budget.

MMB’s forecast also doesn’t take into account economic changes that could be caused by retaliatory tariffs from Canada, China and Mexico, or any federal government changes that have occurred since February 10, 2025, including changes in the workforce.

Next Up: Budget Negotiations

MMB’s forecast is a key step in the biennial budgeting process, providing lawmakers a detailed update of the state’s financial health and preliminary numbers needed to create Minnesota’s budget for the upcoming biennium. With this information, the House and Senate can now establish budget targets, with each chamber establishing its tax and spending priorities and providing guidance to budget committees on resources available for their finance and tax bills. The Senate is expected to announce their budget targets later this month. House leaders have publicly stated that they expect to announce the House’s budget target by early April.

With the House now evenly divided 67-67 after March 11’s special election, reaching agreement on targets will be particularly difficult. Usually, the party controlling the chamber sets budget targets. With an evenly divided House, both Republicans and DFLers will have to agree on these targets. With significant differences between the caucuses on both the size and scope of government and spending priorities, a difficult and protracted negotiation is a distinct possibility.

Whether and when House Republicans and DFLers reach agreement on budget targets will play a significant role in the legislature’s ability to enact a biennial budget before it is constitutionally required to adjourn on May 19, or whether a special session is needed. Failure to enact a biennial budget by June 30 will result in a state government shutdown.