Minnesota’s November 2024 Budget and Economic Forecast for 2026-27 Biennium

At a Glance

• Higher spending for special education and long-term care services, coupled with reductions in projected revenue from income and sales tax collections, and MMB’s inflation expenditure estimate make for a significantly lower surplus than forecast in February.
• Although state revenue is expected to grow, officials said spending will exceed revenues throughout the budget horizon, creating a deficit of more than $5 billion in fiscal years 2028-29.
• Governor Walz will present his budget proposal in late January, and the legislature has until May 19 to pass a balanced budget for fiscal years 2026-27.

What Is It and Why Does It Matter?

• The Minnesota Department of Management and Budget (MMB) prepares formal forecasts of state revenues and expenditures in November and February each year, which policymakers use to set the state’s budget and ensure it remains balanced.
• The main task of the Minnesota Legislature will be setting the state’s biennial budget when it convenes in January 2025.
• MMB’s November 2024 Budget and Economic Forecast is the major planning document for Minnesota Gov. Tim Walz in preparing his budget recommendations, and it provides a detailed picture of the state’s financial health as policymakers prepare tax and spending priorities. The forecast has a significant impact on the perception of the upcoming legislative session.
• MMB budget forecasts are also used by bond rating agencies and other financial analysts to review the state’s financial health.

$616 Million Projected Surplus for FY2026-27

• This is significantly lower than the surplus projected in MMB’s February 2024 forecast.
• This reduction is caused largely by higher spending for special education and long-term care services, coupled with reductions in projected revenue from income and sales tax collections ($2.210 billion), and MMB’s inflation expenditure estimate ($926 million).

Significant Deficit Projected for Next Biennium

• Although state revenue is expected to grow, officials said spending will exceed revenues throughout the budget horizon, creating a deficit of more than $5 billion in fiscal years 2028-29.
• According to MMB, the structural deficit for FY2028-29 is $5.76 billion.
• The widely reported deficit number of $5.1 billion assumes the entire $616 million FY2026-27 surplus is carried forward and used entirely for deficit reduction.
• MMB reports the budget reserve at $3.177 billion, an all-time high. The cash flow account remains constant at $350 million.

Forecast’s Risks, Concerns and Impacts

• The forecast doesn’t reflect potential impacts from the incoming administration’s tariff, trade and immigration policies.
• Additional impacts include: inflation, U.S. fiscal policy uncertainties, monetary policy, geopolitical conflict, and the 31 months until the end of FY2026-27.

What About Inflation Impacts?

• MMB is now required to include inflation in expenditure and revenue estimates. Until 2023, only revenue estimates included inflation.
• MMB projects it will cost $926 million in FY2026-27 to cover inflation in expenditures.
• This amount balloons to $2.2 billion the following biennium — more than 40% of the projected deficit.

Governor and Legislative Leaders React

• “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.”
  — Minnesota Management and Budget Commissioner Erin Campbell
• “Those are really hard decisions that are going to have to be made. We’ll take a look at everything.”
  — DFL Gov. Tim Walz regarding tax increases and cuts to state programs
• “While the budget is stable in this biennium, it’s obvious that spending reductions are needed to prevent a deficit down the road. House Republicans are putting state agencies on notice: the times of automatic budget increases and dramatic government employee growth are over, and we expect you to join us in working to find savings and root out waste and fraud.”
  — Republican Leader Lisa Demuth
• “For state policymakers, it’s our job to look at these cautionary notes … and take those into account. We are up to the task of managing these long-term risks in the future.”
  — DFL Leader Melissa Hortman

2025 Legislative Session — What’s Next?

• The legislative session convenes January 14, 2025.
• Governor Walz will present his budget proposal in late January.
• MMB’s forecast will be updated at the end of February.
• The legislature has until May 19 to pass a balanced budget for FY2026-27.