— UPDATED 1:25 p.m.
The state’s government is expected to have less money than previously predicted for lawmakers to allocate when they return to the Capitol Jan. 14 and begin crafting a budget for the next two fiscal years.
Minnesota Management and Budget officials released the November 2024 Budget and Economic Forecast Wednesday detailing the expected financial future.
It shows a $1.1 billion decrease from the prior estimate in February which had predicted a $1.7 budget billion surplus during the 2026-27 fiscal biennium that begins July 1, 2025. That surplus is now forecast to be $616 million.
The change was largely caused by projected reductions in income and sales tax revenues coupled with increased spending for long-term care and special education, which will contribute to what is expected to be a growing structural imbalance during the budget years to come.
Although the state’s revenue is expected to grow during the next fiscal biennium, officials said spending will exceed revenues throughout the budget horizon creating a budget deficit of $5.1 billion in fiscal years 2028-29.
“What you’ll see in this forecast is that Minnesota, like many other states, is facing significant financial headwinds,” Minnesota Management and Budget Commissioner Erin Campbell said during a morning news conference. “… It will be especially important for lawmakers to take the long view when enacting budget decisions this year.”
[MORE: See the MMB budget forecast presentation]
The forecast provides a detailed update of the state's financial health that sets the stage for the upcoming legislative session by providing lawmakers preliminary numbers needed to create Minnesota’s budget for the next two years.
That process may be even more complicated than usual given the uncertainty about how the House of Representatives will function with a 67-67 split between DFL and Republican members, pending legal challenges, after the November election.
Current House Speaker Melissa Hortman (DFL-Brooklyn Park) said in a statement the forecast “shows reasons for concern” but noted there is still a $616 million surplus predicted and cited the state’s budget reserve “our highest budget reserve fund balance – another $3.5 billion – to date” in urging fellow lawmakers to balance near- and long-term priorities.
“We will do what we always have done – which is to make responsible and sustainable commitments to Minnesotans – from preschoolers to nursing home residents,” Hortman said. “… In a tied House, we need to and will operate in a bipartisan fashion to get our work done. We are prepared to work together with legislators on both sides of the aisle who are willing to collaborate and compromise.”
Current House Minority Leader Lisa Demuth (R-Cold Spring) – who was elected as House speaker-designate by her caucus for the next legislative session, as was Hortman – said spending cuts are needed.
“While the budget is stable in this biennium, it’s obvious that spending reductions are needed to prevent a deficit down the road," Demuth said in a statement. "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.”
Forecast changes
Minnesota Management and Budget officials said income tax revenue is expected to be down $830 million from the agency’s February forecast and sales tax revenue is down by $541 million, although those losses were somewhat offset by revenue increases in other areas such as corporate franchise taxes.
Meanwhile, spending in the coming biennium is now predicted to be $572 million more than previously forecast, with a jump in E-12 education spending of $202 million, due in large part to preliminary data showing special education costs for schools up 9% over the previous year when typical increases are closer to 6%.
Health and human services spending is projected to be $388 million above previous estimates as long-term care services for people with disabilities are projected to cost more than previously expected.
While education spending has historically been the largest single budget expenditure, finance officials believe spending for health and human services will roughly equal it by the 2028-29 biennium, with each area accounting for about 38% of budget expenses.
The projected surplus in 2023, prior to the current budget cycle, was more than $17 billion and lawmakers subsequently passed a $72 billion two-year budget, the largest in state history.