Minnesota’s budget situation worsens in the near and long term with possible deficit growing
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Minnesota finance officials reported Thursday on worsening in the state’s budget picture in the near term and down the road, saying a small fiscal cushion had shrunk and a future potential deficit has grown.
State lawmakers now have just $456 million in wiggle room for the upcoming budget, barring no changes. It’s about a 25 percent smaller than the prior estimate.
As concerning to lawmakers is that the shortfall that could accrue within four years could approach $6 billion, which is about $850 million higher than a status check in December.
Erin Campbell, the commissioner of Minnesota Management and Budget, said the situation could get dicey if possible cuts being discussed at the federal level happen.
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“I want to underscore that, like other states, we are closely monitoring unprecedented changes at the federal level, changes that are still very much in flux,” Campbell said, calling the downside risk “devastating” if key aid dries up.
The full 102-page document spells out those challenges, some of which won’t be resolved before state lawmakers have to set a new budget.
The report sets the stage for more serious talks about a two-year budget that lawmakers will be cobbling together.
The report lays out local, national and international economic trends and looks ahead at what economists expect could be coming down the road. It also details how much the state is collecting in taxes and how that funding flows to schools, health care services, public safety organizations and other state agencies.
Republican House Speaker Lisa Demuth said a budget approved by DFL lawmakers over the prior two years wasn’t sustainable.
“This was an irresponsible spending spree and now we have to figure it out,” Demuth said. “We have to work together to fix the mess we are in today.”
While budget experts and lawmakers nodded to potential federal actions that could affect the state’s economy down the road, the report focuses more on what has happened. And that could leave gaps in what the officials predict versus what comes to pass in the state’s economy.
“The worst is yet to come,” said House DFL Leader Melissa Hortman, who pointed to nagging inflation, tariffs and federal spending and job cuts that further could pinch states.
Gov. Tim Walz, a DFLer, was more blunt: “There is a storm at the federal level and that storm is Donald Trump.”
Demuth scoffed at DFLers putting the problems on the doorstep of Trump, who took office on Jan. 20. She said DFLers were looking to “blame anyone else.”
No matter what, lawmakers will use the underlying figures as they assemble a budget. That must be in place by June 30 to avoid a state government shutdown.
How much have the financial headwinds shifted?
Minnesota’s December economic forecast projected the state would have a $616 million surplus at the end of the next budget cycle, down $1.1 billion from the prior report. The projected deficit for 2028-29 was estimated to hit $5.1 billion.
Both revenue and spending rose between the forecasts, with expenses rising faster.
These new projections could inform whether lawmakers opt to hold spending levels steady or propose cuts. There is already talk about canceling out programs that haven’t gotten off the ground but rely on a federal match, with Senate Majority Leader Erin Murphy saying those items might be on the chopping block in Washington anyway.
The DFL-led Legislature approved a $72 billion two-year budget in 2023, which included a good amount of one-time spending. With no changes to ongoing spending, the budget would be around $66 billion for the next two years.
Where is state spending projected to change?
Spending on school students and people on public health programs was driving the increased costs.
The forecast does assume a measure of inflation on the spending side, but state officials said it’s hard to pin down where inflation is going. It had been expected to come in line after years of being unusually high. But prices continue to tick up.
Overall, for the next two years spending is due to rise by $790 million over the prior forecast. Revenue was due to climb over the same time period by $640 million. Both are if no changes get made.
Will Trump — and federal changes — play in?
The forecast focuses more on concrete changes that are playing into the state’s economic outlook and not dwell as much on what might occur.
So that means that President Trump’s executive orders or proposed changes that haven’t been fully implemented weren’t included. Key data used to compile the forecast was received on Feb. 10, meaning things like his tariffs on trading partners weren’t fully factored in.
Significant changes at the federal level could trickle down. Minnesota was expecting to receive $23 billion in this fiscal year.
Budget officials said if even the most-conservative plans to reduce spending on the Medicaid program happen, that could shave $1 billion or more per year from the budget.
Lawmakers know the proposed changes to federal health care funding, or federal employee layoffs, or imposition of tariffs could hit the state’s economy. Those variables could reshape Minnesota’s budget outlook.
Tariffs might be the biggest question mark because the Trump administration has threatened and then retreated from the import levies on big trading partners. Then Trump went ahead with new tariffs on Canada and Mexico but could step back from them during negotiations. Tariffs on other international trading partners also loom large.
Walz said he doesn’t want lawmakers to wait on federal actions to get their budget plans in order because the Trump administration conditions sometimes change by the hour.
“We are not going to chase the chaos,” Walz said.
Do legislative leaders align in how to proceed?
GOP and DFL lawmakers acknowledged that to stave off future shortfalls they must find spending reductions in the next budget, which runs from this July through 2027.
Lawmakers already urged agencies to recommend spending reductions. They’re also pushing measures to root out fraud, inefficiency or abuse of state dollars.
Rep. Paul Torkelson, the top Republican on the House Ways and Means Committee, said he’d aim to “right size” the state government but didn’t plan to propose across-the-board cuts.
Walz said he’ll adjust his budget plan to address the less rosy economic outlook.
Do lawmakers tap into the rainy day fund?
Minnesota’s rainy day fund sits at an all-time high — around $3.5 billion. It could be an option if lawmakers reach a position where they need to plug significant budget holes.
Walz said he didn’t want to touch that pot of money. Wall Street rating agencies assess state reserves when giving out what amount to state credit scores. Those can affect the cost of borrowing for long-term construction projects.
But DFL leaders had said they were open to exploring the option and they worry it could be needed if proposed cuts at the federal level take effect.
“If (members of Congress) are going to pass a budget like the one that they talked about last week, it would really be devastating to Minnesotans,” House DFL Floor Leader Jamie Long said. “This will have an enormous impact on Minnesotans.”
Murphy, the Senate leader, said tapping the reserve wasn’t her preference. MMB Commissioner Campbell added: “Today is not the rainy day.”
Republicans said they’d prefer to balance a budget through cuts to existing programs, but wouldn’t rule out dipping into the reserve.
“We may need to look at it. I mean, that's what it's there for. But I don't want to go too far into it,” said Rep. Greg Davids, chair of the House Taxes Committee. “Because when the state has worse, if there's an emergency, that’s where we go. And so I kind of like hands off on that.”