State projects $2.4 billion surplus, but potential budget deficit looms
Minnesota’s budget agency on Wednesday predicted that the Legislature next session will sit on a $2.4 billion surplus, but if current trends continue, the state government will spend more than it takes in during the two-year period beginning July 1, 2025.
The rapidly emptying punch bowl came as something of a shock to a political class that’s become accustomed to big surpluses and resulting relatively painless budget choices.
Minnesota Management and Budget Commissioner Erin Campbell said the state’s latest budget forecast shows that the Legislature should be thoughtful about any new spending that could propel the state into a deficit.
“There’s positive news in this forecast. Revenues are expected to grow — but having said that — with increasing spending, it appears policymakers should exercise caution when making budget decisions,” Campbell said.
This means Minnesota interest groups will need to curtail their funding requests to DFL Gov. Tim Walz and the DFL-controlled Legislature, as MMB predicts there could be a $2.3 billion deficit in fiscal year 2026.
Fiscal year 2026 doesn’t begin until July 2025, however, and a lot of unknowns could affect the economy and the state’s budget in the coming years.
Here are some interesting nuggets from Wednesday’s budget forecast.
What’s driving higher spending?
General fund spending is projected to jump dramatically from $27.2 billion in fiscal year 2023 to about $38 billion in fiscal year 2024. A year-over-year increase of that magnitude is unprecedented going back to 1990. While one-time expenses account for a considerable share of the increase, spending is projected to remain well above normal levels in subsequent years.
When the legislative session ended in May, the state estimated its total general fund spending would be $69.5 billion for fiscal years 2024-2025. That estimate was $998 million off.
The increase in spending comes primarily from two departments: education and health and human services.
Student enrollment in E-12 education is about 5,000 students greater than expected. MMB said the increase is due to schools seeing more English Language Learner students due to increased migration in Minnesota. Those students require more help, which costs more money.
Caring for people with physical and developmental disabilities has also been costlier than expected. MMB said it’s seeing higher enrollment in disability programs, which will cost the state an additional $165 million during the current biennium.
Gov. Tim Walz, speaking after the budget presentation, had some strong words about the recent news that the Internal Revenue Service would tax the state rebate checks sent out to Minnesotans earlier this year.
Minnesotans who made a gross income of up to $75,000 in 2021 were eligible for a $260 rebate check, and families who made up to $150,000 were able to receive a $520 check. The tax could eat up $26 of a $260 rebate.
When asked about the IRS taxing the rebate checks, Walz — who is known to speak extemporaneously and occasionally over-caffeinated on Diet Mountain Dew — called it “bullshit.”
“I’m deeply disappointed and I think the idea, if they even think about downplaying the $26, I will have even harsher words than I started with because that’s simply — this is not right,” Walz said.
Reporters asked Walz how he thinks the $2.4 billion surplus should be spent, but he said the state should be careful to make sure the state doesn’t plunge into a deficit, which led to a revelation about his credit score.
“Those who know me — I am not shy to show them my 850 personal credit score because I worked pretty hard on that. I’m pretty fiscally conservative about these things,” Walz said, adding that Minnesota will “live within our means.”
He then told reporters that this session will look different from last year when the Legislature spent nearly all of its $17.5 billion surplus.
“I’m just telling them (lawmakers), ‘Stay the course,’ but recognize this is not going to be like last year. It’s not a budget year. It’s a supplemental budget year, and I think it’s going to be … very measured inside the parameters that are here,” Walz said.
Don’t say deficit
MMB is projecting a potential budget shortfall beginning in fiscal year 2026, but don’t call it a “deficit.”
“Let me clarify that we’re not projecting a deficit. We’re projecting a structural imbalance,” Campbell said.
Reporters were confused and asked Campbell to clarify. She said it’s not a deficit because the state currently has a surplus.
Still, the state’s spending is projected to exceed revenue once the next biennium starts.
“It is not fair to call it a deficit,” Campbell said.
“No matter the semantics that we’ve heard today, no matter how they spin this, this is a deficit,” said Senate Minority Leader Mark Johnson, R-East Grand Forks.
Press release writers’ wasted labor
Many nonprofits and lobbying groups sent out press releases that seem to have been written before the actual MMB numbers came out projecting the “structural imbalance.” They urged lawmakers to give them a piece of the budgetary pie, even though the pie beginning in July 2025 may be a shrunken version of the 2023 session’s Paul Bunyon-sized pie.
One group said the money should go toward mental health. Another said lawmakers should invest in hospitals. The state’s teachers’ union said the Legislature should ease the teacher shortage.
But the numbers should serve to temper expectations. That may be a gift to Walz and DFL legislative leaders, who need to persuade voters in next year’s election — 134 House seats are up, though the Senate is not — that they are careful stewards of the people’s money.
Infrastructure projects built with borrowed money are another story, however. MMB says the state has the capacity to borrow $830 million for infrastructure projects.
More consumer spending, corporate profits
It wasn’t all bad news: MMB says consumer spending and corporate profit growth are increasing the state’s revenues for this biennium compared to the last forecast in February.
Officials said this is because the U.S. economic outlook is improving. The state is seeing higher-than-expected consumer spending, business investment and employment.
But the revenue growth has been mostly offset by the increase in projected spending.
“Ultimately, forecasts are intended to help inform the decisions of policymakers. Resources available last legislative session allowed for major investments, many of which were one time in nature, in recognition that spending needed to be in line with resources,” Campbell said.