In the near term, Minnesota is showing a projected general fund surplus of $3.7 billion for the current budget cycle (FY 2026-27). This is estimate is up $1.3 billion compared to the November 2025 Forecast.
These estimates come from the February 2026 Budget and Economic Forecast (released on February 27, 2026), one of two comprehensive reports released every year on the state’s budget and economic outlook by Minnesota Management and Budget (MMB).
The forecast also predicts a $377 million positive balance for the following biennium, FY 2028-29, a dramatic flip from the $3.0 billion deficit projected in November.
Significant contributors to these improved projected budget figures include:
- Slightly more positive national economic projections compared to the November forecast, especially for consumer spending and GDP growth; and
- Higher forecasted state revenues, driven primarily by higher expectations for corporate profits and investment returns.
However, ongoing federal policy and economic uncertainty – and missing data – posed challenges to the task of forecasting the economy, state revenues, and state spending, making this forecast more incomplete than usual.
And despite the improved budget numbers, the forecast includes multiple troubling signals for the Minnesota and national economies.
Key data from the forecast
- The current budget cycle (FY 2026-27) is projected to end with a $3.7 billion general fund surplus.
Most of the $1.3 billion increase in the current biennium balance compared to November 2025 is due to a $1.2 billion increase in projected revenues, which the forecast describes as “driven by increases to the state’s more volatile revenue sources, including tax revenue from capital gains, interest income and corporate profits.” Of the increased projected revenues, $665 million comes from the individual income tax, and $336 million comes from higher projected corporate taxes.
These sources of revenue are generally more tied to the stock market and are closely associated with how wealthier Minnesotans are faring. Projected spending for the current biennium is relatively unchanged at $68 million less than in November.
The FY 2028-29 planning estimates now project a small positive balance of $377 million. The movement from a $3 billion deficit to a positive balance for the state’s general fund is due to slightly improved economic and revenue projections compared to the November forecast.
The FY 2028-29 projected surplus figure assumes all of the FY 2026-27 surplus remains unspent and is used to fund public services in FY 2028-29.
Revenues for the biennium are now projected to be $2.2 billion higher than in the November forecast, and spending is forecast to be $152 million higher.
However, the increases in revenue coming in are not enough on their own to cover spending during the biennium.
Disregarding the positive starting balance to the biennium, the structural imbalance for FY 2028-29 – defined as the gap between expected revenues ($70.0 billion) and expected spending ($73.4 billion) including discretionary inflation) – is projected to be about $3.4 billion.
The budget calculations for FY 2028-29 include just over $1 billion in “discretionary inflation,” which is the amount of funding that would be needed for certain public services to keep up with inflation – specifically, those services whose spending does not increase with inflation or change in relation to the number of people to be served. The discretionary inflation amount does not automatically go toward inflationary increases of every program; funding increases only occur if policymakers allocate dollars to specific purposes. - Economic projections continue to be increasingly concerning for those not benefiting from the “split economy.”
In a split economy, upper-income households thrive and spend while low- and middle-income folks struggle to get by. The slightly improved national outlook for GDP and consumer spending reflects this dynamic – wealthy Americans are spending more while lower-income Americans are spending the same or less, resulting in overall numbers that look a little bit improved but hide inequities.
The state’s economic forecaster, SPGMI, expects national real GDP growth to be 2.2 percent in 2025, 2.7 percent in 2026, and then 2 percent or below through 2029. The November forecast described real GDP growth below 2 percent as “well below historic experience.” At the rate GDP is growing, workers are unlikely to experience real (inflation-adjusted) wage increases that could help their lives feel more affordable. And while these GDP figures are improved over what was predicted in November, unfortunately the forecast’s expectations for wage growth are about the same as in the prior forecast.
Projected rates of inflation for 2026 through 2029 are slightly lower than the prior forecast in November 2025, but the Consumer Price Index (CPI) is nonetheless expected to remain elevated close to 2.5 percent through 2029.
The forecast also outlines some deeply concerning trends in the labor market. From 2027 to 2029, Minnesota employment is projected to increase by an average of just about 9,000 jobs per year. That is about one-third the number of jobs created in 2024 (26,000). The slowing labor force growth is the result of structural changes including demographic trends (an aging population and slowing birth rate) and federal immigration policies. At the national level, all the job gains of 2025 happened in the first four months of the year. We note that this is the time period in which President Donald Trump ramped up punitive immigration enforcement policies but before they were fully implemented.
Unemployment data tell a similarly concerning story. SPGMI expects national unemployment to rise slowly, reaching 4.7 percent by mid-2026 and remaining above 4.5 percent through mid-2028. Unemployment in Minnesota is increasing at the second fastest rate in the country, and is creeping closer to the national unemployment rate, which historically has been worse than Minnesota’s. Compared to a year ago, the number of unemployed workers in Minnesota has increased 40 percent. An increase this big has not happened outside of a recession in the history of state-level employment data, which has been produced since 1976.
In addition to increasing unemployment, employed workers are also experiencing negative impacts from reductions in production and sales, and a softening labor market. Employers are cutting personnel costs by doing things like lowering the number of hours their employees work, lowering shift sizes, etc. These types of employer adjustments, which are short of layoffs but still tend to lower individual employees’ pay, appear to be rising to rates not seen since the Great Recession. - Minnesota’s budget reserve is strong.
The state’s budget reserve is “full” up to the statutory target, which is currently measured at $3.4 billion and remains strong to protect Minnesotans’ access to crucial public services for rainy days that might be on the horizon. The state’s cash flow account is also unchanged at $350 million. The strength of these accounts is key to the state maintaining a solid AAA credit rating, which keeps down the costs of the state borrowing money to fund infrastructure projects, also called bonding. - Uncertainty remains the key feature of the forecast.
Some key sources of uncertainty in the forecast that make it more incomplete and undermine the reliability of the top-line numbers:- Data limitations again presented problems for economists across their roles in preparing the forecast. The February forecast “was prepared with missing or incomplete data on some important variables due to the federal government shutdown in October and November 2025, as well as the partial shutdown in February.” For example, the improvement in GDP growth projected by SPGMI was made assuming stronger economic growth in the last three months of 2025 than the Bureau of Economic Analysis in D.C. actually reported. SPGMI also assumed this higher growth would carry forward into 2026.
- Federal policy uncertainty presents significant risks that the nation’s actual economic performance will be different from what is assumed in the forecast. It is harder to do reliable economic forecasting given the Trump administration’s frequent shifts in federal policies on trade, tariffs, immigration, and government spending.
In addition, the economic and geopolitical landscape substantially changed after the forecast was produced, in ways that suggest actual economic performance will be different from the economic assumptions that underlie the forecast. Two examples include: 1) The recent U.S. Supreme Court ruling that overturned the reciprocal tariffs put in place by the Trump administration. The ruling will have an impact on both tariffs themselves, the trade deals in progress based on those tariffs, and businesses’ decision-making; 2) On the last day in February, the United States and Israel launched strikes against Iran, including strikes that resulted in the death of Iran’s Supreme Leader Ayatollah Ali Khamenei. The end date of the conflict with Iran is uncertain, and the conflict could have serious ramifications, especially for global energy markets and local gas prices, not to mention the humanitarian costs. - The surge of immigration enforcement in Minnesota likely impacted the state’s economy. The scope and scale of that impact won’t be known for months.
The state’s forecaster, SPGMI, assigned a 50 percent probability that their baseline forecast scenario will be an accurate reflection of how the economy performs. They assign 25 percent to each of their optimistic and pessimistic scenarios. In the optimistic scenario, stronger GDP growth occurs driven by factors including AI-related productivity gains, higher business investment, and lower rates of unemployment than in the baseline scenario. In their more pessimistic scenario, a recession occurs and unemployment reaches higher levels, as a result of things like higher tariffs and inflation, a “partial deflation of the AI bubble,” and larger and faster deportations than in the baseline scenario.
The state’s Council of Economic Advisers, a group of independent economists that reviews the forecast’s assumptions and methodology, generally agreed with each other that more negative economic outcomes are more likely than improvements compared to the baseline economic forecast.
Federal attacks on public services in Minnesota create potentially grave risks
H.R. 1 upended the relationship between the states and federal government in delivering key public services, including affordable health care through Medicaid and food assistance through SNAP. Some of the new responsibilities that H.R. 1 transferred to the states include implementing new or expanded work reporting requirements for some folks to maintain their eligibility, new requirements for the state to pick up more of the costs of services, and limits on how states can fund health care for low-income people through Medicaid.
The forecast’s calculations do not include estimates for all the impacts from federal changes that would happen without state action to mitigate the harm, nor does it model what it would take to maintain all current services in the new federal environment. So, the projected surpluses should not be interpreted as what is left after maintaining Minnesotans’ existing access to health care, food assistance, and other public services. The state still needs to act – and allocate necessary resources – if we are to achieve those goals.
However, the timelines for states to adapt their policies to meet these new federal requirements are tight. For example, the federal government expects states to implement brand new Medicaid work reporting requirements by January 1, 2027. This will take significant attention and investment, especially if the goal is to retain Minnesotans’ affordable health care coverage. Another challenge meeting these deadlines is that the federal government has not provided the detailed guidance that states need to ensure that the changes they make will meet federal requirements.
Not meeting those timelines – or choosing as a state to go against some aspects of H.R. 1 by not complying with federal guidance – is another unknown cost the state could face. As the forecast names, “precise penalties for noncompliance are unknown; however, they could include loss of federal Medicaid funding for” the Medicaid expansion population (low-income, non-elderly adults who have not been certified as having a serious disability). Further reductions in federal funding to the state for Medicaid would create significant pressures for public services as a whole, as around 64 percent of all the federal funding that the state received for state-federal programs in FY 2023 was for Medicaid.
Another funding threat not captured in the forecast is that federal funds to Minnesota for basic needs programs including Child Care Assistance, Medicaid, and basic assistance through TANF have repeatedly come under attack from the Trump administration. In just one case of these attacks, since January 2026, the Centers for Medicare and Medicaid Services (CMS) have threatened to withhold $2 billion in Medicaid funding to Minnesota and have deferred around $260 million in Medicaid funding for end of federal FY 2025. If Minnesota does not prevail in its legal challenges to protect this funding, the positive balance for FY 2028-29 will be gone in a blink.
Forecasts now handle the cost for infrastructure differently
One recent significant, but potentially easy to overlook, change to forecast methodology is that MMB’s spending projections no longer include the debt service costs for future bonding bills.
Historically, in even-numbered calendar years, the Minnesota Legislature endeavors to pass a capital investment bill, also called a bonding bill, which authorizes the state to borrow money by issuing bonds for a negotiated list of infrastructure projects. Bonding can only be used for capital expenditures, which are fixed assets (ex. land, building, physical equipment, or some other improvement to land, structures, or equipment). That means things like IT improvements generally cannot be funded through the state’s general obligation bond process. Bonding bills require a supermajority vote of 60 percent of the members of each chamber (House and Senate) to pass.
Previously, the forecast included the debt service costs for anticipated bonding bills (a larger one in even-numbered years and a smaller one in odd-numbered years) to be passed in its projections of spending. After a law change passed in 2025, the forecast’s spending projections now only includes the debt service on bonds that have already been sold or authorized.
The practical implication is that, starting with this legislative session, the debt service costs for new bonding bills are competing for funding with all other proposals for a portion of the projected surplus.
What’s next
The February Forecast provides critical but incomplete information about the state’s budget and economic landscape. This is the backdrop for policymakers as they confront important decisions about how to respond to sweeping federal actions and their impact on the state’s budget, economy, and people. Among the issues calling for state action are:
- Responding to new federal requirements and the harmful impacts of H.R. 1, which involves making changes to key basic services and replacing lost federal funding; and
- Mitigating the harm to communities and people from Operation Metro Surge.
We call on our policymakers to take bold action in this moment to prioritize and protect Minnesotans’ health and economic well-being; ensure Minnesotans can access health care, food support, and other public services regardless of their immigration status or other identities or circumstances beyond their control; and to raise revenues, especially from those with the most resources, to replace lost federal funding and sustainably fund critical public services that Minnesotans count on.