Policymakers, advocates, and the public recently got a first look at what opportunities and challenges Minnesota may be facing when Minnesota Management and Budget (MMB) released the November 2024 Budget and Economic Forecast.
Challenges include that, in 2025, policymakers will need to pass the state’s next two-year budget with a smaller projected surplus than previously anticipated, and will need to prepare to respond to substantial disruption and harm from likely federal decisions. And in the longer term, the state is not projected to raise enough revenues to sustainably fund its commitments to public services Minnesotans count on.
In the near term, Minnesota is showing projected surpluses for the current and upcoming budget cycles, which policymakers can deploy as they set the budget for the next biennium (FY 2026-27). In addition to the $3.8 billion surplus projected for the end of this budget cycle (FY 2024-25), the November forecast predicts a modest positive balance of $616 million for FY 2026-27.
The forecast also predicts a $5.1 billion shortfall for the following biennium, FY 2028-29, which takes into account the estimated costs for current services to keep up with inflation. A significant driver of this gap is that revenues are projected to grow more slowly than spending.
The state’s budget and economic forecasts set the context for the tax and budget conversations to come. Forecasts estimate expected revenues and spending in the state’s general fund if current budget and tax decisions are kept in place as is, and include what it would take for existing services to keep up with inflation. The forecast also accounts for expected economic conditions.
In 2023, policymakers used unprecedented budget surpluses to begin to make up for years of underfunding, respond to real problems everyday people face, and fund transformational policy changes that invested in Minnesotans’ well-being. Much of those unprecedented surpluses were temporary, and reflecting that reality, about $9 billion of the new spending policymakers approved in 2023 was “one-time” spending that they did not commit to continue after FY 2024-25.
Ahead, we are facing likely monumental federal changes that will have negative impacts for our people and state budget. Federal policymakers have plans to dramatically step back from their commitments to health care, food support, and other services Americans count on to be healthy and get by. In addition, federal policymakers will likely shift more responsibilities to the states and cut funding to state and local governments. Because the state’s budget forecast is based on existing law and was prepared before the election, the severe damage to state budgets and potential economic harm from upcoming federal decisions are not reflected in this forecast.
Key data from the forecast
1. The current budget cycle (FY 2024-25) is projected to end with a $3.8 billion surplus.
The forecast projects a $3.8 billion general fund surplus for FY 2024-25, which ends on June 30, 2025. That balance is $461 million higher than estimated at the end of the 2024 Legislative Session, with both higher revenues and lower spending contributing to the improved figures. The forecast assumes this $3.8 billion surplus will carry forward and fund public services in FY 2026-27.
2. A smaller surplus is projected for the upcoming FY 2026-27 budget cycle.
The forecast projects a $616 million positive general fund balance at the end of FY 2026-27.
The FY 2026-27 figures assume an estimate of $926 million for discretionary inflation. Discretionary inflation is the amount of funding that would be needed for certain public services to keep up with inflation – specifically, those services that don’t have provisions in current law to increase with inflation or changes in the number of people to be served. The discretionary inflation amount does not automatically go toward inflationary increases – policymakers must decide how to allocate these dollars. Using the prior method of calculating state budget balances without discretionary inflation, the surplus would be $1.5 billion.
The forecast surplus is $1.1 billion lower than was projected at the end of the 2024 Legislative Session. The reduction from earlier projections is driven by a combination of lower projected revenues and higher anticipated spending.
In FY 2026-27, revenues are forecasted to be 3.9 percent higher than in FY 2024-25, but lower than what was previously estimated at the end of the 2024 Legislative Session. Expectations for both individual income tax and sales tax revenues are lower than previously.
General fund expenditures for FY 2026-27 are projected to be $3.7 billion lower than in FY 2024-25 but higher than prior estimates. The areas showing the largest dollar value increases in spending compared to end-of-session estimates are special education services and services for disabled folks using what’s called “long term care waivers.” (See pages 69 and 72 of the forecast for more details about trends in special education and LTC waiver spending, respectively).
3. The forecast shows a deficit for FY 2028-29.
Minnesota is somewhat unusual among states in how far into the future our state budget forecasts cover, and this forecast is the first view we’ve gotten of FY 2028-29. While this gives the public and policymakers a better sense of long-term trends, these future figures tend to be more uncertain because of the difficulty of accurately predicting this far into the future.
The forecast projects a $5.1 billion deficit for FY 2028-29. Factors contributing to this deficit include that revenues are growing but spending is projected to grow faster. This figure includes an estimate for discretionary inflation of $2.2 billion.
4. The forecast’s underlying economic projections largely do not include the potential impact of federal economic policy changes.
While the national economic growth predictions that underlie this forecast are somewhat stronger than in February, there are signs that any improvements will likely be short-lived for workers. For example, U.S. GDP growth experienced a strong short-term rebound in 2024 (annualized growth is now 2.7 percent, up from the February forecast projection of 2.4 percent). However, a cooling labor market, with fewer jobs added by employers and fewer opportunities per job seeker, appears to be on the horizon.
The forecast shows that some Minnesota-specific measures are lagging behind national improvements. Minnesota job and total annual average wage growth are projected to be the same or relatively smaller and slower than national increases from 2024 to 2026. One economic challenge that Minnesota faces is that we already have the fifth highest rate of labor force participation in the country (67.7 percent of working-age folks are employed in Minnesota compared to 62.6 percent nationally in October 2024), and the state’s aging labor force is one factor making it hard to increase the number of workers.
However, the forecast is a less useful tool this time around because, as the state’s Council of Economic Advisors notes, “The November outlook was prepared before the U.S. presidential election and does not incorporate any projected effects on the economy from the policy proposals of the incoming administration.” The new federal administration’s policy choices could send shockwaves through the national economy, such as through labor interruptions resulting from mass deportations and potentially unbearably high tariffs rising the costs of goods families need to survive.
5. $264 million was added to the state’s budget reserve.
As required when there is a projected surplus in the current biennium in a November forecast, MMB automatically allocated $264 million to the state’s budget reserve. This amount brings the reserve up to reach the recommended target level of $3.2 billion. This reserve exists to best equip Minnesota to respond to an unexpected economic downturn and supports our state’s ability to borrow at lower rates and maintain an AAA credit rating.
Our takeaways
The November forecast often is seen as the kick-off of the state’s budget-setting calendar. It provides the financial baseline that informs the governor’s budget proposal, which is released in January 2025. Another forecast will be released in February, which will serve as the foundation for budget and tax negotiations as the Legislature and Governor Tim Walz seek to reach agreement on the next two-year budget. Policymakers will need to pass a balanced budget for FY 2026-27 in the upcoming 2025 Legislative Session. They do not need to balance the budget for FY 2028-29, but they will need to be mindful about the impact of their decisions on reaching sustainability for the long term.
In their tax and budget decisions ahead, policymakers must prioritize investing in Minnesotans and the public services needed to make Minnesota a place where everyone can thrive. Building on the transitional investments made in 2023, raising the revenues to sustain these and other crucial services into the future, and protecting Minnesotans from the harm of federal decisions must be the focus.
In crafting the next two-year budget, policymakers will need to determine what is the best use of the dollars available to them in order to improve the lives of Minnesotans and their families. There are some areas of crucial importance to Minnesota families that need ongoing funding to build on one-time investments in 2023 – such as access to affordable child care. And they will have to decide which services will receive funding increases simply to keep up with inflation.
Policymakers must also respond to the fact that Minnesotans are facing harm from likely federal budget cuts, and should best position Minnesota to continue to provide vital services Minnesotans count on. And to do that, policymakers should construct a budget that protects us from harmful federal cuts and prioritizes Minnesotans’ health, well-being, and economic security.