I asked Gov. Tim Walz the tough question first: Knowing now that the state's budget office sees a potential deficit two years out, does he regret spending so much in the budget he and legislators crafted last spring?

"No, no," he said. "Those were investments in the future."

Some of those investments may take awhile to pay off, he added. And some people, he said, may not recognize the savings and new spending ability they have from measures like the child tax credit, elimination of Social Security taxes for most and provision of free school lunches for all.

We met in his office with Matt Varilek, commissioner of the Department of Employment and Economic Development, in late January as the warm spell arrived. I'd been more critical than any other voice in the Star Tribune of the governor and his fellow Democrats who control the Legislature for deciding to spend or refund the entire $17 billion revenue surplus the state government had going into the 2024-25 biennium, which began last July.

By November, my caution appeared to be warranted. That's when the state budget office warned a deficit may appear in the 2026-27 biennium, one big enough to consume the excess revenue that's again accumulating.

That office will provide another forecast later this month. Because the U.S. and state economies are strong, there's a chance the state's revenue will keep growing to a level that, when legislators craft the 2026-27 budget early next year, they will be able to cover a structural shortfall, Walz said. However, he'll have to put the kibosh on lawmakers who want to raise spending in the legislative session that begins Monday. It will be Walz's sixth session since being elected governor in 2018.

"I'm under no illusion. I think this is going to be one of the more challenging sessions that I've had as governor because you've got to say no to your friends," Walz said.

He's fine with that.

"We did a lot last year," he said. "I was saying right afterwards, 'Look, we've got enough on our plate. We don't need to expand anymore.'"

The expansion of state government in 2023 was the largest in the lifetime of most Minnesotans. It happened for three reasons.

First, the pandemic shocked the economy into greater efficiency, weeding out marginal businesses, sending more people into retirement and giving more opportunity for lower-income workers to rise.

Second, Minnesota's progressive tax system was structured to capture the jump in Minnesotans' income and U.S. corporate income that resulted from the efficiency shock. The state's tax collection, which typically rose in single-digit percentages over biennial terms, was 29% higher in 2022 than in 2020.

Third, legislators in spring 2021, still wary about the pandemic, took a cautious approach to the 2022-23 budget and left some of that new money unspent. In spring 2022, Republicans and Democrats couldn't agree on how to spend or return the new revenue. After Democrats won control of the Legislature in fall 2022, the surplus was so large that — even with some one-time rebates, the child-tax credit and Social Security-related cut — they were able to lift the 2024-25 budget by 36% compared to 2022-23.

As state government hires more workers this year, it is intensifying competition for Minnesota's private employers when the workforce is constrained by the exit of baby boomers and by ultra-low population growth. On top of that, lawmakers created new worker benefits that will also push up labor costs for businesses.

The most controversial is paid family and medical leave for all workers in Minnesota, set to begin two years from now. For businesses that already offer generous leave options to workers, a decision looms about whether to join the state-administered program that most of the state's private employers will rely on. Walz said he's been talking a lot with business owners and executives about the leave program to assure them on its implementation.

"At this point, I'm feeling pretty comfortable," he said. "But we are going to be judged not on all this background work, but on the first day paid leave comes online. Is somebody able to make a claim? Is it fraud proof? Do they get their money in their bank account?"

Varilek, who leads the agency that will run the paid leave program, each week provides Walz a rundown on systems and hiring for it. DEED also runs the state's unemployment insurance and will link that system technologically with paid leave. "We'll be able to use essentially the same wage reporting for a leave system that folks are already familiar with," Varilek said.

The best thing Walz did in 2023, in my view, was issue an executive order last fall to eliminate college education as a requirement for most of the jobs the state has on offer. Too many employers, I believe, overlook talented people by requiring credentials or experience that may not necessarily reveal what they can bring to a job.

As a former high school teacher and veteran of the Army National Guard, Walz said he's seen plenty of people start a job, prove their competency and rise up. "The idea is to get in and be able to do the job," the governor said.

The worst thing I think he did, though, was to sign a bill that made it tougher for people to become a Minnesota public school teacher without an education degree. "Seem contradictory to you?" he asked. He then spoke about realizing that, since his teaching license had lapsed, it would be harder for him when he leaves office to return to the high school in Mankato where he taught than to join a college faculty.

"Teaching fourth-grade science is hard. You've got to have skills," he said. "But if there are people who are saying 'I want to give it a try,' then we need to think about how we streamline that without weakening our standards. I think it's a fair point. It's one that I do struggle with."