In just a few short years, Minnesota swung from having a record $17.6 billion budget surplus to seeing a projected deficit on the horizon.

The revelation that the state is headed toward a modest $616 million surplus in the next two-year budget cycle and a deficit of $5.1 billion in the 2028-2029 biennium gave some state legislators whiplash. Gov. Tim Walz and DFL leaders said the fiscal reversal was largely unavoidable, fueled by the ballooning costs of special education and long-term care for adults with disabilities that wouldn't have been solved by one-time surplus money.

"This is an over-the-horizon budget issue of growing costs in an aging population and more people accessing services," Walz said at a Wednesday news conference. He stressed that Minnesota is on solid financial footing, and there's time to adjust the budget to avoid a future deficit.

Asked if Democrats should have left more of the record surplus on the bottom line, the governor said no.

"The public wanted it back; we sent the money back to them. We paid off our [unemployment] insurance, we paid off the stadium, we invested in education, roads and bridges," Walz said. "Had we not done some of those things, the revenues are less because you're not getting growth."

Republicans, meanwhile, seized the opportunity to say, "I told you so," slamming Democrats for what they considered runaway spending that put the state in this position.

"The Democrat policies have put Minnesota on an incredibly precarious path long-term," said House GOP Deputy Leader Rep. Harry Niska.

How Minnesota got here

The record surplus Democrats used to enact sweeping changes and pass a $71 billion two-year budget was an anomaly, fueled by federal pandemic relief money. Pre-pandemic, a typical surplus was around $1 billion or less.

Democrats saw the $17.6 billion surplus as an opportunity to make big investments at a time when they held full control of state government. They used some of the money on one-time expenses while also creating new programs, such as free school meals, that grew the state budget. The next two-year budget is expected to be closer to $66 billion without the one-time spending.

Without a change, state spending is expected to exceed revenues in each of the next two-year budget cycles. Lawmakers left $3.7 billion unspent at the end of this year's legislative session, to help cover the gap in the 2026-2027 fiscal biennium. But a deficit looms in the following years.

The skyrocketing costs of special education for students and long-term care for adults with disabilities are the biggest drivers of the money crunch.

Walz and Democratic leaders said the state had known for years these expenses would grow as the population ages and more kids are identified as needing special education services.

"We have been warned by the state demographer for many years that we need to be looking at ways to fund human services," said Rep. Mohamud Noor, DFL-Minneapolis.

That prompted Republicans to ask why Democrats didn't do more to address those costs when the state was flush with cash.

"They can talk today about the drivers that are driving state spending, but those are problems they chose not to address when they had a trifecta and a $17.5 billion surplus," Niska said.

Former state budget commissioner Jim Schowalter, who served under Walz and DFL Gov. Mark Dayton, contends it wouldn't have made much difference if legislators used more of the previous surplus on special education and long-term care costs.

"It helps you manage it, but it doesn't solve that ongoing issue," said Schowalter, who was Minnesota's longest-serving budget commissioner.

Myron Frans, another former state budget commissioner, said "the magnitude of the increasing costs and the reduction in revenues was sort of going to happen."

Legislators will have to decide whether to start making budget adjustments now in anticipation of the projected 2028-29 deficit, or wait to see how the economy changes during the next four years.

"I would argue that there is time now to make some adjustments," Frans said.

What legislators could do about it

Differences quickly emerged as legislative leaders debated potential solutions.

Walz and DFL leaders said everything is on the table, from budget cuts to tax increases. House DFL Leader Melissa Hortman and Walz said hard decisions lie ahead, particularly about special education and long-term care. Education and social services are the largest sources of state spending.

Hortman said a future deficit won't be avoided by making cuts at smaller agencies, such as the Departments of Natural Resources or Agriculture.

"You have to look at the biggest areas of spending if you're actually going to tackle the problem in front of us," Hortman said.

House GOP Leader Lisa Demuth said the Legislature should look to cut spending across state government. It shouldn't increase taxes, she said.

Republicans will have more negotiating power in the upcoming legislative session, since they gained three seats in the House and brought the chamber to a rare 67-67 tie, pending a contested election. Democrats still hold the Senate by one vote.

Demuth said House Republicans will send letters to state agencies asking how many unfilled jobs they have, how much they're spending on leases for offices that aren't full due to remote work, and how many employees are working on diversity, equity and inclusion efforts.

"We will expect the agencies, the commissioners, to provide detailed information about every facet of their agency budgets," Demuth said. "... We need to start working now to evaluate efficiency of our state programs."

State funding isn't the only factor. Republican control of Congress and Donald Trump's re-election to the presidency could have significant implications for federal funding, which is key for both special education and services for adults with disabilities.

Kirk Schneidawind, executive director of the Minnesota School Boards Association, said the federal government has always underfunded special education, even as federal law requires public schools to provide it. Federal cuts could force a heavier burden on Minnesotans.

"We have seen the federal portion remain flat or decline over the last decade, so who picks up the costs? The states and local school districts do," he said.

Rep. Cheryl Youakim, DFL-Hopkins, will be charged with figuring out how to get a handle on special education costs as the incoming co-chair of the House education finance committee. And Noor, a Minneapolis Democrat who will co-chair the human services committee, will look at the rising cost of long-term care waivers.

Both Youakim and Noor said the Legislature should be careful when considering cuts for programs that serve the most vulnerable.

"A cut might sound great on a bumper sticker," Youakim said. "But in practicality, in how it's implemented, it could be devastating to our kids."

GOP Reps. Ben Bakeberg and Dawn Gillman, the incoming vice chairs of the House education and human services committees, respectively, said thoughtful cuts are possible in those areas.

Gillman said the Legislature needs to hold disability service providers accountable to ensure they're delivering necessary assistance and not lining their own pockets.

Bakeberg, a school principal in Jordan, said he wants to see more review of the services children with special needs receive to ensure schools aren't "over-servicing" kids.

"What you want to do in many cases is, you want to provide an intervention for a period of time, help the student develop skills so they don't need that level of support anymore," Bakeberg said.