Minnesota's near-term surplus shrinks, while projected future deficit grows to $6 billion

Minnesota's projected surplus for the next two years has shrunk amid "significant near-term economic and fiscal uncertainty," state budget officials said Thursday, and the deficit anticipated down the line has grown to about $6 billion.

With Minnesota's latest economic forecast Thursday, the state has a projected surplus of $456 million for the next two-year budget cycle, about 25% lower than previous estimates. And the projected deficit in the 2028-2029 biennium has increased from the $5.1 billion figure in December.

The latest forecast predicts higher inflation will push up revenue and spending. But spending growth is expected to outpace revenue growth in the coming years, and shifting federal policies "introduce significant uncertainty to the projections."

"I think that there's a lot of risk in front of us right now," said state Budget Commissioner Erin Campbell, referring to the federal economic uncertainty. "The impact to the state budget could really be devastating."

Since taking office in January, President Donald Trump has laid off tens of thousands of federal workers, announced tariffs on the country's biggest trade partners and attempted to broadly freeze federal spending.

The state forecast assumes domestic and retaliatory tariffs, tax cuts and deportations will all contribute to higher inflation over the next two years.

U.S. House Republicans also advanced a budget package in late February that proposes steep federal spending cuts, which could affect Medicaid funding. Federal Medicaid cuts could worsen Minnesota's budget outlook, potentially by $1 billion or more per year, officials said.

"There is a storm at the federal level, and that storm is Donald Trump," DFL Gov. Tim Walz said at a news conference Thursday. "This is chaos. It's nonsense, it's not how you run any business, let alone the federal government."

GOP legislative leaders argued that the blame for the state's fiscal situation lies with DFLers, who spent most of a previous $17.6 billion surplus in 2023. Republicans noted Minnesota was already facing a large deficit before Trump took office, and the projection has increased just slightly since.

"They can deflect to Trump all they want, but this is Minnesota Democrats that have gotten our state into the position that we're in," said House Speaker Lisa Demuth, R-Cold Spring.

The economic forecast sets the stage for spending discussions at the Capitol. Walz and lawmakers must work together to pass a two-year state budget before the legislative session ends May 19.

The state has more than $3 billion in its budget reserve that could help minimize potential cuts. Campbell called it a "welcome safety net."

Senate Majority Leader Erin Murphy, DFL-St. Paul, said now isn't the time to dip into the state's rainy-day fund. But she said lawmakers might have to tap the fund later if Congress cuts Medicaid funding and forces states to cover the difference.

"We will pass a balanced, equitable budget that does everything we can to protect Minnesotans from Trump's chaos," Murphy said.

The biggest drivers of Minnesota's projected deficit are skyrocketing costs of long-term care for people with disabilities and special education for students.

Walz and DFL legislative leaders framed the budget situation as largely unavoidable in December, saying it's the result of an aging population and more people needing services. On Thursday, they directed most of their remarks at Trump.

"Donald Trump is wrecking our economy," said House DFL leader Melissa Hortman of Brooklyn Park. "We know that tariffs will raise prices for Minnesotans and alienate some of our closest allies and trading partners."

Asked if Democrats bear any responsibility for the future deficit after spending the previous surplus, Hortman said, "No. That is far beyond the period that we budgeted for."

Democrats used the $17.6 billion surplus in 2023 to pass a nearly $71 billion two-year budget, the largest in state history. It included some one-time spending as well as new programs that grew the state budget.

The next two-year budget is expected to be closer to $66 billion without the one-time expenses.

"Democrats have clearly broken Minnesota's budget," said Senate Minority Leader Mark Johnson, R-East Grand Forks. "The deficit that they are leaving behind is going to be a mess that we're going to have to be cleaning up this session."

The governor released a budget proposal in January that would substantially reduce projected state spending on Medicaid waivers for low-income Minnesotans with disabilities.

Walz said the state must figure out how to contain rising long-term care and special education costs while still delivering the services effectively. Hortman also showed interest in looking at the fast-growing programs.

Republicans indicated they're interested in cutting spending more broadly.

"Republicans are ready to work on a responsible and balanced budget that's going to fund our priorities. It will protect vulnerable Minnesotans," Demuth said.

Janet Moore of the Minnesota Star Tribune contributed to this story.