Budget Surplus Shrinks, Potential Deficit Looms

by Sam Richie, AASPMN Lobbyist

Minnesota state economists have released an updated look at the state’s financial health ahead of the 2025 legislative session and have significantly lowered the projected surplus for the upcoming biennium, which covers fiscal years 2025 and 2026.

More troubling, and likely to have a more outsized impact on next year’s budget setting legislative session, is the projected deficit of up to $5.1 billion in the 2027-2028 biennium if current spending and tax trends continue without change.

Minnesota Management and Budget, the state’s economists, are tasked with providing updated budget forecasts twice each year, once in November and again in February. The November forecast provides an update on how tax revenues have flowed to the state and gives an indication of what kind of economic reality lawmakers will have to deal with when they start the process of setting the next two-year state budget in January. The final budget projection will be provided in the next budget forecast, which will come out in early February and provide the financial details lawmakers will use in setting the next state budget. 

When lawmakers last received a budget projection from MMB back in February 2024, there was a projected surplus in the next biennium of roughly $1.1 billion. While that might sound like a fair amount of money, in the context of a $71 billion state budget it really doesn’t go all that far. It also pales in comparison to the roughly $17.5 billion surplus that lawmakers had on hand when they began the 2023 legislative session, but most of that money was utilized in new state programs and in one-time spending. MMB’s latest budget forecast now predicts a much more modest surplus for the next two-year budget period, $616 million instead of the $1.1 billion previously predicted. 

The shrinking of the projected surplus and the potential for an actual deficit in the near future is likely to complicate the upcoming legislative session in which a new two-year state budget must be passed before July 1. DFL lawmakers had full control of state government over the past two years and were able to enact sweeping changes to both budget and policy priorities while utilizing most of the previous budget surplus. But with a tie in the state House and just a one seat DFL majority in the state Senate, the legislative process promises to be a much different experience in 2025. 

Following the news of the budget forecast, House Republican leader Lisa Demuth of Cold Spring warned that budget cuts will be necessary to ensure the budget stays in balance moving forward. “While the budget is stable in this biennium, it’s obvious that spending reductions are needed to prevent a deficit down the road.” Republican lawmakers have been warning of the impact of reckless DFL spending for two years, and this budget forecast gives them additional ammunition for that argument.

DFL lawmakers have been striking a more cautious tone when discussing the budget challenges they will face in 2025, but have not yet gone so far as to agree with their Republican colleagues’ calls for drastic budget cuts. It does seem unlikely that there will be new tax increases that will be able to pass the closely divided Legislature in 2025, which would mean the only way to avoid a deficit in 2027 is to cut some amount of government spending. While this budget forecast was not the great news that DFL lawmakers had hoped for, there is still one more budget and revenue projection to come from MMB in February that will set the official revenue numbers that lawmakers use for budget setting purposes, so things could still shift between now and then. No matter what those final numbers look like, expect a very heated budget setting session in St. Paul in 2025. 

Want more? Check out the January 2025 issue of AASP-MN News!