Minnesota’s Latest Budget Forecast Calls for a Fiscally Prudent 2026 Legislative Session

By Owen Wirth

Minnesota’s latest budget and economic forecast, released in early December, shows a stable picture for the current biennium. It also points to a sizable long-term gap the state will need to address in the years ahead. For cities and for the League of Minnesota Cities’ advocacy work, the forecast sets the stage for a legislative session that may see limited major action but still carries important implications for bonding, planning, and long-term fiscal strategy.

A look at the numbers

The state ended the 2024-2025 biennial fiscal budget cycle with a $4.88 billion closing balance, which carried into fiscal year 2026-2027. After accounting for a $277 million deposit into the state’s budget reserve, Minnesota now projects a $2.47 billion surplus for the current budget cycle. The budget reserve stands at $3.77 billion, which meets the statutory target and helps protect the state if economic conditions worsen.

The forecast also shows a structural imbalance of $2.18 billion in fiscal year 2026-2027, meaning spending is expected to outpace ongoing revenue. The challenge grows in fiscal years 2028-2029, when the structural imbalance is projected at $5.43 billion. If the current surplus is carried forward, and not used this session, the future gap would drop to about $2.96 billion. Even with that reduction, the deficit remains significant.

The November forecast is more positive than the one released in February 2025. The current-year surplus has grown, and the four-year deficit has narrowed slightly. Minnesota is one of only 13 states that projects its budget outlook four years ahead, instead of two years, which gives lawmakers and local governments more room to plan.

What it means for the 2026 legislative session

Minnesota operates on a two-year budget that was passed last session and funds state government through July 2027. That means lawmakers do not need to pass a supplemental budget this year to keep government operating.

That fact, combined with the political calendar, may shape the year ahead. This legislative session takes place in a presidential midterm election year, with all legislative seats and statewide constitutional offices on the ballot. Gov. Tim Walz recently announced he will not seek reelection to a third term, setting up Minnesota’s first open gubernatorial race since 2018. Several state officials have already entered the race, creating a political environment that is likely to make bipartisan agreement on major budget bills more difficult.

If lawmakers do pursue a supplemental budget, House and Senate leaders will need to agree on joint budget targets. These targets tell committees how much they can spend as they shape their bills. With a partisan tie in the House and a very narrow DFL majority in the Senate, finding agreement could be challenging. Many debates are also expected to center on campaign themes. Republicans have signaled a focus on fraud prevention, while DFL leaders are focused on public safety, firearms regulation, and Capitol security. Leaders have until the end of May to reach agreement on any of these issues before the Legislature must adjourn.

Bonding prospects

The budget forecast does not include assumptions about a bonding bill, which means there is no updated estimate on the state’s ability to take on new debt. To pass, bonding bills require a 60% vote in both chambers, and with divided control and small margins, reaching that threshold will be a challenge.

The lack of new debt capacity guidance does not prevent lawmakers from assembling a bill, but it adds uncertainty for local officials who depend on state support for large capital projects. As the legislative session progresses, the League will provide updates related to bonding via the City Bulletin e-newsletter (subscribe at lmc.org/citiesbulletin).

What cities should take away

The current surplus gives the state some flexibility, but the longer-term deficit signals pressure on future budgets. Cities should expect lawmakers to be cautious about implementing new ongoing spending during the 2026 session.

When it comes to bonding, politics may matter more than the numbers. Cities with time-sensitive capital needs should engage early with lawmakers to build bipartisan support.

The strong reserve fund is good news for cities. It lowers the risk that the Legislature will turn to cuts or shifts that affect local aid programs if revenue slows. Still, the projected imbalance in fiscal years 2028-2029 and beyond will shape future discussions about revenue and spending.

Implications for the League’s advocacy work

The League will continue to advance city priorities during the legislative session. While sweeping policy changes are unlikely during an election year, the League will focus on protecting existing funding for cities, keeping city infrastructure needs visible in any bonding discussions, and emphasizing the importance of stable, predictable support for local government.

Minnesota’s financial position is solid today, but the forecast is a reminder that long-term planning matters. For cities, the 2026 legislative session may be relatively quiet, but it remains an important chance to influence how the state supports local services and infrastructure in the next budget cycle.

Owen Wirth is an intergovernmental relations representative with the League of Minnesota Cities. Contact: [email protected].