Latest State Budget Forecast Projects $456M Balance

State revenues fell by $160 million, and the structural deficit has increased to nearly $6 billion in future years.

On March 6, Minnesota Management and Budget (MMB) released the February 2025 state budget and economic forecast (pdf), which provides lawmakers with the last major economic outlook before they begin crafting a two-year state budget.

The forecast shows that Minnesota’s budget uncertainty continues to grow as expenditures outpace revenues. A $456 million surplus is projected for fiscal years 2026-2027, a $160 million decrease from the November 2024 budget forecast. MMB attributes the reduced surplus primarily to higher inflation, which has driven up both revenue and spending projections from last year.

Debt capacity declines

The forecast also showed a decrease in Minnesota’s debt capacity for a potential bonding bill. In November 2024, the state had a $780 million debt capacity, but that figure has now dropped to $700 million. It remains to be seen how that decrease will impact Gov. Tim Walz’s yet-to-be-released updated bonding proposal, which will be based off this latest budget forecast.

Projected deficit continues to grow

While the current short-term surplus has been reduced, the long-term structural deficit for fiscal years 2028-2029 has grown to nearly $6 billion — roughly $800 million more than previous estimates in 2024. MMB cites higher-than-expected inflation as the primary reason for this worsening outlook. Compared to the November 2024 budget forecast, current year revenues have increased by $640 million, but expenditures have grown by even more — $790 million.

Shifting federal policies cause uncertainty

While presenting the budget forecast at a press conference, MMB officials warned that potential changes in federal policy and funding could further increase budget uncertainty. Key concerns include:  

• Potential cuts to Medicaid and federal programs.
• Shifts in trade policies affecting inflation and economic stability.
• Federal actions on tariffs and tax cuts, which could drive inflation higher over the next two years.

Minnesota receives roughly $26 billion from the federal government for matches to the state Medicaid program and $19 billion in federal funds for other programs. Any cuts at the federal level could significantly impact state budget projections.

View MMB’s PowerPoint outlining the February 2024 budget forecast (pdf).

What’s next?

The 2025 February budget and economic forecast represents the last significant report on Minnesota’s economic health before lawmakers pass the 2026-2027 state budget.

Over the next month, Gov. Walz is expected to release an updated budget proposal and legislative leaders in the House and Senate will release budget targets for finance committees as they begin compiling and passing major budget bills throughout the months of April and May.

The constitutional deadline for 2025 legislative session is May 19, and a budget must be passed by July 1 to avoid a state government shutdown.

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