Dec 6, 2023 - Politics

Minnesota budget forecast casts doubt on future surplus

Illustration of the Minnesota State Capitol with lines radiating from it.

Illustration: Brendan Lynch/Axios

Minnesota still has a budget surplus, but spending it all risks a deficit down the line.

Driving the news: The updated state economic forecast, released Wednesday, shows a projected surplus of $2.4 billion for the two-year budget that began in July.

  • But it also warns of a "significant structural imbalance" in the following biennium due to projected increases in spending.

Why it matters: The number sets the stage for debates over spending — and, potentially, taxes — at the DFL-controlled Legislature next year.

  • While the state's financial outlook remains stable, Minnesota Management and Budget commissioner Erin Campbell warned that lawmakers "will need to be very thoughtful when making decisions next year."

By the numbers: State economists boosted this summer's surplus projection by $808 million in the latest forecast, citing higher than expected consumer spending and corporate profit growth.

Yes, but: Projected increases in spending on ongoing obligations will eat into that buffer starting in the 2026-2027 budget year, when costs are expected to outpace revenues by $2.3 billion.

  • If legislators don't spend the surplus next year, allowing the balance to carry over, the current outlook suggests they'd start the following biennium with a surplus of just $82 million.

Between the lines: Factors include a higher-than-expected price tag for the state's new universal free school meals program — food reimbursement rates and participation could cost an additional $81 million in the first two years alone —and a yearslong trend in more Minnesotans seeking disability waivers.

What to expect: Next year isn't technically a budget year, but lawmakers will likely weigh well over $82 million in spending requests when they return in February. Just last week, several DFL lawmakers outlined a proposal to spend an additional $500 million to make childcare more affordable.

What they're saying: Gov. Tim Walz declined to comment on specific asks, but said the overall numbers call for a "measured" approach to spending next year. He told reporters it's "too early to have these conversations about tax increases."

  • DFL legislative leaders echoed that view. Senate Majority Leader Kari Dziedzic said leader have already been telling members to wait for a better financial picture before making plans for the next session.

The other side: Republicans blasted Democrats for spending down the previous $17.5 billion surplus in the $72 billion two-year budget they passed earlier this year.

  • "We sounded the alarm last session and [said] this is setting us up for future deficits," Rep. Kristin Robbins (R-Maple Grove) said. "Now we have a number where that's exactly what happened."

The intrigue: Lawmakers could find themselves with more money to work with, without a need for tax increases, House Speaker Melissa Hortman noted.

  • That scenario could happen if projected inflationary increases, built into the forecast for the first time this year, aren't as big as expected or if Minnesota continues to outperform the national economy.

The bottom line: The forecast is a projection. Factors like the broader economy and programs costing less or more than anticipated can lead to big swings.

  • But the less rosy outlook will loom over decisions made when lawmakers return in February.

Editor's note: This story has been updated throughout with additional context and comments.

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