Minnesota’s projected budget surplus for the next two years has dropped to $456 million, lower than the last estimate, and a projected deficit for the following two years has grown to nearly $6 billion.

Those figures come from a new budget forecast released Thursday by the Minnesota Department of Management and Budget. Another downward turn in the state budget outlook comes amid “significant near-term economic and fiscal uncertainty” brought by tariffs and other policy changes under President Donald Trump, according to state officials.

“I want to underscore that, like other states, we are closely monitoring unprecedented changes at the federal level — changes that are still very much in flux,” said MMB Commissioner Erin Campbell at a Thursday briefing with reporters at the Minnesota Department of Revenue in St. Paul. “We are still getting a sense on federal policy direction under the new administration, and there are many key details we don’t know yet.”

Minnesota already expected a modest surplus in the next two years and a following deficit amid growing costs for long-term disability care and special education costs and a drop in tax revenue.Surplus, deficit

The new surplus projection for the 2026-2027 biennium is $160 million lower than the last estimate, and the new deficit projected for 2028-2029 is $852 million higher. Spending growth is still expected to continue outpacing revenue growth, and inflation is expected to drive up both revenue and expenditures, officials said.

Something the forecast doesn’t include is the possibility of spending cuts at the federal level to programs like Medicaid and Social Security, which could happen under Trump and a Republican-controlled Congress. A group of state Republican lawmakers have sent a letter to Minnesota’s GOP members of Congress expressing concerns about possible cuts to Medicaid.

The forecast is based on economic conditions as of Feb. 10, so it doesn’t include tariffs on Canadian and Mexican goods or any tariffs that may come from those countries in retaliation, according to State Economist Anthony Becker. It also doesn’t factor in any layoffs in the federal workforce.

Federal cuts could mean extra strain on state lawmakers, who are required to pass a balanced budget this year. Minnesota currently gets about $42 billion in federal grants in addition to the roughly $70 billion two-year state budget, and cuts to federal money could disrupt services covered by a mix of federal and matching state dollars in ways that are yet to be seen.

Legislators already knew Minnesota would have less money to work with in the upcoming two-year budget than they did in previous cycles, but the amount of wiggle room they have continues to shrink.

November’s forecast found the state was poised to have a $616 million surplus in 2026-2027, but officials projected a $5.1 billion deficit for the two following years. In that forecast, the surplus had dropped $1.1 billion from what the state had expected earlier in 2024.

What’s the cause?

So why did the picture worsen in February?

Revenue projections actually grew slightly since November, but MMB blames inflation for wiping out those gains. Costs also continue to grow in the education and the Health and Human Services Department.

Growing education and special education costs went up by $198 million from the last forecast. Health and Human Services costs grew by $338 million.

The biggest driver of HHS cost increases was $113 million the state improperly billed to the federal government for tribal mental health services. Minnesota had to pay that amount back.

State Budget Director Ahna Minge also noted an increase in the cost of weight loss drugs. Between 2023 and 2024, there was a 90% increase in patients accessing those drugs through medical assistance. That’s expected to increase funding in that program by $80 million to $90 million each two-year budget cycle, Minge said.

A different situation than 2023

To address future shortfalls, Gov. Tim Walz proposed cuts to home disability care and other services in his January budget recommendations. The Legislature will craft the budget and must do so by June 30 or risk a government shutdown.

It’s a much different picture at the Capitol this year than in 2023, when the Democratic-Farmer-Labor Party controlled the House, Senate and governor’s office.

They still have the Senate and governor’s office, but Republicans currently have a majority in the House. That could become a 67-67 tie again after a special election, but regardless of the outcome, the DFL must now compromise with Republicans to pass a budget.

And, Minnesota is no longer flush with cash. In March 2023, MMB found the state had a historic $18 billion budget surplus. That year, DFL-controlled state government passed a more than $70 billion state budget that grew spending by nearly 40%.

Reaction

Republicans blamed what they called irresponsible spending by the DFL for the worsening fiscal outlook.

“Before Democrats actually spent it all and raised taxes and fees, we actually had the money in the bank to handle any potential shortages,” said House Speaker Lisa Demuth, R-Cold Spring, “We had been warning over two years that this was not going to be sustainable.”

Demuth said Republicans will not agree to pass a budget with tax increases this year.

DFLers, meanwhile, blamed the worsening economic outlook on the policies of President Trump.

“What’s clear in this budget picture, you just heard it, is there is a storm at the federal level and that storm is Donald Trump,” Walz said at the Thursday briefing. “That’s the thing that’s changed between November and today’s numbers.”

Despite a growing expected deficit in the 2028-2029 fiscal year, House DFL leader and former speaker Melissa Hortman said she thinks the state is still in good economic shape. She noted that the state still has about $3.7 billion cash-on-hand going into the upcoming two-year budget cycle (much of which will be consumed by the state spending more than it takes in), and another $3.5 billion in the state “rainy day” fund.

Hortman said she wouldn’t be surprised if lawmakers had to return to the Capitol later this year to address disruptions created by cuts or other policy changes at the federal level.

“We’re already starting to see the negative impacts of Donald Trump’s chaos, cruelty, incompetence, in Washington, D.C., with inflation, tariffs, and uncertainty taking their toll on our economy and state budget,” she said.

Republicans called DFL legislative leaders and Walz’s criticisms of Trump a deflection.

“Minnesota Democrats are constantly blaming D.C., but there’s no one to blame but themselves,” said Senate Minority Leader Mark Johnson. “They squandered the surplus, they raised taxes, they wasted half a billion dollars in fraud.”

MMB’s February economic forecast is a key point as lawmakers craft the state budget. DFL leaders said they’d have spending targets together by early April.

The Legislature will then have to figure out a budget before May 19. If they don’t the governor will have to call them back to the Capitol for a special session to avoid a government shut down on July 1.