Minnesota will see a higher-than-expected surplus for this current budget cycle, but a deficit looms in the future due to spending outpacing revenues, budget officials said Thursday.  

Minnesota Management and Budget released its latest forecast on Thursday, showing a projected surplus of $2.45 billion for the current two-year budget period, which is more than the bottom line expected when the divided Legislature approved that spending plan in June during a special session.

But there is still a gap between spending and revenues, prompting a projected deficit of nearly $3 billion in fiscal years 2028 and 2029. 

Lawmakers slashed state spending the current budget to stave off what was previously predicted to be a nearly $6 billion deficit in the future. Those efforts did significantly reduce the shortfall by session's end — to an estimated $1.1 billion — but it grew this forecast. 

"The governor and Legislature made significant progress last legislative session in reducing the projected negative balance. Thanks to their leadership, we are in a stronger place to respond to a more challenging budget situation," said Erin Campbell, commissioner of Minnesota Management and Budget. "Clearly, there is more work to do."

Officials said higher health care costs and slow economic growth are driving that imbalance between how much the state is spending and how much tax revenue it's collecting. But two bright spots, the experts noted, are the surplus this biennium and a record-high rainy day fund account to weather any significant downturn. 

"Fortunately, policymakers have demonstrated their willingness to make hard choices, and this remains a solvable problem," Campbell said, adding that the current outlook shouldn't require dipping into those budget reserves. 

These numbers will provide a starting point for lawmakers when they return for the 2026 session in February. They aren't required to pass a budget this year, but can approve supplemental spending cuts or other changes to tackle the future deficit if they so choose. The forecast informs their decisions. 

DFL Gov. Tim Walz and legislative Democrats blamed decisions in Washington under President Trump and the Republican-led Congress for worsening Minnesota's economic outlook.

"For the last two budget forecasts. Democrats stood up here and warned Minnesotans about what could happen to our state budget and economy as a result of Donald Trump," said House DFL Leader Rep. Zack Stephenson. "And now we're seeing the consequences: higher prices, higher health care costs, and more and more giveaways going to billionaires and big corporations at the expense of the rest of us." 

Meanwhile, Republicans pointed the finger at legislative Democrats — who had total control of the Capitol for two years before the House became tied this year — -and the policies they enacted at the time, including some new taxes and fees. Heading into the 2023 session, there was a surplus of more than $17 billion.

"We don't have a revenue problem. We have a spending problem," said GOP House Speaker Lisa Demuth. "We did a great job of cutting state spending in the last session, but our forecast, as we've seen, does show there's a lot more work to do."

GOP leaders also noted fraud in state programs, in which dozens are accused and convicted in schemes that stole hundreds of millions of dollars intended to support vulnerable residents. Campbell noted that the forecast includes spending projections for those programs, but it does not analyze the impact fraud has on those estimates.

Many of those programs are federally funded with a partial state match. 

"It's been pointed out that health care costs have increased, and that actually deserves a serious look to whether that increase is because of fraud," said Demuth. "We've seen scandal after scandal after scandal of fraud in our social service programs on the current administration's watch."

Walz recently tapped a third-party to audit Medicaid-billed programs deemed at high-risk for fraud and said there should be a public report at the end of January to have a better sense of the scope. He also highlighted recent legislative changes that allow state agencies to pause payments if there is a suspicion of phony billing or other unlawful practices.

"If folks are going to commit crimes here, thinking because our generous spirit and our programs that we have is going to give them some kind of cover, they are sadly mistaken," Walz said.