Minnesota State Budget Faces Structural Deficit
Despite a positive closing of the 2024-25 fiscal biennium last June, Minnesota continues to face a structural deficit over the 4-year budget horizon. With a positive balance of $4.5 billion last June, and assuming the 2026 legislature doesn’t increase spending next year, the state is facing a $3 billion structural deficit, projected out to the close of the 2028-29 fiscal biennium (closing June 30, 2030). With roughly $3.8 billion in the state’s budget reserve and cash flow accounts, the 2026 legislature could take a full pass on any budget balancing measures. Given the likely 67-67 tie in the State House, a thin 34-33 DFL majority in the Senate and Governor Walz seeking a third term, the political math on any supplement budget deal seems impossible.
Still, there will be pressure points that budget-minded lawmakers will want to address in order to try and right size the state’s budget for the next group to work with when they come into session in January of 2027. Medicaid and managed care programs at DHS are running double digit percent increases higher than previously forecasted. Coupled with a sluggish projection for GDP and tax revenues and pressure from Education groups to roll-back planned cuts to special education and to increase funding for Compensatory Aid, the legislature is in a tough spot.
Special Education
The Blue Ribbon Task force on special education cost savings is eyeing a reduction or eliminations of ADSIS funding.
Already baked into the budget forecast cake is a $250 million cut in special education reimbursements. If ADSIS is left alone and no other law changes are made in this area of state fiscal policy, then the 50% special education cross subsidy aid will be reduced.
Compensatory Aid
The budget forecast shows a $19 million (1.1%) reduction in the state’s anticipated Compensatory Aid obligations in fiscal year 2027. It shows a further reduction of $62 million (3.4%) in the state’s anticipated Compensatory Aid obligations in the FY 28-29 biennium. A MDE sponsored task force is exploring compensatory aid and other methods of generating this revenue, in addition to what the revenues should be targeted for.
February Forecast
The legislature convenes on February 17, and Minnesota Management & Budget will deliver an update to the budget forecast later that month. The Legislature will consider any supplemental budget changes from the Governor, in addition to advocacy requests, and they have until May 17 to pass any legislation impacting budget and policy matters.