February Forecast Shows Worsening Budget Outlook
Minnesota Management and Budget (MMB) delivered the delayed February budget and economic forecast yesterday. While MMB projects a $456 million surplus for the FY 2026-27 biennium, this projected surplus is now $160 million lower than estimates from the November Forecast. In a statement, MMB said the “budget outlook has been adjusted downward amid significant near-term economic and fiscal uncertainty” and that “higher forecast inflation results in increases in projected revenues and expenditures.”
The projected deficit for the FY 2028-2029 biennium has grown to $5.995 billion, $852 million worse than November estimates. MMB stated further in its statement that “shifting policies at the federal level introduce significant uncertainty to the projections.”
Impact of Discretionary Inflation Account is New
During the last biennium, the legislature changed the law, now requiring estimates of inflation to be included in the official budget forecast. However, in crafting the forecast, the cost of inflation isn’t spread out amongst the various parts of the budget where it is anticipated, but rather those expected inflationary costs are accounted for in a separate bucket, a discretionary inflation account. In accounting for inflation in this way, the legislature is acknowledging that in order to maintain certain services, costs will increase; however, they are also acknowledging that it is the responsibility of the legislature to decide whether to accept the increased costs or to alter existing policies to bend cost curves or make other decisions in how to spend that money.
Topline Budget Numbers Don’t Tell Whole Story
Despite the negative headlines, the forecast picture isn’t as bleak as it seems. The anticipated inflation forecast for FY 26-27 is $1.145 billion, which is placed in the discretionary inflation account. When the $456 million projected surplus is combined with the $1.145 billion discretionary inflation account, the total actual surplus is $1.601 billion. This represents a greater number than existed in November. At that point, the surplus was $616 million, while the discretionary inflation number was $926 million for a total of $1.542 billion. In short, legislators have more money to spend now in FY 26-27 than they did following the November Forecast. The money just shifted from the surplus to the discretionary inflation account.
Future Coming into Focus…
Just after publication of last week’s Top 5 (in which we discussed the lack of announced deadlines), legislative leaders released the 2025 committee deadlines. Due to the unusual nature of this year’s legislative session, the first and second deadlines have been combined (April 4 at 5:00 p.m.), and take place just one week before the final committee deadline (April 11 at 12:00, noon). In effect, what the deadlines mean is that the work of policy committees should be completed by April 4, and omnibus finance bills must be completed by April 11. Deadlines do not apply to the following committees: Capital Investment, Finance / Ways and Means, Taxes and Rules. The legislature will be on break following the final deadline, until Tuesday, April 22, at which point they will have approximately four weeks to complete their work.
…And Becoming More Clear
Also this week, we have received insight on when budget targets may be announced. Separately, House and Senate leaders announce their preferred budget targets for the various areas of jurisdiction in order to craft finance bills. According to Axios reporter Torey Van Oot, the House plans to release targets by April 1, though the Senate indicated they may not release their until as late as April 5. Neither of these dates provide much time for committees to make final decisions on what to include in their finance bills.
