Getting your Trinity Audio player ready...

By Dana Ferguson, Minnesota Public Radio News

Minnesota finance officials reported worsening in the state’s budget picture in the near term and down the road, saying a small fiscal cushion had shrunk and a future potential deficit has grown.

State lawmakers now have just $456 million in wiggle room for the upcoming budget, barring no changes. The shortfall that could accrue within four years could approach $6 billion, which is about $850 million higher than a status check in December.

“Shifting policies at the federal level introduce significant uncertainty to the projections,” state budget officials added in a summary they released.

The Department of Minnesota Management and Budget released the overarching figures as part of an economic forecast that will set the stage for more serious talks about a two-year budget that lawmakers will be cobbling together.

The report lays out local, national and international economic trends and looks ahead at what economists expect could be coming down the road. It also details how much the state is collecting in taxes and how that funding flows to schools, health care services, public safety organizations and other state agencies.

The full document will be published at midday Thursday.

While budget experts and lawmakers will surely nod to potential federal actions that could affect the state’s economy down the road, the report focuses more on what has happened. And that could leave gaps in what the officials predict versus what comes to pass in the state’s economy.

No matter what, lawmakers will use the underlying figures as they assemble a budget. That must be in place by June 30 to avoid a state government shutdown.

How much have the financial headwinds shifted?

Minnesota’s December economic forecast projected the state would have a $616 million surplus at the end of the next budget cycle, down $1.1 billion from the prior report.

Lower than expected sales and income tax projections, along with higher than anticipated state spending for long-term care and special education were expected to drive down that financial cushion in the cycle ending in 2027.

There was a $5 billion shortfall in the budget cycle that followed, barring any changes.

Monthly updates since the report have varied. Minnesota Management and Budget reported higher than expected intake of individual and corporate income taxes in November and December. But that trend turned in January with those income taxes coming in lower than was predicted. The monthly report was the last one before Thursday’s update.

MMB officials will report whether that downward trend is continuing through February and beyond. Those projections could inform whether lawmakers opt to hold spending levels steady or propose cuts.

The DFL-led Legislature approved a $72 billion two-year budget in 2023, which included a good amount of one-time spending. With no changes to ongoing spending, the budget would be around $66 billion for the next two years.

Is state spending projected to change?

Over several economic updates, state spending — particularly to disability services and to K-12 education — has been forecast to grow fast over time. Budget officials will report what that would mean for the state’s budget if lawmakers opt to keep current services and programs steady.

The forecast does assume a measure of inflation on the spending side, but it’s worth watching whether that estimate of inflation matches up with what has been occurring as cost increases nationwide haven’t abated.

Will Trump — and federal changes — play in?

Budget officials have said the forecast will focus more on concrete changes that are playing into the state’s economic outlook and not dwell as much on what might occur. So that means that President Donald Trump’s executive orders or proposed changes that haven’t been fully implemented won’t necessarily be included.

That’s not to say that they won’t be a key focus for lawmakers or that economists won’t bring up how significant changes at the federal level could trickle down. Minnesota was expecting to receive $23 billion in this fiscal year.

Lawmakers know the proposed changes to federal health care funding, or federal employee layoffs, or imposition of tariffs could hit the state’s economy. Those variables could reshape Minnesota’s budget outlook.

Tariffs might be the biggest question mark because the Trump administration has threatened and then retreated from the import levies on big trading partners. Then Trump went ahead with new tariffs on Canada and Mexico but could step back from them during negotiations. Tariffs on other international trading partners also loom large.

Do legislative leaders align in how to proceed?

Ahead of the economic forecast, GOP and DFL lawmakers acknowledged that to stave off future shortfalls they must find spending reductions in the next budget, which runs from this July through 2027.

Lawmakers already urged agencies to recommend spending reductions. They’re also pushing measures to root out fraud, inefficiency or abuse of state dollars.

Gov. Tim Walz said he’ll adjust his budget plan to address the less rosy economic outlook.

“I’ll have a revised budget out in a few weeks,” Walz said. “We need to take into consideration that the economic situation has changed dramatically, and is by all indicators, a pretty massive downturn.”

Do lawmakers tap into the rainy day fund?

Minnesota’s rainy day fund sits at an all-time high — around $3.5 billion. It could be an option if lawmakers reach a position where they need to plug significant budget holes.

Last year, Walz said he didn’t want to touch that pot of money. Wall Street rating agencies assess state reserves when giving out what amount to state credit scores. Those can affect the cost of borrowing for long-term construction projects.

But DFL leaders said they were open to exploring the option and they worry it could be needed if proposed cuts at the federal level take effect.

“If (members of Congress) are going to pass a budget like the one that they talked about last week, it would really be devastating to Minnesotans,” House DFL Floor Leader Jamie Long said. “This will have an enormous impact on Minnesotans.”

Republicans said they’d prefer to balance a budget through cuts to existing programs, if the forecast projects a deficit. But they’d also leave the door open.

“We may need to look at it. I mean, that’s what it’s there for. But I don’t want to go too far into it,” said Rep. Greg Davids, chair of the House Taxes Committee. “Because when the state has worse, if there’s an emergency, that’s where we go. And so I kind of like hands off on that.”