Minnesota’s state budget picture improved in the February Budget and Economic Forecast released last week by Minnesota Management and Budget. That forecast estimates an improved budget picture in both budget cycles compared to the November Forecast.
The forecast shows a $3.7 billion general fund surplus projected for the two-year budget cycle we are currently in (FY 2024-25), followed by a $2.2 billion projected positive balance at the end of the next biennium (FY 2026-27). One-time surplus dollars generated in the past, much of which were generated from federal policy actions to respond to the health and economic impacts of the COVID-19 pandemic, continue to play an important role in funding public services and contribute to the projected surpluses.
The improved outlook over the prior November forecast is largely the result of higher projected tax revenues estimated to come into the state. While revenues to-date have been coming in stronger than anticipated, most of the additional revenues in the forecast are projections for the future rather than money the state has already received.
The forecast estimates general fund revenues and spending under the two-year state budget passed in 2023 based on current projections about how the economy is expected to perform. It provides policymakers, advocates, and the public with information to inform the budget decisions to be made in the 2024 Legislative Session.
Some of the key take-aways in this forecast include:
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The forecast projects a $3.7 billion general fund surplus in FY 2024-25.
The increased surplus in FY 2024-25 results from a higher revenue forecast that expects an additional $1.3 billion compared to November’s figures; all three of the largest general fund tax types (individual income tax, general sales tax, and corporate tax) are forecast to have higher revenues. The biggest contribution to the increase in revenues comes from a boost in projected corporate tax revenue of $749 million. Forecasted spending remains about the same in the current biennium as in November.
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A $2.2 billion positive balance is projected at the end of FY 2026-27, up from $82 million in November.
The increased FY 2024-25 surplus carries forward and contributes to a stronger positive balance for FY 2026-27. In addition, increased revenues are forecast to continue in FY 2026-27, also contributing to the stronger positive balance of $2.2 billion. Revenues are projected to be $907 million more than in the November forecast. Corporate taxes are expected to be $940 million higher than predicted in November, which more than offsets a $103 million anticipated reduction in individual income tax revenues.
The forecasted improvements in state revenues reduces the reliance on one-time dollars to fill in the gap between projected revenues and projected spending, decreasing the size of this structural imbalance in FY 2026-27, though it does not eliminate it completely.
When policymakers set the state’s budget in 2023, they recognized how much of the $17.5 billion surplus projected at that time was temporary. A significant portion of the new funding they allocated for FY 2024-25 does not continue into FY 2026-27; projected general fund spending for FY 2026-27 is $66.3 billion, $4.2 billion less than projected spending for FY 2024-25.
The February forecast does increase projected spending for FY 2026-27 by $75 million, or 0.1 percent, over the November figures, primarily due to increases in estimated costs for E-12 education. Special education is expected to cost an additional $95 million and nutrition programs an additional $32 million, due to higher actual costs to deliver special education services and higher participation in nutrition programs. These programs facilitate a strong learning environment for all Minnesota students.
The projected spending estimates also include $842 million for discretionary inflation, which is the estimated additional funding needed for non-forecasted programs to keep up with inflation (essentially, all areas of the budget except general education, special education, debt service, property tax refunds, and state funding for some health care and long-term care). These dollars do not automatically go to funding these services; any funding increases would need to be passed into law through budget legislation, and policymakers could decide to use those dollars for other purposes.
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While the budget is in balance at the end of the four-year picture, one-time dollars are playing a big role.
Because the forecast is based on the state’s current budget decisions, it assumes the $3.7 billion surplus in FY 2024-25 will not be used in that budget cycle, but instead be carried forward to FY 2026-27 to contribute towards funding public services in those years. As a result, decisions in the Legislature during the 2024 session that would use some of that surplus to reduce revenues or increase spending, even on a one-time basis, will impact FY 2026-27 and beyond.
As policymakers move through the legislative session, they may consider whether to leave some of the $2.2 billion for future years.
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U.S. economic outlook projected to be improved in 2024 and beyond.
Minnesota’s macroeconomic consultant now predicts an improved national economic outlook for most of the years 2023 through 2027, with a significant increase to 2.4 percent growth GDP in 2024, compared to the 1.4 percent growth projected in November. Subsequent years see more modest GDP growth of 1.6 percent, 1.7 percent, and 1.8 percent growth in 2025, 2026, and 2027 respectively.
Minnesota’s economic outlook reflects the national outlook with improvement since the November forecast. These improvements are predicted to be reflected in stronger growth in employment and wages in 2024. Minnesota’s labor market remains strong; the state’s unemployment rate was 2.9 percent in December, the 10th lowest in the country.
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Forecasters are somewhat confident in projections.
The state’s national economic consultants assign a 55 percent probability that the economic predictions that underlie the February forecast will accurately predict the economy’s performance. Forecasters assign a 30 percent probability that the economy performs less well than the baseline forecast. A scenario like this could be the result of tighter lending standards that constrict consumer spending and higher energy prices due to worsening conflicts overseas. Forecasters assign a 15 percent probability to a more optimistic outlook. This could result from easier access to credit supporting consumer spending, quicker resolution of the Russia-Ukraine and Middle East conflicts, and stronger corporate profits arising from greater gains in productivity.
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Increased surplus depends on future stronger corporate tax receipts.
There are two sources of risk in this forecast that stand out compared to November. The first is that a substantial part of the revenue increases come from future revenues, rather than dollars that the state has already collected. The second is that corporate taxes are the largest source of those new revenues; this adds uncertainty in this forecast because the corporate tax is particularly volatile.
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Forecast assumptions include a larger $980 million infrastructure bill.
In even-numbered calendar years like 2024, policymakers focus on passing an infrastructure bill that funds capital investments in things like roads, bridges, and public buildings. This is often called a “bonding bill” because these projects are normally financed by issuing state bonds to investors, which spreads the cost of these investments over time. The forecast uses both historical averages and a set of debt capacity guidelines in making assumptions about the size of bonding bill that will pass. The February forecast assumes a $980 million bonding bill will pass in the 2024 Legislative Session, an increase over the $830 million estimated in November.
Our take
The Minnesota Budget Project has long argued for bold policy choices that tackle the challenges that everyday people face, so that all Minnesotans can thrive. During the 2023 Legislative Session, we called for transformational policy changes and stressed the need to raise revenues to sustainably fund those investments and other crucial public services after the temporary surpluses are gone.
As policymakers make choices this session, they will need to find the right balance in taking action to improve Minnesotans’ lives today and reaching sustainability for the long run. They will also need to be mindful about the risks that actual economic and revenue outcomes could underperform the forecast. Among our priorities to improve the lives of everyday people are investing in affordable child care through Great Start Scholarships, advance periodic payments of the state’s Child Tax Credit, and increasing health care access through a public option.
What’s next
With these numbers in hand, Minnesota policymakers will soon release information about the new initiatives or adjustments they want to make to the overall state budget passed in 2023. Governor Tim Walz will release a supplemental budget describing his priorities later this month. The Legislature expresses their budget priorities first through a set of budget targets that outline how much of the projected surplus they would like to allocate to various parts of the budget, and then work through the rest of the legislative session to reach agreement on the details of budget legislation. In their response to the forecast release, legislative budget leaders indicated that they will strive for joint budget targets that are agreed to by the House, Senate, and governor. Watch our blog for future analysis!