REGIONAL — Minnesota budget officials on Thursday released a new economic forecast showing short-term stability and a sizable long-term deficit. Its release unfolded against a backdrop of heightened political tension over President Donald Trump’s remarks about Somali Minnesotans and continued disputes over fraud in state programs.
The forecast projects a surplus of roughly $2.5 billion through the end of the 2026 and 2027 biennium, buoyed by strong reserves and higher-than-expected tax collections.
But beginning in 2028, expenses are expected to outpace revenue by nearly $3 billion, a gap driven largely by swelling health and human services costs, slower economic growth, and demographic pressures that are increasing demand for long-term care and basic medical services. The state’s rainy-day fund remains at an all-time high of $3.77 billion, but policymakers have historically avoided tapping it unless no other options remain.
Gov. Tim Walz opened his remarks not with the details of the forecast, but with what he called the corrosive political climate stirred by Trump’s recent derogatory comments about Somali Minnesotans. Before turning to the state’s finances, he condemned Trump for labeling Somali residents as “garbage” and describing Minnesota as a “hell hole.”
“These are vile, racist lies and slander,” Walz said. “Anyone who refuses to condemn this is complicit in it.”
He emphasized that immigrant communities “should hear clearly” that they are respected and valued in Minnesota.
Walz then shifted to the forecast itself, describing Minnesota’s financial position as comparatively strong despite unmistakable challenges.
“Despite a worsening economy nationally, Minnesota’s financial position is better than when we came here last time,” he said.
He credited what he called seven years of responsible budgeting for keeping reserves healthy and allowing the state to maintain the projected surplus.
Still, he acknowledged that last year’s budget required difficult decisions and said deeper reductions than he had originally proposed might have left Minnesota in better shape today.
Much of the pressure on the state’s long-term outlook stems from rising costs in Medical Assistance, the state’s Medicaid program. Officials warned that spending on health care and human services will climb from $21 billion in the 2024 to 2025 cycle to $25.8 billion in 2026 and 2027, and then $27.6 billion in the following biennium.
Minnesota Management and Budget Commissioner Erin Campbell said the increases mirror trends in other states and reflect higher enrollment, rising prescription drug costs, and growing demand for long-term care services. She emphasized that the higher spending is tied to underlying program pressures, not fraud.
State economists also noted that the recent federal shutdown delayed key data releases, clouding the picture on inflation and employment used to develop the forecast.
Walz leaned heavily on the theme that federal policy instability under Trump has amplified Minnesota’s challenges. Walz pointed to the uncertainty generated by Trump’s public statements and warned that relying on them to shape the state’s budget would undermine long-term stability.
Under that approach, he said, “we would have chaos.”
Walz later said his administration would craft budget adjustments aimed at preserving essential services while maintaining long-term fiscal stability, emphasizing that Minnesota must continue investing in the factors that contribute to its high quality of life even as policymakers prepare for tighter financial conditions.
Walz also described continued efforts to uncover and prevent fraud in human services programs, noting that third-party audits and a temporary pause on certain payments are expected to give Minnesota “the first clear picture” of the true extent of improper claims.
Sen. Grant Hauschild, DFL–Hermantown, said the $2.5 billion surplus shows that disciplined budgeting has kept Minnesota on solid footing.
“This forecast is important as it shows Minnesota has a strong $2.5 billion budget surplus, highlighting that steady fiscal responsibility has paid off,” he said. “But we need to stay vigilant with future budget projections. It is more important than ever, that we remain diligent so we can protect this stability for the long term and keep Minnesota on strong footing.”
While Walz and DFL lawmakers framed the long-term challenge as the product of federal volatility and predictable demographic trends, Republican leaders placed the blame squarely on decisions made in St. Paul. House Speaker Lisa Demuth said the deficit forecast reflects “the negative effects from those massive changes over regulation and overspending from one party, Democrat control.”
“We do not have a revenue problem. We have a spending problem,” she said.
Demuth pointed to projections showing spending more than $5 billion above anticipated tax collections in the 2028 to 2029 biennium. She tied that imbalance to the DFL’s spending of the $18 billion surplus in 2023 and 2024 and the expansion of several major programs. Even with more than $10 billion in new taxes and fees enacted last year, she said, the structural deficit persists because the budget remains out of alignment. She credited bipartisan reductions last session for narrowing what she said would otherwise have been an even larger projected shortfall.
Fraud in human services programs featured prominently in Demuth’s remarks.
“Warnings about irregularities were ignored for years,” she said. “Federal investigators have already identified more than $1 billion in fraud, and that is the tip of the iceberg.”
When pressed to address the president’s Somali remarks, Demuth avoided mentioning him explicitly and answered instead with a general statement.
“In no way do I believe any community is all bad, just like I do not believe any community is all good,” she said.
She emphasized that enforcement should target individuals, not entire populations.
Rep. Roger Skraba, R-Ely, echoed Demuth’s budget criticism, casting the forecast as evidence of unchecked spending during the DFL’s period of full control.
Skraba said the forecast confirms his concern that state spending continues to rise faster than revenue, even after last year’s tax increases. He argued that Minnesota needs a sharper focus on accountability and restraint as lawmakers head into the next session.
“We need to defend taxpayer money, crack down on rampant fraud, and ensure every dollar is used responsibly,” he said. “Minnesotans deserve leaders who are focused on real solutions here at home, not shifting blame to Washington.”
The political landscape will play a large role in shaping how lawmakers respond when they return to the Capitol in February. The Minnesota House is expected to be evenly split 67 to 67, while Democrats hold a one seat majority in the Senate.
Both Walz and Demuth are running for governor next year, a dynamic that is likely to complicate negotiations and sharpen rhetoric through the session.
Minnesota’s reserves remain strong and the current surplus offers lawmakers short term breathing room. The larger test will come in February, when a divided Legislature begins debating how to address the projected deficit in the next biennium.
MPR News contributed to this report