Earlier this month, Minnesota Management and Budget released the state’s
November Budget and Economic Forecast. This forecast is one of two released by the state in a year. It takes a comprehensive look at Minnesota’s projected revenues and expenditures based on the budget passed earlier this year, and reflects current predictions about the economy.
The forecast predicts an $82 million positive balance at the end of the four years covered by the forecast. One-time surplus dollars generated in the past continue to be an important funding source throughout the four-year budget window.
Revenues for FY 2024-25 are expected to be higher than earlier estimates. Updated information has resulted in an increase in expected spending in both FY 2024-25 and FY 2026-27.
This forecast gives policymakers, advocates, and the public an initial look at the state’s budget landscape as we get closer to the upcoming legislative session. The next forecast will be released in February, and those figures will inform the tax and budget decisions made in 2024.
With this in mind, here are our top takeaways from the November Forecast:
1. The forecast projects a $2.4 billion general fund surplus for FY 2024-25, and a $82 million positive balance in FY 2026-27.
The $2.4 billion surplus in FY 2024-25 results from higher revenues more than offsetting an increase in spending. The higher revenues are a combination of a larger dollar amount carrying forward from the FY 2022-23 biennium, and revenues for FY 2024-25 coming in higher than initially anticipated.
Total general fund revenues for FY 2024-25 are forecast to come in $837 million, or 1.4 percent, higher than end-of-session predictions. Higher than anticipated consumer spending and corporate profits contribute to higher tax revenues.
In FY 2026-27, general fund revenues are nearly the same as earlier predictions. Lower projections for state income tax collections are balanced out by higher projections in other tax and revenue sources.
The forecast projects higher state spending in both the FY 2024-25 and FY 2026-27 budget cycles than projected at the end of the 2023 session. FY 2024-25 spending is predicted to be $998 million (or 1.4 percent) higher than previously forecast and FY 2026-27 spending is predicted to come in $982 million (or 1.5 percent) higher.
Public services whose spending adapts to changes in the number of folks served or to changes in the cost of providing services are called
forecasted programs. Forecasted programs are not common, but they include some of the largest areas of the budget, including components of education and health and human services. Changes in these programs are reflected in the forecast.
More students enrolling than initially anticipated are contributing to increased projected funding to schools through the general education basic formula and certain other education aids. For FY 2024-25, E-12 expenditures are expected to be $205 million (or 0.8 percent) higher than end-of-session estimates. For FY 2026-27, E-12 expenditures are expected to be $112 million (or 0.4 percent) higher than initial estimates.
On the health and human services side, one factor contributing to forecast changes is a larger increase in the number of elderly people and folks with severe disabilities getting the care they need through what’s called “long-term care waivers.” The average cost of these services also increased. These waivers enable people to receive care at home or in their communities similar to the kind they would get in nursing homes and other long-term care facilities.
For FY 2024-25, Medical Assistance (Medicaid) general fund expenditures are expected to be $512 million higher than end-of-session estimates; $355 million of this increase is related to long-term care waivers. Other factors include a decrease in federal Medicaid funding and the impact of temporarily extending coverage to some households to avoid disruptions in their health care as the state adjusts to the end of the COVID public health emergency. For FY 2026-27, Medical Assistance general fund expenditures are expected to be $582 million higher than end-of-session estimates, with the largest increase being related to long-term care waivers.
For public services that are not forecasted, the forecast now better represents what funding would be necessary to maintain current service levels while keeping up with inflation. Spending estimates for FY 2026-27 include $880 million for this purpose – also called “discretionary inflation.” While those costs are included in the forecast figures, any funding increases for these services would need to be passed into law through budget legislation – their funding does not automatically increase.
2. While the budget is in balance at the end of the four-year picture, one-time dollars are playing a big role.
The forecast calculates a $2.4 billion surplus for FY 2024-25, and assumes that those resources will not be used in that budget cycle and will carry forward into FY 2026-27 and contribute to funding public services in those years.
As a result, decisions made in the 2024 Legislative Session that would use some of the $2.4 billion surplus to reduce revenues or increase spending, even on a one-time basis, will have an impact on FY 2026-27. As they set priorities, policymakers may decide it is more important to fund some initiatives being considered in the 2024 Legislative Session rather than reserve all of the $880 million for discretionary inflation in FY 2026-27.
3. The near-term national economic outlook is stronger than prior projections, while the longer-term outlook is not as strong.
Minnesota’s macroeconomic consultant now predicts that the U.S. economy will see 2.4 percent GDP growth in 2023, substantially higher than the February forecast. Higher than expected consumer spending and business investment, and stronger employment growth are driving factors in this change.
Looking to the longer term, the Federal Reserve is expected to raise interest rates higher than initially anticipated for a longer duration of time. Because of this, forecasters predict slower GDP growth in 2024, 2025, and 2026 than previously.
Within the forecast’s description of the economy, they note that Minnesota’s unemployment rate continues to be lower than the national average. In October, Minnesota’s unemployment rate was 3.2 percent; for comparison, the national rate was 3.9 percent.
4. Forecasters are somewhat confident in their economic predictions.
Forecasters assign a 55 percent probability that the economic predictions that underlie the November Forecast will accurately predict the economy’s performance. Forecasters assign a 30 percent probability that the economy performs less well than the baseline forecast. This scenario could be the outcome if tighter lending standards constrict consumer spending and small businesses activity, and energy prices rise as a result of geopolitical events. Forecasters assign a 15 percent chance to a more optimistic scenario, perhaps from conflicts in Russia-Ukraine and the Middle East seeing quicker resolutions.
5. $61 million was added to Minnesota’s budget reserve.
Any time a November forecast projects a surplus, up to one-third of that surplus is added to the state’s budget reserve as needed to reach its targeted amount set in law. The automatic allocation of $61 million brings the budget reserve up to $2.9 billion.
Our take
We’ve long argued for bold action to address the real problems that everyday Minnesotans face, and to become a state where all can thrive. In the 2023 Legislative Session, we called on policymakers to use the historic surplus to make transformational changes, and lifted up the importance of tax policy that raises the revenues needed to sustainably fund those investments and other essential public services after the short-term surpluses ended.
The forecast reminds us that Minnesota wisely continues to take steps to build a strong budget reserve, a critical part of being prepared for the next economic downturn. In the case of a recession when state revenues plummet, a strong budget reserve could protect the services that Minnesotans count on.
Budget decisions have a real impact on people’s lives. This forecast gives us glimpses of what it takes, for example, to ensure that elders and people living with disabilities have what they need to stay in their homes and communities, and for every child to have the nutritious meals they need to learn.
As they make budget and tax decisions, policymakers should continue to focus on the real challenges Minnesotans are facing and work towards building an equitable future for all.