MINNEAPOLIS — Minnesota’s budget outlook has flipped from a record surplus to a projected $6 billion deficit down the line.

The shortfall projected for the state’s 2028-2029 budget cycle will almost certainly influence spending decisions at the Capitol this year. Legislators have a small projected surplus of $456 million for the coming two-year budget cycle, but they’ll likely need to roll it over to cushion against the future shortfall.

Gov. Tim Walz and legislative leaders agree that certain spending must be reined in or cut. But they’re divided on what to cut and who’s to blame for the situation.

GOP leaders faulted Democrats for spending most of the state’s previous $17.6 billion surplus when they controlled both legislative chambers in 2023.

“This was an irresponsible spending spree,” GOPHouse Speaker Lisa Demuth said Thursday. “We actually had the money in the bank to handle any potential shortages in any area, any uptick in costs.”

Walz and Democrats argue the fiscal reversal was mostly unavoidable because of the rising costs of long-term care for people with disabilities and special education for students. They noted that the state’s budget outlook has worsened since President Donald Trump took office and began imposing tariffs and laying off federal workers.

“The only thing that’s changed since November is Donald Trump’s chaos to the economy,” Walz said, alluding to how the projected state deficit grew from $5.1 billion to about $6 billion in just a few months.

—What’s driving the deficit?

Budget officials are assuming tariffs, tax cuts and deportations will contribute to higher inflation in coming years. While inflation will push up revenue and spending, they said, the spending growth is expected to outpace revenue growth.

DFL leaders and state officials are also concerned about the possibility of budget cuts by Congress, which weren’t factored into Minnesota’s latest economic forecast. In late February, U.S. House Republicans advanced a package that proposes steep spending cuts, which could affect Medicaid funding.

Minnesota Budget Commissioner Erin Campbell said federal funds make up a third of the state’s budget. The state is estimated to receive $45 billion in federal money in the upcoming two-year budget cycle, she said, more than half of it for Medicaid.

If U.S. House Republicans move forward with planned cuts, Campbell said Minnesota “could see a reduction of $1.2 billion to $1.6 billion in (fiscal year 2027) alone.”

The state is required by law to pick up any Medicaid costs the federal government doesn’t cover, she said. “If the federal government makes significant reductions in Medicaid, it could result in a dramatic hole in the state’s budget,” Campbell said.

Walz and DFLers were eager to focus on the federal factors that contributed to the projected deficit widening over the past few months: “We’re already starting to see the negative impacts of Trump’s chaos, cruelty and incompetence in Washington, D.C.,” House DFL Leader Melissa Hortman said.

Some state-level factors were also at play, including a $113 million payment mistake by the Minnesota Department of Human Services that must be repaid to the federal government.

Minnesota was already facing a big projected shortfall before Trump took office, driven mostly by the rising long-term care and special education costs, as well as spending growth.

Democrats used the previous $17.6 billion surplus to pass a nearly $71 billion two-year budget, the largest in state history. It included some one-time spending while also creating programs, such as universal school meals.

The coming two-year budget is expected to be closer to $66 billion without the one-time expenses.

“Democrats have put us on an unsustainable spending path,” said Senate Minority Leader Mark Johnson, a Republican.

“Minnesota Democrats are constantly blaming D.C.,” he added, “but there is no one to blame but themselves.”

After the state’s economic forecast was released Thursday, neither party wanted to acknowledge the budget factors that were inconvenient for their party.

Asked if the DFL’s spending decisions contributed to the future deficit, Hortman said, “No. That is far beyond the period that we budgeted for.”

Republicans, for their part, dismissed the threat of federal funding cuts as “hypothetical” and defended Trump’s tariffs.

“Tariffs are being used as a tool to open up negotiations,” Johnson said. “We will try to get better deals ... across the globe.”

—What happens next?

Legislators have until their May 19 adjournment deadline to figure this out. If they don’t pass a new two-year state budget by then, they’ll have to go to a special session. A budget must be in place before July to avoid a government shutdown.

Walz released a budget proposal in January that would substantially reduce projected state spending on Medicaid waivers for low-income Minnesotans with disabilities. The governor said the state must figure out how to contain its biggest rising costs while still delivering services to those in need.

Hortman also showed interest in evaluating the fast-growing programs, while DFL Senate Majority Leader Erin Murphy said the state should look at programs that rely on but haven’t received a federal match.

GOP legislative leaders have said they’re interested in cutting spending more broadly. They’ve asked agencies to recommend possible cuts, saying they are focused on finding fraud.

The state has more than $3 billion in its budget reserve, also known as the “rainy day fund.” Walz and legislative leaders said they’d rather not tap the reserve, but Murphy said it could be necessary if Congress cuts Medicaid spending and forces states to pick up the difference.

If federal spending cuts are made after the state sets its next two-year budget, lawmakers might have to return to St. Paul to plug the gaps.

“If we have to come back in September and October if the Republicans in Congress and the president screw it all up, we’ll come back,” Hortman said.

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