Top-Line Highlights
- The general fund balance at the end of the current biennium FY2026-27 is now projected to be $3.7 billion, $1.3 billion higher than was forecasted in November 2025.
- The general fund balance for the FY2028-29 biennium is now $377 million, $3.3 billion higher than was forecasted in November 2025.
- While budget balance conditions have improved, there is still a significant structural imbalance
Minnesota Management and Budget (MMB) released the much-anticipated February 2026 forecast last week. It shows a significant improvement from a year ago, when the February 2025 forecast showed a negative $6.45 billion deficit for the FY2028-29 biennium.
A Structural Imbalance Remains
While the general fund balance has significantly improved, there remains a sustained and growing structural imbalance, which is the difference between the revenue the state takes in and its expenditures. This means that a leftover positive balance from the FY2026-27 biennium will be reduced from its projected $3.7 billion level to a mere $377 million, due to this structural imbalance and inflation.
In percentage terms, revenue growth between FY2026-29 is estimated to be 1.9% annually, while expenditures are expected to grow 2.2% annually. So, while the forecast paints a rosier picture of the overall deficit, large spending increases remain unlikely this year due to the growing structural deficit.
Source: February 2026 Budget and Economic Forecast.
Improvements in the Economic Outlook
The budgetary balance has improved for both the current biennium (FY2026-27) and the following biennium (FY2028-29), with the latter moving from a deficit to a positive balance. The primary drivers of the improved economic conditions are tax revenues from capital gains, interest income, and corporate profits. The forecast notes that these are also the most volatile of the state’s revenue sources, suggesting they could swing the other way more easily by the next forecast in November. Another driver of improved conditions is the upward revision of corporate profits, which is buffering against recession fears.
Finally, the report shows that inflation has leveled off from the 8% peak in 2022 to between 2% and 3% in the 2026-2029 period. We note, however, that inflation has been slightly revised upward between the November 2025 and February 2026 forecasts.
Economic Uncertainties
On the labor side of the state’s economy, the unemployment rate—historically much lower than the national average—has been slowly inching up, which may indicate a softening hiring market. In relative terms, Minnesota’s unemployment rate rose 1.1% between December 2024 and December 2025, the second largest increase among all states, and the largest increase outside of a recession since 1976.
The implication for the general fund is that tax revenues from wage income are more stable than those from non-wage income, which adds to budget forecast uncertainty.
Source: February 2026 Budget and Economic Forecast.
Conclusion
- General fund balance condition much improved, but structural imbalance remains.
- Some factors have improved the outlook since the last forecast (tax revenues, corporate profits), but some factors raise concern (increased unemployment, more revenue volatility).
- Inflation has leveled off, but tariff policy, geopolitical conflict, and energy prices may affect future inflation levels.
For questions about this analysis, please contact CGMC Director of Research & Analytics Derrick Miedaner at djmiedaner@flaherty-hood.com.
