Governor Walz releases budget proposal for FY2026-2027

Today, Governor Walz held a press conference to release his budget proposal, calling it “responsible” and highlighting features aimed at balancing the budget. The November 2024 budget forecast showed higher-than-expected spending and a structural deficit leading into the FY 2026-2027 biennium, ultimately leading to a negative balance in the 2028-2029 biennium. The Governor’s newly proposed spending plan amounts to just under $66 billion, curbing some costs following the historic spending passed in 2023 under the Democrats’ legislative control.

The next biennial budget cycle starts July 1, 2025.

Budget Cuts and Increased Revenues

Major cuts to the state budget for FY 2026-2027 include:

• Reducing the growth of disability waivers - $348 million in total.
• Eliminating alternative teacher compensation revenue and nonpublic pupil aid - $187 million.
• Realigning funding sources for HHS and the Metropolitan Council - $114.9 million.
• Eliminating base funding for Business Development Public Infrastructure (BDPI).
• Eliminating Local Government Cannabis Aid.

In total, the cuts to state spending equal $907 million between 2026-2027. In addition to spending cuts, the Governor’s budget also includes increasing state revenues during FY2026-2027 from a number of sources:

• Cutting the state sales tax by 0.075% but expanding sales tax for certain professional services - $185.2 million.
• Increasing the HMO surcharge from 0.6% to 1.25% - $173 million.

The net impact to the state budget from the Governor’s proposal would be a net increase of $573 million between 2026-2027 and $1.7 billion for 2028-2029. Given these changes, the general fund balance is projected to be $2.1 billion at the end of the 2026-2027 biennium. However, a negative balance of $495 million is still forecasted at the end of the 2028-2029 biennium.

The next economic forecast will be released in late February, after which the House and Senate will put together their own budgets. In order to avert a government shutdown, both chambers will need to reach a spending deal and pass it along to Governor Walz for his signature before July 1st.