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Minnesota's state budget outlook looks a bit brighter than it did late last year, but officials say there are still many unknowns that could alter their projections — including the federal government’s effort to hold back money meant for social services.

State finance officials on Friday projected Minnesota will see a $3.7 billion surplus over the next 16 months, a 

$1.3 billion improvement over the last outlook

. Longer term forecasts show a $377 million surplus for the two years after that, dramatically better than the nearly $3 billion shortfall through mid-2029 projected in the prior estimate.

Still, officials warned that federal immigration policy, changing tariffs and rescinded federal funds could dramatically cloud the state’s financial future.

"There is good news in this forecast, but significant risks do remain,” Erin Campbell, commissioner of Minnesota Management and Budget, told reporters. "The reality is that it wouldn't take much to have $377 million in a positive balance end up being a negative number in the next few months.”

Campbell noted many unknowns remain as the state deals with on-and-off-again tariffs, federal funding changes and the still-unfolding economic impact of the surge of federal immigration agents in the state the past two months.

While the budget numbers are better, the 

 warns of slower payroll growth in the state as Baby Boomers retire, birth rates decline and international immigration recedes.

“Without sustained worker inflows either from international immigration or domestic migration, Minnesota employers may struggle to fill jobs, potentially slowing the growth of total wage and salary disbursements” and hampering economic growth, the report cautions.

The report also acknowledges that “Minnesota’s economy has been affected by the recent immigration enforcement actions, Operation Metro Surge. Retail sales, employment, tourism, the residential real estate market, and other sectors of the state’s economy may show effects. Data to evaluate any effects on the state’s economy will not be available for several months."

Campbell said while the state is in good shape, lawmakers need to be prudent in spending decisions to avoid a “future fiscal cliff.”

The state’s budget and economic experts, she added, will recommend “policymakers should, at a minimum, strongly consider offsetting any new spending with spending reductions."

Gov. Tim Walz said he would present the Legislature with a “measured supplemental budget” request sometime in the next month, although he added that passage of a public works bonding bill was his top priority. “Our goal is to keep Minnesota on solid financial footing.”

The budget outlook dictates what could get done at the Capitol this year.  This is the last substantial glimpse into state finances lawmakers will get before they ramp up the work of the legislative session.

Heading into this session, lawmakers faced billions of dollars in requests for local construction projects and hundreds of millions in potential updates to conform state tax law to federal policies, including no tax on tips or overtime. 

Proposed school safety measures are a priority after a late-summer shooting in Minneapolis. Efforts to send out grants to small businesses affected by immigration actions rank as important to some lawmakers. So is rent relief for tenants at risk of missing monthly payments.

Officials also continue to struggle with the rapidly rising costs of providing special education in Minnesota. 

State Budget Director Ahna Minge on Friday noted that special education costs continue to rise significantly faster than earlier projections. Data show that costs grew 10 percent last year compared to the initial 6 percent forecast. 

State spending is expected to grow from $1.6 billion in 2020 to 3.6 billion in 2029, she said, adding that forecasters expect 9.5 percent annual growth from 2025 to 2029.

The uncertainty around federal funding is also making it harder to make a budget. 

Earlier this week, Vice President JD Vance announced that the Trump administration is temporarily halting $259 million in Medicaid funding to Minnesota meant to reimburse claims for certain services over concerns about fraud. 

In January, the federal Centers for Medicare and Medicaid Services warned it could withhold funding from Minnesota for 14 programs it said were at risk of fraud. That could result in a $2 billion hit to the state if that threat is carried out. Minnesota would have to decide whether it could use state funds to pay for programs involved or cut them.

The Trump administration also froze other federal funding streams for child care funding, nutrition assistance and small business loans. Some of those have been reinstated after courts intervened. 

Another shift since the December economic forecast stems from the federal immigration enforcement surge in Minnesota stretching over several months. The Trump administration sent thousands of agents to the state, initially in the name of fighting fraud. 

Small businesses, particularly those owned by immigrants and people of color, have said the surge came with significant financial strain. They had to limit hours, or close their doors due to enforcement actions. Some workers decided against leaving their homes due to fear of arrest.

What could that mean for proposals this session?

Democrats hold a one-vote edge in the Senate and the House is tied. That means for any bill to move forward, it needs bipartisan support. That’s especially true for for a bonding bill, which needs 60 percent support in each chamber to pass to allow the state to sell debt to finance public construction projects.

The forecast serves as a reality check. Lawmakers came in with a long list of priorities, many with a price tag. If the outlook is worse than it was previously predicted, lawmakers will have to prioritize or put up new revenue raisers — like taxes or fees — to offset extra state spending.

Any significant federal funding cuts could force the state to come up with money to bridge the gap to pay for services or decisions to stop offering them.

Democrats and Republicans came in with different ideas about where any extra money should go. For Republicans, aligning state tax law with the new federal tax code is a must-do item. 

“When we're looking at that tax conformity, the whole idea would be to make things more affordable for Minnesotans, as we have seen our costs rise and other things that make it harder here in our state,” said House Speaker Lisa Demuth, R-Cold Spring.

The price tag for full tax conformity is hundreds of millions of dollars — so there would have to be cuts to current spending or other offsets to fund it.

Meanwhile, Democrats said the state should offer financial help to those adversely impacted by immigration actions, especially if the federal government won’t. They also said they’re focused on passing a construction projects bill and perhaps helping counties upgrade old technology systems.

“This is a statewide issue, even though some of my colleagues don't recognize it,” said Senate Majority Leader Erin Murphy, DFL-St. Paul. “And when we have had statewide crises in the past, we've come together to solve them for the people that have been impacted.”

Lawmakers still might be hesitant to go very far if it creates or exacerbates a possible shortfall later.

Lawmakers have until May 18 to finish their work.

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While the budget numbers may be better, the economic report accompanying the update warns of slower payroll growth in the state as Baby Boomers retire, birth rates decline and international immigration recedes.

Lawmakers got an update on what’s on the horizon for Minnesota’s budget and economy. The forecast is complicated by in-limbo tariffs and impacts of surged federal immigration action.

Minnesota’s economic outlook improves with $3.7 billion near-term surplus, though uncertainty looms

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