Executive Snapshot
The February 2026 MMB forecast brings mixed signals for Minnesota school districts. The headline number, a $3.734 billion projected FY 2026-27 surplus, is welcome news on its face. But beneath the surface, the outlook for E-12 education is more nuanced: special education costs are rising faster than expected, enrollment growth is slightly better than forecast, the basic formula allowance faces downward CPI pressure, and a significant structural imbalance looms in FY 2028-29 that will directly affect future education funding decisions.
(FY 2026-27)
| Budget Measure | Nov 2025 Forecast | Feb 2026 Forecast | Change |
|---|---|---|---|
| State General Fund Surplus | $2.465B | $3.734B | +$1.269B |
| Total State Revenues | $66.262B | $67.464B | +$1.201B |
| Total State Expenditures | $70.299B | $70.231B | -$68M |
| E-12 Education Spending | $25.869B | $25.980B | +$111M |
| Special Education (within E-12) | baseline | +$112M | +1.9% |
| General Education (within E-12) | baseline | ~flat | ≈0% |
| Health & Human Services | $25.808B | $25.646B | -$162M |
| FY 2028-29 Projected Balance | est. | $377M | structural gap |
The $3.7 Billion Surplus: What It Means
The FY 2026-27 general fund is projected to end with a $3.734 billion balance, an improvement of $1.269 billion over November. This was driven almost entirely by stronger-than-expected revenues, not reductions in planned spending.
- Individual income tax: +$665M (+1.9%), driven by higher capital gains and interest income
- Corporate franchise tax: +$336M (+5.4%), improved corporate profit outlook
- General sales tax: +$87M (+0.5%), higher taxable sales
- Non-tax revenues: +$91M (+3.5%), higher investment income on state cash
- It does not unlock new education appropriations; those were set by SSHF5 in 2025
- It does not change the basic formula allowance for FY 2026 or FY 2027
- It provides a legislative cushion, but the 2026 session will focus on managing FY 2028-29 structural pressure
- Volatile revenue sources (capital gains, corporate) can reverse quickly under economic stress
E-12 Education Spending: The Details
E-12 education remains the state's single largest spending category at approximately 37% of total general fund expenditures, $25.980 billion in FY 2026-27. The February forecast increased E-12 spending by $111 million (+0.4%), driven almost entirely by special education.
Special education is the primary driver of change in E-12 forecasts. The February forecast increased special education spending by $112 million (+1.9%) for FY 2026-27 and a striking $350 million (+5.1%) for FY 2028-29. Because special ed aid is reimbursement-based, last year's actual costs flow directly into state projections, and FY 2025 actual expenditures came in higher than projected.
- Faster salary & benefit growth for special education staff at local education agencies
- More staff providing special education services statewide
- Rising transportation costs for students with disabilities
- Increased ADSIS participation (Alternative Delivery of Specialized Instructional Services)
- Transportation reimbursement cut to 95% in FY 2026 and 90% in FY 2027 (SSHF5)
Total general education spending is roughly flat for FY 2026-27, but the components carry important signals for multi-year planning:
| Component | FY 2026-27 Change | FY 2028-29 Change | Notes |
|---|---|---|---|
| Basic Formula | +$8M (+0.1%) | -$26M (-0.2%) | Higher enrollment offset by lower CPI |
| Compensatory Revenue | -$3M (-0.2%) | -$60M (-3.3%) | Fewer direct-certified students than projected |
| All Other General Ed | -$5M (-0.3%) | -$7M (-0.4%) | Various smaller streams |
| General Education Total | ~flat (0.0%) | -$93M (-0.5%) | |
| Special Education | +$112M (+1.9%) | +$350M (+5.1%) | Primary driver of E-12 growth |
| Total E-12 | +$111M (+0.4%) | +$257M (+0.9%) |
The basic formula allowance (per-pupil funding) is indexed to CPI with a 2%–3% annual floor/ceiling. The February forecast lowers the CPI trajectory slightly, reducing formula allowance estimates in out-years compared to November. These are small adjustments but compound meaningfully over a 5-year horizon.
| CPI Calendar Year | Fiscal Year | CPI % | Formula Allowance | Change vs. November |
|---|---|---|---|---|
| 2024 | FY 2026 | 2.74% | $7,481 | — |
| 2025 | FY 2027 | 2.69% | $7,683 | -$21 |
| 2026 | FY 2028 | 2.72% | $7,892 | -$26 |
| 2027 | FY 2029 | 2.59% | $8,097 | -$29 |
For Edina's ~9,579 APU, a $29 reduction in FY 2029 formula allowance represents approximately $278,000 in foregone revenue compared to November projections, before accounting for any additional out-year revisions.
Enrollment Outlook
MDE's statewide pupil count projections were revised upward slightly compared to November, a modestly positive development for per-pupil revenue statewide. However, structural enrollment headwinds remain pronounced.
- Aging population and declining birth rates reduce the pool of school-age children
- Reduced international immigration projections: SPGMI reduced net immigration by 500,000/year vs. Census projections
- Private school enrollment declined FY 2024 to FY 2025, partially boosting public district counts in the near term
- Postsecondary Enrollment Options (PSEO) continue to reduce effective pupil unit counts at the high school level
- Statewide decline in enrollment creates long-term downward pressure on general education appropriations
The FY 2028-29 Structural Imbalance
This is the section most relevant to district strategic planning and multi-year forecasting. The February 2026 forecast confirms and deepens the structural imbalance projected for FY 2028-29. The surplus today is real, but the trajectory beyond FY 2027 is a direct threat to K-12 funding.
| Item | FY 2026-27 | FY 2028-29 | Annual % Change |
|---|---|---|---|
| Forecast Revenues | $67.464B | $70.007B | +1.9% |
| Baseline Spending | $68.372B | $72.325B | +2.9% |
| Discretionary Inflation (FY 2028-29) | — | $1.039B | — |
| Total Projected Spending | $70.231B | $73.364B | +2.2% |
| Structural Balance (excl. inflation) | -$2.767B | -$2.318B | — |
| Structural Balance (incl. inflation) | — | -$3.357B | — |
| Projected Balance | $3.734B | $377M | — |
Under current law, the 2027 legislature will face intense pressure to close a multi-billion dollar structural gap. The implications for school districts are significant:
| FY 2024-25 | FY 2026-27 | FY 2028-29 | Annual % Change | |
|---|---|---|---|---|
| E-12 Education | $24.565B | $25.980B | $27.425B | +3.1% |
| Health & Human Services | $20.951B | $25.646B | $27.435B | +7.3% |
| Property Tax Aids | $5.566B | $4.823B | $5.044B | -2.0% |
| Total Expenditures | $69.285B | $70.231B | $73.364B | +1.2% |
- $420M general education cut is already in statute (SSHF5), locked in for FY 2028-29
- Blue Ribbon Commission must find $250M in sped savings or MDE cuts cross-subsidy factor
- Basic formula allowance growth slows further due to lower CPI projections
- Compensatory revenue drops $60M (-3.3%) statewide, affecting higher-poverty districts most
Federal Policy Risk
The February forecast includes some of the most significant federal-level uncertainty in years. Several factors create direct or indirect risk for Minnesota school districts; the forecast itself acknowledges lower-than-normal confidence due to incomplete federal data.
- SPGMI assumes an average effective tariff rate of 14% in its baseline
- Supreme Court struck down IEEPA tariffs Feb. 20; administration responded with 10% Section 122 tariffs (limited to 150 days)
- Tariff uncertainty affects CPI, which drives the basic formula allowance
- Construction materials costs remain elevated; affects facilities capital projects
- Administration suspended/cancelled numerous federal grants, some of which are being challenged in court
- H.R. 1 (reconciliation): SNAP reductions and ACA changes may increase poverty concentrations affecting compensatory revenue
- Title I, IDEA, and federal categorical grants remain uncertain
- Operation Metro Surge (immigration enforcement) may affect EL enrollment and federal program eligibility
This forecast was prepared with incomplete federal economic data due to the October/November 2025 and February 2026 government shutdowns. BEA Q4 2025 GDP data was released late and showed weaker growth than SPGMI assumed. CPI and PCE price indexes for October 2025 were not available. MMB explicitly acknowledges lower confidence in forecast accuracy.
- Fed expected to hold rates through mid-2026, then gradually reduce to 3.0–3.25% by September 2026
- Near-term: higher investment income on district cash reserves (positive)
- Longer-term: rate reductions lower returns on idle cash and bond proceeds
- State non-tax revenue jumped $91M partly due to investment earnings; districts should actively manage portfolio yields now
Economic Context for District Planning
- MN unemployment rose to 4.1% in December 2025, up 1.1 percentage points year-over-year (3rd-highest increase among all states)
- Employment fell in educational services, information, and federal government sectors year-over-year
- Wage and salary income growth: +3.9% in 2025 and 2026, slowing to ~3.8% annually through 2029
- Slower wage growth informs labor cost projections, relevant for collective bargaining modeling
- Housing market constrained by high mortgage rates, elevated materials costs, and low existing home supply
- Districts relying on TIF, new construction, or property tax levies may see lower-than-expected tax base growth
- Edina's strong existing residential base provides relative insulation
- Immigration enforcement may dampen housing activity in some markets, affecting property value trajectories
SPGMI's February 2026 baseline (released Feb. 6, 2026) projects real GDP growth of 2.2% in 2025 and 2.7% in 2026, slightly higher than November estimates. However, the forecast faces meaningful downside risks from tariffs, immigration policy, and equity market volatility.
| Indicator | 2025 | 2026 | 2027-2029 Avg. |
|---|---|---|---|
| Real GDP Growth | 2.2% | 2.7% | ~2.0% |
| CPI Inflation | ~2.5% | 2.5% | 2.4–2.8% |
| MN Unemployment Rate | ~4.0% | est. stable | est. stable |
| MN Wage & Salary Growth | 3.9% | 3.9% | ~3.8% |
| MN Employment Growth | +5,400 jobs | -2,000 jobs | +9,000/yr |
| Federal Funds Rate | held | to 3.0–3.25% | gradual ease |
2026 Legislative Session: What to Watch
The February forecast sets the fiscal parameters for the 2026 legislative session, which convened in mid-March 2026. The $3.734 billion surplus gives the legislature some flexibility, but the structural imbalance and already-locked-in FY 2028-29 cuts will dominate the conversation.
- Blue Ribbon Commission report due October 2026, which will shape 2027 session's special ed funding decisions
- Any modifications to the $420M general education cut scheduled for FY 2028-29
- Federal fund replacement: will the legislature backfill any federal categorical grant cuts?
- Basic formula allowance adjustments if CPI or economic conditions change materially
- Compensatory revenue reform task force (created in SSHF5); recommendations could affect revenue for districts with high free/reduced lunch populations
- Special ed transportation: currently 95%; drops to 90% in FY 2027
- Immigration and enrollment policy: any changes affecting EL aid or pupil unit calculations
- General obligation bonding bill, which affects future debt service and school construction capacity
- Property tax compression and levy interactions as legislature addresses structural imbalance
Key Takeaways & Recommended Actions
- Budget is stable; basic formula indexed to CPI and formula growth intact
- Plan for rising special ed costs and lower transport reimbursement (90% in FY 2027)
- Monitor federal funding for Title I, IDEA, and nutrition programs closely
- Maximize investment returns while rates remain elevated
- Engage 2026 session around compensatory task force recommendations
- Track Blue Ribbon Commission proceedings proactively
- Model $420M general education cut scenario in 5-year financial forecast
- Scenario-plan for reduced special ed cross-subsidy reimbursement
- Structural imbalance makes 2027 legislative cuts to E-12 highly probable
- Build operating fund reserves now to absorb FY 2028-29 budget pressure
- Watch formula allowance trajectory; CPI forecasts revised downward in out-years
- Evaluate opportunities for revenue enhancement and expenditure efficiency proactively
Mert Woodard
CFO/Director, Finance & Operations
Edina Public Schools