Trouble ahead

Minnesota’s budget is a disaster waiting to happen.

How does a state go from having an $18 billion surplus to potentially facing a deficit within a year? The answer is reckless spending.  

After Gov. Tim Walz and the DFL-controlled legislature squandered a historic $18 billion surplus mostly expanding government programs and creating new ones, the 2024 end-of-session estimates published by Minnesota Management and Budget (MMB) pegs Minnesota’s budget for the 2024-25 biennium at $71 billion. Adjusted for inflation, this is $17 billion — or one-third — higher than the $52 billion Minnesota spent in the 2022-23 biennium. For the 2026-27 biennium, spending will top $66 billion, 22 percent higher than the 2022-23 biennium budget.  

Unfortunately for Minnesotans, the federal gravy train that pumped trillions into the economy during the COVID-19 pandemic has stopped running. Without spending cuts, Minnesota will likely face future budget deficits.  

Currently, MMB expects Minnesota to collect $1.6 billion less in taxes than it plans to spend in the 2026-27 biennium. Adding together the $3.3 billion surplus from the 2024-25 biennium with the $2.9 billion from the budget reserve, there is about $6 billion that lawmakers can use to cover this $1.6 billion hole — assuming the Minnesota Department of Revenue collects every anticipated dollar in tax revenue in the 2025 fiscal year. Even then, the projected $6 billion balance still wouldn’t fix Minnesota’s budget problem. Long-term factors — such as an aging population and rising health care prices — will continue to strain the state budget beyond 2027. 

Minnesota faces an aging population. This will require increased spending on services mainly utilized by the elderly, such as costly public health care programs. At the same time, dwindling birth rates mean a continuing workforce decline. This translates to fewer than optimal taxpayers contributing to the state coffers.

The Minnesota State Demographic Center estimates Minnesota had 930,000 residents aged 65 and above in 2020 and that number will rise to 1.26 million by 2070. By 2050, these retirees will outnumber children aged 0 to 14 years old, and for every retiree, the state will have 3.4 workers, down from 4 in 2020. This does not bode well for the sustainability of the state budget, especially since Health and Human Services (HHS) spending is already the fastest-growing expense in the state budget.  

Moreover, partly because health care prices rise faster than average price inflation, the Minnesota Department of Health estimates that health care spending will reach $17,530 per Minnesotan in 2030, up from $10,530 in 2020. In that period, public-payer spending is expected to grow faster than private-payer spending. So, lawmakers have subjected Minnesota’s budget to high price inflation by dedicating a growing share of the state budget to health care programs (through increased HHS spending). This makes it more likely that, at some point, tax collections won’t be enough to meet ever-increasing spending obligations.  

The possibility of deficits appears especially likely when considering that a portion of over $6 billion in new long-term HHS spending that lawmakers passed in 2023 was funded by money outside the state budget. Spending obligations will rise even further once these expenses are shifted to the general fund.  

For example, lawmakers spent $50 million to expand eligibility for cash assistance programs. Between 2024 and 2027, lawmakers funded these expenses using federal money. But beginning in the 2028 fiscal year, the cost of these programs will be shifted to the general fund. Lawmakers also financed $1.4 billion of new HHS spending (mostly going to Medicaid) using the Health Care Access Fund (HCAF). If at some point HCAF funds fail to sustain this new spending, it will also have to be shifted to the general fund budget.  

Adding to the concern is that more than half of the money Minnesota spends on its biggest state agency — HHS — comes from the federal government. With increasing federal debt, chances are that Congress could reduce state aid — an option already brought up by the Congressional Budget Office. This would mean hundreds of millions, if not billions, more in new state spending obligations for Minnesota, solely due to DFL-led spending policy. 

In 2019, for example, the federal government shouldered 56 percent of Minnesota’s Medicaid spending. If that share was 50 percent, Minnesota would have had to spend an additional $785 million in state funds to maintain the program. If the share was lowered even further, to say 40 percent, Minnesota would have had to spend an additional $2 billion for its Medicaid program. Federal tax hikes wouldn’t be a better option either. Minnesota is already a high-tax state, so higher federal taxes would put Minnesota’s economy, and consequently the budget, in a sticky situation.  

In February, MMB announced a $3.7 billion surplus for the 2024 Fiscal Year. Yet Walz and lawmakers only spent less than $500 million in the 2024 legislative session, urging caution. In any other year that should have been celebratory news. Sadly, after the 2023 spending spree, the damage has already been done. Currently, the massive Minnesota state budget is mainly held together by a COVID-19 surplus. Once that money runs out, one recession would be enough to push the state into a very deep budgetary hole. The frivolous and careless spending by Walz and the DFL-controlled legislature in 2023 has put the Minnesota state budget on an unsustainable path.