Minnesota state budget is a disaster waiting to happen, thanks to Gov. Walz and the DFL-controlled legislature

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

After Gov. Tim Walz and the DFL-controlled legislature squandered a historic $18 billion mostly expanding numerous government programs and creating new ones, recently published 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 a third higher than the $52 billion spent in the 2022-23 biennium. For the 2026-27 biennium, spending will be $66 billion. This is 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 is likely in for a future of 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 and the $2.9 budget reserve, there is about $6 billion that lawmakers can use to cover this $1.6 billion hole — that is assuming the Department of Revenue collects every anticipated dollar in tax revenue int he 2025 fiscal year.

But 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 healthcare prices — will continue to strain the state budget beyond 2027.

Table 1: 2024 End-of-Session General Fund Estimates

Aging population

Minnesota, much like the rest of the developing world, is facing an aging population. This will require increased spending on services mainly utilized by the elderly, such as costly public healthcare programs. At the same time, dwindling birth rates mean a continuing decline in the Minnesota workforce. This translates to fewer than optimal taxpayers contributing to the state coffers.

The Minnesota State Demographic Center estimates, for example, that while Minnesota had 930,000 residents aged 65 and above in 2020, that number will rise to 1.26 million by 2070. In 2050, these retirees will outnumber children aged 0 to 14 years old, and for every retiree, Minnesota will have 3.4 workers, down from 4 in 2020. This does not bode well for the sustainability of the state budget.

Rising healthcare prices

Partly because healthcare prices rise faster than average price inflation, the Minnesota Department of Health estimates that healthcare 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, by dedicating a growing share of the state budget to healthcare programs (through increased HHS spending), lawmakers have subjected Minnesota’s budget to high price inflation. This makes it more likely that at some point, tax revenues won’t meet ever-increasing spending obligations.

Future Unaccounted spending

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

For example, lawmakers spent $50 million to effectively expand eligibility for cash assistance programs, among other things. Between 2024 and 2027, lawmakers funded these expenses using federal money. But beginning in the 2028 fiscal year, the cost of these changes, which will likely have grown, 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). So, if at some point HCAF funds fail to sustain this new spending, it will have to be shifted to the general fund budget also

A looming federal debt crisis

To top it all, more than half of the money Minnesota spends on welfare programs under the state’s biggest agency — the Department of Human Services — comes from the federal government. With increasing federal debt, however, the United States Congress could reduce state aid—an option that has already been brought up by the Congressional Budget Office (CBO). For Minnesota, this would mean hundreds of millions, if not billions, more in new state spending obligations.

In 2019, 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 on Medicaid. If the share was lowered even further, to say 40 percent, Minnesota would have had to spend an additional $2 billion.

Federal tax hikes wouldn’t be a better option either. Minnesota is already a high-tax state. Higher federal taxes would put Minnesota’s economy, and consequently the budget, in a sticky situation.

The Minnesota budget is on an unsustainable trajectory

In February this year, MMB announced a $3.7 billion surplus for the 2024 Fiscal Year. Walz and lawmakers only spent less than $500 million in the 2024 legislative session, urging caution. Any other year, that should have been news for celebration. Sadly, after the 2023 session spending spree, the damage has already been done.

By spending so carelessly in 2023, Walz and the DFL-controlled legislature have put the Minnesota state budget on an unsustainable path. Currently, the massive state budget is being mostly held together by a COVID-19 surplus. Once that money runs out, everything might just topple over.

Minnesotans and the rest of the country need to be concerned. As a Vice Presidential nominee, this is what Walz will be bringing to the rest of the country.