Minnesota’s expanding welfare system is a looming threat to budget stability
After lawmakers raised Health and Human Services (HHS) spending in the 2023 session by over $6 billion, welfare is now the fastest-growing expenditure in the Minnesota state budget.
Between 2024 and 2027, for example, over 40 percent of all new general fund spending will go to HHS. And while still behind K-12 education, HHS will account for 35 percent of all general fund spending in the 2026-27 biennium, compared to 29 percent in the 2022-23 biennium.
This should be concerning, particularly for what it means for the future sustainability of the Minnesota state budget.
Potential budget deficits
Minnesota’s state budget is in trouble, and that is mainly due to growing HHS spending.
After lawmakers went on a spending spree in 2023, end-of-session estimates by the Minnesota Management and Budget (MMB), for instance, showed that general fund spending in the 2026-27 biennium would outpace tax revenues by almost half a billion dollars — $1.3 billion after adding inflation. In the November 2023 forecast, that gap grew to $2.3 billion, mainly due to higher-than-estimated HHS spending.
As of the February 2024 forecast, that deficit is down. Still, spending in the 2026-27 biennium is estimated to outpace tax revenues collected in that period by $1.5 billion.
Adding together the surplus from the current biennium (2024-25) — which is now expected to top $3.7 billion — and the $2.9 billion from the budget reserve, there is over $6 billion that can be used to cover the $1.5 billion budget hole expected in the next biennium.
Unfortunately, however, even after plugging that gap, pressure on the budget would likely remain an ongoing issue due to the following reasons, among others:
- future unaccounted spending
- aging population
- rising healthcare prices
- a looming federal debt
Future unaccounted spending
In the 2023 legislative session, lawmakers used special revenue funds to finance some of the additional HHS spending. If and when these expenses shift to to general fund budget, they will worsen pressure on available general fund resources, raising the potential for future deficits.
For instance, in 2023 lawmakers spent about $50 million to expand eligibility for cash assistance programs and increase benefits. Between 2024 and 2027, these changes will be temporarily paid for with federal TANF dollars. But beginning in 2028, the cost of these changes will be shifted to the general fund, increasing spending obligations.
Additionally, in the 2024-27 period, lawmakers financed about $1.4 billion of new HHS spending using revenues from the Health Care Access Fund (HCAF). What does this mean?
If at some point HCAF funds fail to sustain this new Medicaid spending (for instance, due to increased MinnesotaCare spending obligations), it will have to be shifted to the general fund budget, increasing spending obligations even further.
An aging population
According to the MInnesota Demographics Center,
in total, Minnesotans of retirement age (65) and above numbered 930,000 in 2020. This number is expected to roll over 1.26 million in 2070. Minnesota’s oldest residents — those aged 85 and above — are expected to rapidly increase, nearly reaching 200,000.
Overall,
by 2050, the population of retirees (those 65 and older), will outnumber that of
children aged 0 to 14.
Figure 1: Minnesota population pyramid
What does this mean for the budget?
An aging population will require increased spending on services mainly utilized by the elderly, like costly public healthcare programs, while declining birth rates will result in a continuing decline of the workforce and thereby fewer than optimal taxpayers to contribute to these increasing spending obligations. The Minnesota State Demographic Center estimates, for example, that while in 2020, the state had 4 workers for every retiree, that number will drop down to 3.4 by 2050.
This does not bode well for the sustainability of the state budget.
Rising healthcare prices
Healthcare prices generally rise faster than average price inflation. According to the Federal Reserve Bank of St. Louis, average prices rose by 70 percent between 2000 and 2022. Healthcare prices, on the other hand, rose by 110 percent.
Figure 2: Cumulative Percent Changes in Consumer Price Index for All Urban Consumers, (CPI-U), for Medical Care and All Items
Partly due to high inflation:
..the Minnesota Department of Health estimates that Minnesota’s healthcare spending will rise, on average, 5.5 percent per year between 2021 and 2030, reaching $106 billion — $46 billion higher than what it was in 2020 — or “$17,530 per Minnesotan, up from $10,530 in 2020.”
Not only that but 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, lawmakers have subjected Minnesota’s budget to high price inflation, making it more likely that at some point, tax revenues won’t meet ever-increasing spending obligations.
A looming federal debt crisis
The United States federal government has over $34 trillion in debt. That debt is expected to grow further due to rising spending on Medicare, Social Security, and interest.
There are limited ways through which the federal government can stabilize this debt. Among other things, the federal government could
- reduce its share of Medicaid spending, or
- raise taxes
Both of these options could spell trouble for Minnesota, and here’s why:
Currently, the federal government shoulders over half of Medicaid spending for all states, including Minnesota. If the federal government were to reduce its share of spending, states would have to dedicate more tax revenues to maintain their Medicaid programs. For Minnesota, that would likely mean hundreds of millions, if not billions, more in new spending obligations.
In 2019, for example, the federal government’s share of Minnesota’s Medicaid spending was 56 percent, according to NASBO. If the federal government’s share of spending was reduced even to 50 percent, Minnesota would have had to spend an additional $785 million in state funds to maintain the program. And if the federal government’s share was lowered to 40 percent, Minnesota would have had to spend over $2 billion to maintain a similar level of service.
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 state budget, in a more risky position.
Other concerns
Unfortunately, the risks associated with the growing welfare system do not end there. In addition to threatening the sustainability of the budget, Minnesota’s expanding welfare system will also likely:
- crowd out other budget priorities. As welfare programs take up a bigger share of government resources, they leave fewer resources for other, potentially more vital, services like public safety and transportation.
- Crowd out the government sector: An overall bigger state government will crowd out the private sector, making Minnesota’s economy less productive.