Federal uncertainty and inflation lead to a gloomy Minnesota budget forecast

Yahoo

07-03-2025

Gov. Tim Walz takes questions following the release of the state's November budget forecast in December 2024. Photo courtesy of Minnesota House Public Information Services.
Minnesota's budget agency on Thursday said stubborn inflation is causing the state's looming multi-billion dollar deficit to grow, while providing a snapshot of Minnesota's current economic outlook.
But all of that could be quickly upended by President Donald Trump's sweeping economic policies and slashes to federal spending.
In the remaining 10 weeks or so of the legislative session, lawmakers will work in earnest to craft a two-year budget that will likely top $60 billion, funding everything from roads and schools to parks and social services. It will be a difficult feat with swiftly changing federal policies, Minnesota's split Legislature and entrenched partisanship.
Here's some takeaways from Thursday's forecast.
Budget analysts project that state lawmakers will have a $456 million budget surplus to craft their two-year budget — $160 million less than November estimates.
Minnesota's increasing costs are expected to outpace revenue, potentially causing a nearly $6 billion budget deficit during the two years beginning in July 2027 — $852 million worse than November estimates, largely due to higher-than-expected inflation.
This is all quite a contrast from two years ago, the last time the Legislature gathered to craft a budget. Then, the Democratic-Farmer-Labor trifecta approved a $72 billion budget fueled by a $17 billion surplus, a large increase in state spending that included lots of one-time expenses.
Minnesota Management and Budget now says lawmakers won't enjoy a large cash heap like they did two years ago, and lawmakers need to be careful about ongoing spending, otherwise Minnesota could end up nearly $6 billion in the red.
What's causing it?
Increasing costs of disability services and special education are still the biggest drivers of the projected deficit.
Trump's policies, including tariffs, tax and spending cuts and deportations, as well as the policy uncertainty and chaos that are his forte, could depress business activity and erode consumer confidence, but at the moment it's not clear exactly what cocktail he's brewing.
Minnesota lawmakers will have to draft a budget without knowing the full impact of Trump's policies. Since taking office, Trump and Elon Musk's Department of Government Efficiency have laid off about 62,530 workers over the past two months from the federal government. Minnesota is home to 18,000 civilian federal employees.
Trump has also proposed sweeping new tariffs on Canada, Mexico and China; Trump said Thursday he is delaying the new tariffs on Canada and Mexico another month after stocks tumbled when they took effect earlier this week.
Disruptions from Trump's attempts to freeze federal funding have also impacted several Minnesota programs.
Minnesota Management and Budget Commissioner Erin Campbell was at times understated during a budget presentation Thursday. 'In the weeks and months ahead, Minnesota policymakers will need to decide how to account for the potential impacts of federal actions and the growing projected deficit in the planning years.'
At other moments, Campbell was blunt: 'The impact on the state budget could be really devastating.'
About one-third of Minnesota's budget comes from the feds, and in fiscal years 2026-2027 MMB projects the state will receive $45 billion in federal funds — over half of which includes Medicaid.
Last week, the U.S. House passed a budget resolution that calls for $880 billion in cuts to programs overseen by the House Energy and Commerce Committee, which includes Medicaid.
About 1.2 million Minnesotans are on Medicaid, and if Minnesota wants to ensure all these people keep their health care, we would be on the hook to fill in any gaps that federal funds don't cover. This means lawmakers would need to make significant cuts to coverage or elsewhere in the budget — or increase taxes.
Walz said Thursday that the state will need to make tough decisions to rein in rising spending. In January, Walz proposed a budget that included slowing spending on disability services and proposed changes to the sales tax that would shift the tax burden on wealthier Minnesotans, while generating more revenue for the state.
But Walz said he would rethink his proposed budget if Congressional Republicans cut Medicaid.
Thanks to what the Department of Human Services calls a 'coding error' that goes back a decade, the federal government paid $113 million in reimbursement for seven mental health facilities. The problem: They are not eligible for federal reimbursement, which means the state will have to repay the money.
'I am proud of our … staff at DHS for detecting a decade-old coding error in our billing system and taking immediate action to diagnose the problem and then fix it. In the process, we verified that all claims paid out by DHS were accurate and for legitimately provided treatment services,' said Shireen Gandhi, the acting commissioner of DHS, in a statement.
Because of the 'improperly claimed payments,' as MMB calls them, however, the state is now on the hook for $113 million.
State Budget Director Ahna Minge, when asked about the improper payments, said the budget forecast reflects a 'set up with the federal government to apply the right payment source to the cost,' noting that none of the payment amounts were incorrect but only from the wrong source.
The next election might be 19 months away, but it's never too soon to hit the opposition. Gov. Tim Walz blamed Minnesota's grim economic outlook on one person — Trump.
'There's a storm at the federal level, and that storm is Donald Trump,' Walz said. 'That's the thing that's changed between November and today's numbers.'
Minnesota was already facing a multi-billion dollar deficit in the long term, however, before Trump took office, thanks largely to increasing cost of health care and special education.
Walz has floated running for president in 2028, and Minnesota going from a multi-billion dollar surplus to a multi-billion dollar deficit during his tenure wouldn't be a great talking point.
Right on cue, Republicans blasted Democrats for the stark difference in where Minnesota stands now compared to two years ago, when federal COVID money and improving economic conditions led to the big surplus.
'Republicans are ready to work on a responsible and balanced budget that's going to fund our priorities. It will protect vulnerable Minnesotans, yet we're going to address the fiscal disaster that Democrats in the state of Minnesota have created,' House Speaker Lisa Demuth, R-Cold Spring, said. 'We can't take time blaming a new administration for problems that were caused over the last two years under one party.'
Senate Minority Leader Mark Johnson, R-East Grand Forks, pushed back on the idea that Trump's policies are causing chaos for Minnesotans.
'Let's address (the deficit) first before we start getting into the hypotheticals of what's going on in D.C.,' Johnson said. 'The reality is that we have issues right here in the state right now.'
Senate Majority Leader Erin Murphy has used a salty tongue to get her point across lately, and Thursday was no exception: 'Trump, Musk and the Republicans in Congress have got to pull their heads out of their asses and get to work for the people of this country,' said Murphy, DFL-St. Paul. 'The Democrats here will continue to stand up for all Minnesotans, and we will pass a balanced, equitable budget that does everything we can to protect Minnesotans from Trump's chaos.'