Ramstad: Budget, political constraints signal big fight ahead in Minnesota

In the next six months, we’ll see where power truly lies in Minnesota.

State lawmakers, and Minnesotans whose work depends on funding from the state, wait for the December update on the state budget the way a sprinter listens for the starting gun.

Those people expect to see revenue exceed projected spending, which is historically what has happened in non-recessionary times. And then, Democrats will talk about new things to spend on and Republicans will call for tax cuts.

This year’s update, which happened Wednesday, did not follow the norm. The revenue and spending numbers were much tighter, especially compared with two years ago when the state was swimming in a $17 billion surplus accumulated over several years and was being set against a two-year budget of $50 billion.

This comes on top of the DFL losing its grip on all the levers of decisionmaking in St. Paul. A 50-50 split in the Minnesota House means compromise will be necessary as lawmakers forge plans for taxes, a two-year budget to start next July 1 and separate capital spending.

Looming above all that, and left out of Wednesday’s projections, is the change in Washington as President-elect Donald Trump’s new administration promises a much tighter line on federal funding of state programs, including political appointees reviewing grants to states.

Minnesota has become more reliant on U.S. funds over the last decade. For instance, cuts from Washington will create big challenges to the state’s health programs, which get 45% of their funds from Washington.

The pieces all add up to a mighty fight when the Legislature convenes next month. While power means one thing in a time of financial abundance, as existed two years ago, it means a far different thing in a time of constraint.

For the upcoming 2026-27 fiscal biennium, the immediate focus, legislators could go on autopilot, leave every line item and tax program untouched, spend around $65 billion and wind up with $616 million left to carry into the next two years.

If left untouched into 2028-29, however, projected revenue will fall short of projected spending by around $5 billion. A lot will change before July 1, 2027, when that fiscal year starts, but three forces have converged to create the projected shortfall.

The first is the state’s slow population growth, the slowest in history and currently half the nation’s rate. The others are slowing wage growth, and the resulting lower spinoff of income taxes, and surging costs for the two things the state spends most of its money on — kids and old people.

Though there is no pressure to erase a deficit projection 2 ½ years away, Gov. Tim Walz signaled that many people will be disappointed by the trade-offs ahead.

Neither he nor legislative leaders announced targets for the 2026-27 budget that would help reduce the deficit projected for 2028-29. Everything will be on the table, though, he said.

“I don’t think you can come into a negotiation being disingenuous and saying, ‘Well I’ll do everything except this,’ ” Walz said. “We’re not going to compromise on values. We’re going to make sure that we protect people and the things we need. We’re also going to have an honest conversation ... to get that proper structural balance and make sure we’re growing for the future.”

Many governments across the state and country are facing such a reckoning. In part, that’s because they lost pandemic-era federal assistance they applied not just to emergency needs but also ongoing ones. Also, the spate of inflation in 2021 and 2022 raised the cost of government just as it did Americans’ personal costs.

Add to all that the growing concern that federal debt — now equivalent to one year of the nation’s entire economic activity — is becoming unsustainable. The Trump administration’s moves on taxes, tariffs and spending will be gauged for their effect on the debt, particularly by bond market investors who hold sway over the cost of government borrowing.

Minnesota’s legislators and Walz are facing a problem similar to what Trump and the new Republican-controlled Congress are contending with nationally: The costs that are running out of control are in programs or services that are politically popular and difficult to cut.

On the national level, there’s little that will reduce the annual deficit and ongoing debt without cuts to entitlement programs like Social Security and Medicare.

In Minnesota, the giant programs are education and health and human services, which combined account for three-fourths of the state’s annual budget. Of all costs in state government, the ones rising most quickly are special education for children and disability and long-term care services for elderly people.

By the end of the decade, spending on special education will have doubled to nearly $7 billion, and another doubling will have happened in disability eligibility, reaching more than 80,000 Minnesotans.

“We’re an aging population. We’re seeing more kids with mental health issues and autism. Those things are massively expensive,” Walz said.

As for potential spending cuts, he said: “That’s what a legislative session is for.”