Yesterday’s budget forecast confirmed what American Experiment has continuously warned about — Minnesota’s budget is unsustainable. Unfortunately, the forces that are putting pressure on the budget are ongoing, and will likely only get worse. Ergo, if lawmakers do not restructure spending, especially on welfare programs —, Minnesota’s budget woes are here to stay.
What is going on with the budget? It is worse than the headline numbers show
Certainly, Minnesota ends the 2026-27 biennium with a balance — or surplus— of $616 million. However, the headline numbers leave out the fact that there is a structural deficit within that same period. Here is a look at the 2026-27 biennium revenue and spending forecast.
In the 2026-27 biennium, Minnesota will spend $67 billion in general funds. This is up nearly $600 million since the February forecast. However, the state will only collect $64 billion in revenues — down nearly $1 billion since the February forecast.
There is a $3 billion structural imbalance — up from $1.5 billion since the February forecast — that starts in the 2026-27 biennium and grows bigger in the 2028-29 biennium.
What does this mean? Unlike regular deficits, which are usually caused by temporary fluctuations and clear due to changing conditions, structural deficits indicate that the underlying ability of the tax system to support the state government is compromised. Without structural changes, these deficits will persist — even in good economic conditions — and are likely to worsen.
Growing welfare spending is mainly to blame
In the 2023 legislative session, lawmakers allocated over $6 billion in new funds to Health and Human Services (HHS), a category that mainly houses spending on numerous welfare programs. While Minnesota spent $15 billion on HHS in the 2022-23 biennium, that figure is slated to reach $21 billion by the end of the 2024-25 biennium.
The current forecast puts Minnesota’s HHS spending in the 2026-27 biennium at $24 billion. HHS is expected to grow further and reach nearly $27 billion in the 2028-29 biennium. In the 2028-29 biennium, HHS will cost almost the same as E-12 education.
Figure: Spending on E-12 Education and Health and Human Services (HHS), in Billion $
In short, HHS is the biggest driver of spending growth in the budget as Minnesota Management and Budget (MMB) notes. In fact, half of every dollar of new estimated spending in the 6-year budgeting period between the 2024 fiscal year and 2029 fiscal year will go to HHS.
Welfare spending will continue to grow
Pressure on HHS services will likely persist well beyond 2029 due to several demographic and economic risks that American Experiment has detailed in a recent report. Consider the following about the state’s demographics.
“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.” And by 2050, the population of retirees (those 65 and older), will outnumber that of Children aged 0 to 14.
What does this mean?
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.
Similarly, healthcare prices — which drive human services spending — are expected to rise at a higher rate than general price inflation. Coupled together, rising healthcare prices and an aging population will mean growing pressure on the budget well beyond 2029.
Welfare reform is necessary
Minnesota’s budget woes are largely due to one factor — growing welfare spending. If lawmakers do not restructure the welfare system, the budget problem will continue and likely worsen as several factors beyond the control of state policy — such as the aging population — continue to put more pressure on tax revenues.