If the mark of a successful conclusion to a difficult negotiation is nobody leaving happy, the 2025 budget deal might be one of the most successful budget agreements in state history. Leaders of both parties and Governor Walz expressed satisfaction with their ability to reach an agreement before the constitutional deadline and -- perhaps surprisingly – delivering on making a major dent in the out-biennium projected deficit. But crossing the finish line relies on acceptance of compromises, decisions, and actions that many in both parties find highly objectionable and consider anathema to their ideals, principles, and morality itself. Meanwhile, seemingly endless possibilities exist for legislative hostage taking and related end of session mischief given an essentially tied legislature. This is already materializing with a Senator's absence delaying passage of the Senate labor bill.
Budget Bottom Line:
• A reduction in the FY 26-27 budget of $283 million and $1.8 billion in the out-biennium. Ninety percent of the projected out-biennium deficit is erased leaving a negative budgetary balance of $290 million in FY28-29 -- excluding inflation.
• A 45% reduction in the projected FY 28-29 structural imbalance (current expenditures in excess of current resources) to $2.2 billion (again excluding inflation).
• $1.9 billion left on the bottom line in FY 26-27.
A few notable agreement details extracted out of the press conference:
• Termination of MinnesotaCare coverage for adult undocumented immigrants at the end of the calendar year (children still covered).
• Reduction of 0.1% in employer taxes for Paid Family Medical Leave (apparently without other tweaks).
• No cuts to non-public education.
• Cost of state reinsurance program moved out of state general fund and into Health Care Access Fund paid for by new fees on insurance companies.
Much more as additional details and developments become available.
Some Initial Reactions
The House has some work to do – According to Senate Fiscal’s comparison of Senate/House/Governor targets, the House has to come up with about $800 million in additional spending reductions to meet the out-biennium target. One relatively stressless thing to do would be to follow the lead of the Senate’s Education Finance Committee’s omnibus bill and temporarily unplug the automatic inflation adjustment to the Basic Education Formula yielding over $600 million of FY28-29 cost savings on paper. “On paper” is the key idea because in reality, barring some recession-induced budget crisis, lawmakers could certainly be expected to either restore the CPI-based inflation adjustment capped at 3% in 2027 or make a biennial appropriation for FY 28-29. The Senate bill turns the automatic inflation adjustment back on in FY 2030. It’s gimmicky but that’s what automatic inflation adjustments make possible.
Some idle Tax Committee math speculation – The global tax target is a $118 million net fiscal impact reduction in FY 25-27 ($190 million net negative impact in the FY 28-29 out-biennium). That target is 3 times and nearly 5 times the House Tax Committee's original budget targets for the forthcoming and out-biennium respectively. Leaders reported the bill will include a repeal of the sales tax exemption on electricity use by data centers. However, that revenue will fund the Governor’s refundable R&D credit proposal reportedly leaving about $16 million for the reduction target. A reportedly “small” increase in cannabis taxation will also be included in the tax bill whose revenues would now flow into the general fund. It’s an increase, but perhaps more justifiable to Republicans based on “negative externalities.” Add all this plus each body’s June accelerated sales/excise tax collection proposals (a.k.a. “shifts”) and shared aid cut interest to the House’s existing tax bill and the target should be covered for FY 26-27 with minimal political indigestion. There are many low/no cost policy provisions in both bills – some that can be dispensed with expeditiously; others more controversial. How much of the latter will be sacrificed on the altar of speed remains to be seen.
How much conferring will conference committees actually do? -- The idea of targets presumes subsequent negotiation and decision making by conference committees on all the details. However, as the press conference indicated, some notable details regarding what will and will not be included affecting targets have apparently been “pre-negotiated.” Despite Speaker Demuth’s comment that the leaders are “leaving the full work to chairs and conference committees,” Representative Hortman’s comment that they “hope to wrap by Monday” with a one-day special session before Memorial Day further suggests the cake has been heavily pre-baked, at least in some budget areas.
Presumably, committee chairs participated in, were consulted with, or at least were warned about these decisions. Even if these target details have been negotiated by leadership in consultation with chairs, anything left to the conference committee negotiation process including no cost and policy provisions would be expected to require some time.
Minnesota’s “two reserve” approach to the budget – The state’s official budget reserve is designed to protect state services in times of economic downturn and unexpected budget shortfalls. For the last few years, the state has supplemented the official reserve by leaving considerable “money on the table” to help mitigate structural imbalances going forward. The $1.6 billion left on the bottom line in FY 24-25 helped mitigate a FY 26-27 structural imbalance that grew from a projected $500 million at the end of the 2023 session to $2.1 billion in this year’s February forecast (both excluding inflation). Once again, the global agreement keeps $1.9 billion on the bottom line to help mitigate a projected remaining structural imbalance of $2.2 billion after this year's proposed budget-cutting actions are taken (again excluding inflation). The result is the presentation of a near budgetary balance over the four-year planning horizon. However, the practice of relying on budget rollovers to make up for chronic structural shortfalls in the state’s fiscal system adds to the risk accompanying whatever economic or federal curve balls may come in our direction.