What federal spending cuts could mean for Minnesota
Minnesota gets a substantial amount of funding from the federal government, particularly through the Medicaid program. Under a resolution passed by U.S. House Republicans, federal funding for Medicaid could be significantly reduced for all states. This could spell more trouble for the Minnesota state budget.
The November 2024 budget forecast estimates a $5.1 billion deficit in the 2028-29 biennium. This is mainly being driven by Medicaid spending growth. Federal spending cuts, if enacted, will transfer a substantial share of Medicaid spending onto the general fund budget. This would mean higher general fund spending on Medicaid beyond current projections.
The looming $5.1 billion budget deficit for the 2028-29 biennium would grow, likely by billions. The 2026-27 biennium budget outlook could also worsen, potentially turning the currently estimated $600 million surplus into a billion-dollar-plus deficit as well.
Medicaid funding scheme
Run by the Minnesota Department of Human Services (DHS), Medicaid — or Minnesota’s Medicaid Assistance (MA) program — is a health insurance program for low-income Minnesotans. MA covers children, adults, the elderly, and people with disabilities, and is the biggest welfare program and the largest spending program under Health and Human Services (HHS).
Generally, the federal government matches state MA funding using the Federal Medicaid Assistance Percentage (FMAP), which takes into account average per capita income for each state. The FMAP ranges from a minimum of 50 percent for high-income states to over 70 percent for low-income states. For the 2025 fiscal year, Minnesota’s FMAP is 51.2 percent. Mississippi — the poorest state — has the highest FMAP at 77 percent.
Overall, the federal government contributes over half of Minnesota’s total MA spending. In the 2024 fiscal year, the federal share of MA spending was 59 percent. Federal funds accounted for 55 percent of total HHS spending in the same year.
Owing to the outsized share of federal funds in Medicaid, federal revenues make up a significant share of total state spending and revenues. According to Minnesota Management and Budget (MMB), federal funds make up 34 percent of total revenues and 31 percent of total spending in the 2024-25 biennium.
Table: Federal Share of Minnesota revenues and spending
Simply put, any reductions in federal spending will have significant ramifications for the Minnesota state budget.
What is being proposed
As the Star Tribune reports, how much the federal government ends up cutting from Medicaid will depend on how the budget plan involving resolutions passed by U.S. House Republicans evolves. But as Minnesota DHS Chief Financial Officer Dave Greeman told Minnesota lawmakers last week:
“it’s not unreasonable to say” that the U.S. House committee overseeing Medicaid could make cuts to the program between $600 billion up to the full $880 billion.
If that happens and the cuts are distributed proportionately across states, he said Minnesota could see a $1.2 billion to $1.6 billion reduction in fiscal year 2027, with bigger losses over time.
These cuts could potentially be achieved through the introduction of Medicaid work requirements, capping Medicaid per capita spending, or converting Medicaid’s current open-ended matching system to block grants. Another proposal, according to Greeman:
would eliminate an enhanced federal match rate for the Affordable Care Act expansion. The state gets a 90% federal match to serve that expanded population of Minnesotans. The match rate could drop to around 51%..
Federal spending cuts would grow the Minnesota budget deficit
Despite starting the 2023 legislative session with an $18 billion surplus, Minnesota is facing a potential deficit of $5.1 billion in the 2028-29 biennium. Excluding inflation, the deficit declines, but is still over $3 billion. The upcoming February 2025 forecast will reveal whether those numbers have improved or not.
AS MMB noted in the November 2024 forecast, two spending categories are driving general fund spending growth. These are E-12 education and HHS, with HHS contributing the majority of growth. Broken down further, MA spending is driving HHS spending growth.
General fund MA spending is expected to be up over $3 billion in the 2026-27 biennium compared to the 2024-25 biennium. MA will grow by nearly another $3 billion in the 2028-29 biennium per MMB estimates.
Table 2: Per Biennium Growth
Federal spending cuts, if enacted, could mean even higher growth in MA beyond the current forecast as Minnesota begins to shoulder a larger share of MA spending.
The looming $5.1 billion budget deficit for the 2028-29 biennium is expected to grow, likely by billions. Additionally, the 2026-27 budget outlook could worsen, potentially turning the currently estimated $600 million surplus into a billion-dollar-plus deficit as well.