The Big Beautiful Bill is both a wake-up call and a second chance for Minnesota’s budget reform

Since 2024, Minnesota has consistently spent more than it brings in, with deficits projected through 2029. Expected federal funding cuts in the One Big Beautiful Bill (OBBB) could punch a bigger hole in the budget, forcing legislators to ponder yet again what to do about the state budget.

This represents an opportunity, if lawmakers choose to treat it that way.

Along with commonsense reforms that many Minnesotans support, like Medicaid work requirements, the OBBB offers a second chance to revisit the 2025 session, pursue more sustainable budget changes, and finally get serious about addressing out-of-control spending.

For too long, Minnesota has leaned heavily on Washington, D.C., expanding assistance programs to “maximize federal dollars”. Yet that approach has grown the state budget and left taxpayers to pick up the tab. The OBBB might just be the wake-up call Minnesota needs to adopt a more disciplined approach to spending.

“Maximizing federal dollars” is hurting the MN budget (and taxpayers)

For every $2 the Minnesota state government collects, it brings in $1 in federal funding. However, these funds are rarely free. In nearly every state program where they are used, federal grants must be matched with state money. This has resulted in a concerning phenomenon whereby legislators authorize spending on projects that otherwise do not meet fiscal prudence merely to attract federal matching dollars.

Figure 1: Minnesota governmental Revenues by category

Source: Minnesota Management and Budget

Remember the troubled Southwest Light Rail extension intended to connect Minneapolis to Eden Prairie? The 14.5-mile rail extension was originally expected to cost $1.25 billion and start operating in 2018. The project is now 10 years behind schedule and will cost nearly $3 billion. This could have been avoided if state and local authorities hadn’t been preoccupied with unlocking “free” money from Washington, D.C.

Similarly, costly expansion provisions in programs like Medicaid appear more affordable than they are once federal funds are accounted for.

Consider the following: while general fund spending on Health and Human Services (HHS) — or welfare — has grown by 118 percent between 1997 and 2024, total HHS spending has grown by nearly 200 percent after accounting for federal funds. This widening gap suggests that federal dollars have increasingly cushioned the state’s spending growth. By covering a larger share of costs, federal funding has likely encouraged Minnesota to expand programs beyond what it could sustainably support with state dollars alone.

Figure 2: Actual and Projected Percent change in HHS spending, General Funds vs. All Funds, FY1997-2029, FY1997=100.

Source: Minnesota Management and Budget

But federal dollars don’t fully replace state spending. As a result, HHS expansion is also growing the state’s budget obligations, pushing Minnesota toward fiscal insolvency. Between 2026 and 2029, HHS is projected to be the fastest-growing expenditure and the single largest driver of Minnesota’s budget deficit.

Figure 3: Actual and Projected Percent Change among the four Major General Fund Expenditures, FY1990=100

Source: Minnesota Management and Budget

An opportunity for reform

While federal dollars historically made up roughly a quarter of Minnesota’s state revenues before the Great Recession, that share currently hovers at about 35 percent. This growing reliance on federal funding leaves the state budget—and ultimately taxpayers—in a vulnerable position. As pressure builds in Washington to rein in federal spending and address the national debt, Minnesota faces serious risks to the long-term sustainability of its budget

Figure 4: Federal Grants as a percent of Total Revenues in Minnesota, FY1997-2029

Source: Minnesota Management and Budget

If nothing else, the OBBB should serve as a reminder of the risks inherent in relying on federal funds to prop up growing state budgets. It should spur more serious reform and incentivize Minnesota lawmakers to at least:

  • Limit assistance to the most vulnerable
  • Repeal costly welfare expansions, particularly those enacted in the 2023 session
  • Enact a constitutionally binding limit on future spending growth
  • Root out waste and fraud
  • Slow the growth in long-term care waivers
  • Enact pro-work reforms in other welfare programs beyond Medicaid.