Minnesota in OK financial position, but fraud top of mind for politicians

ST. PAUL, Minn. (Minnesota Reformer) — Minnesota’s finances look good for now, but lawmakers will need to address a future multi-billion dollar budget shortfall, Minnesota budget officials announced Thursday.

The state is currently sitting on a $2.5 billion surplus through June 2027, but could end up nearly $3 billion in the red in the following two years. Minnesota is spending more than it generates in revenue, and slow economic growth and increased special education and health care spending are driving up costs.

Minnesota still has a massive rainy day fund, so policymakers aren’t sounding the most severe alarms about Minnesota budget outlook.

The outlook has improved in the nine months since the state projected a $6 billion deficit in 2028 through 2029, as federal policies so far haven’t greatly impacted the state’s finances.

“Policy changes at the federal level, while concerning and even devastating for some Minnesotans, so far have not had as large an impact on Minnesota’s state budget as we worried that they could’ve back in February,” Minnesota Management and Budget Commissioner Erin Campbell said after a budget presentation.

Minnesota lawmakers last year passed a biennium budget, and they aren’t required to do anything budget-related when they return to the Capitol in February. But lawmakers in off-budget years typically make amendments to the two-year budget in what’s known as a “supplemental budget.”

Gov. Tim Walz told reporters to expect budget adjustments in the upcoming session that include similar cuts made in the last budget, when he tried to curb spending on disability services. Lawmakers will have to make some cuts or raise taxes if they want to make a dent in the projected deficit. The Minnesota House is expected to be 67-67 at the beginning of the session, so any deal would have to be bipartisan.

Although federal prosecutors say scammers have likely been defrauding Minnesota public programs for years, this was the first time fraud was discussed extensively during a budget forecast.

Fraud has captured the attention of President Donald Trump, who has been unleashing anti-Somali bigotry this week while his administration is launching an “intensive immigration enforcement operation” targeting the Somali-American community in Minnesota.

Trump’s renewed focus on Somali immigrants comes following the publication of an article claiming — with little evidence — that Somali-American immigrants accused of defrauding Minnesota’s public programs are providing the money to the terrorist group al-Shaabab.

Rising Medicaid costs drove up spending forecasts

Officials predict Minnesota will spend more on health care and human services in the next four years than previously expected. In 2024 and 2025, the state spent a total of around $21 billion on health and human services. In 2026 and 2027, that number is forecasted to jump to $25.8 billion and then $27.6 billion in the two years after that.

Underscoring Minnesota’s worrisome demographic trends, health and human services is on track to surpass education spending in a few years.

The cost is driven largely by the state’s Medicaid program. Minnesota pays around 36% of Medicaid costs, while the federal government covers the rest. Minnesota is grappling with an aging population in need of more care — Medicaid covers the poor and disabled but also nursing home care for the elderly — as well as rapidly increasing health care costs.

Campbell said that human services fraud or actions from the government on fraud do not factor into their budgeting process at all. In other words, they do not account for the possibility that current efforts to crack down on fraud could help decrease future spending.

She added that Minnesota’s rising costs aren’t because of fraudulent activity: “I would not attribute it to fraud.”

How much Medicaid state money has been defrauded is an open question, though the answer seems to be, at minimum, millions.

Walz said that he expects that a third-party audit of 14 Medicaid programs will give a better picture of how much fraud has affected the state’s finances. He seems to have misunderstood how the audit — first announced via confusingly worded press release — actually works, though.

Optum, a third-party auditor, will review, beginning this month, claims as they are submitted and pause them — for up to 90 days — only if “an anomaly is detected” and needs review, Minnesota’s Department of Human Services has said. Walz indicated incorrectly that the audit shuts down the 14 programs for 90 days, after which, he said, “We’ll get the audits back.”

“We have third-party auditors out there,” said Walz. “We shut the program down for 90 days. We will have the first clear picture, I would argue, in Minnesota history of exactly what the extent of this is.”

The drive in Medicaid spending forecasts is largely from higher costs in direct basic care — think: going to the doctor’s for an injury or illness — which leads to higher fees that governments pay to insurance companies to cover Medicaid recipients.

The other culprit of higher health care spending is long-term care waivers — programs that allow the elderly and disabled to live at home or in group homes and get assistance instead of being institutionalized. DHS is addressing fraud and waste in long-term care by pausing payments for Integrated Community Supports providers, a Medicaid waiver program for disabled adults, as well as hiring Optum to review payments for the 14 Medicaid programs.

Walz vs. Demuth

Officials quickly pointed fingers at who was to blame for a potential future budget deficit. Walz and Democrats, unsurprisingly, blamed Trump. GOP House Speaker Lisa Demuth and Republicans, unsurprisingly, blamed fraud, and, by extension, Walz.

The public received its first glimpse of what is likely to be a combative relationship in the upcoming session between Walz and Demuth. Both are running for governor next year and they both hold high-level positions that will influence the legislative session. Walz and Demuth, even though they won’t admit it, will be using their elected positions to campaign against one another.

Walz said Trump’s policies are to blame for Minnesota’s projected deficit.

“The uncertainty that’s being reflected, the chaos that’s coming out of Washington, the things that are happening there — we can’t control that. But in Minnesota, we can control the ability to do what we do every single year: create good, solid budgets based on factual data,” Walz said.

The governor, who is running for a third, four-year term, began his budget remarks by condemning Trump’s xenophobic remarks about Somali-Americans, whom he called  “garbage.”

Walz then challenged Minnesota Republicans to condemn Trump’s remarks.

Demuth didn’t condemn Trump’s comments about Somali-Americans, but said that “there is not an entire community that is bad and there is not an entire community that is good.” She emphasized that the state needs to hold people defrauding Minnesota’s programs accountable and laid the failure to do that at Walz’s feet.

She also blamed the deficit on the DFL’s 2023-2024 trifecta, when they spent down a $17 billion budget surplus.

“We are, as it has been said by the governor, a very generous state. That doesn’t mean, though, that we should sit back and turn a blind eye when people are taking advantage of Minnesota’s generosity,” Demuth said. “We have, again, both a spending problem and a fraud problem.”

Federal uncertainty puts budget predictions at risk

Federal policies are fleeting, which puts Minnesota’s budget predictions at risk of error. Officials said that uncertainties around trade, tariffs and immigration could impact Minnesota’s economic outlook.

MMB said that even though trade uncertainty has improved since April, tariff levels have frequently shifted. The overall tariff rate is about 18%, and this can create uncertainty for consumer prices and inflation.

The Trump administration’s immigration policies also affect Minnesota’s economy. The state’s unemployment rate rose to 3.6% in August. Without an in-flow of migrants internationally or domestically, Minnesota’s employers might struggle to fill jobs. Some industries are highly dependent on migrants, and costs for employers may go up due to labor shortages.

The S&P projects that net international migration will be 500,000 lower each year relative to Census projections during all four years of the Trump administration.

(Story written by Michelle Griffith and Alyssa Chen – Minnesota Reformer)