Minnesota’s next two-year budget targets, explained

Gov. Tim Walz and legislative leaders agreed this week to spend nearly all of the state’s $17.5 billion budget surplus, with the largest amount of new money going to tax credits and cuts, infrastructure projects and K-12 education.

Using almost all of Minnesota’s surplus over the next biennium propels spending for fiscal years 2024-25 to $72 billion, with about $2.8 billion set aside for reserves.

Confusingly: The $3 billion Walz and legislative leaders have set aside for tax cuts and credits counts as “spending.” Also, aid to local governments will be part of that $3 billion.

The budget agreement means lawmakers now have an outline they’ll use to finalize spending for the programs and initiatives like a paid family leave program, road, bridge and transit upgrades and tax rebate checks for the majority of Minnesota families.

Lawmakers still have to work on the details, but here’s what we know so far:

So what happened this week? 

At the beginning of the legislative session, the state Senate and House each have their own ideas about how to tax and spend, and Walz has his own budget proposal.  

With the Democratic-Farmer-Labor Party in control of both chambers and the governor’s office, the negotiation was a little easier and came much sooner in the year than usual. House Speaker Melissa Hortman, DFL-Brooklyn Park, Senate Majority Leader Kari Dziedzic, DFL-Minneapolis, and Walz hammered out the broad agreement and unveiled it Tuesday.

Walz said his office and the legislative leaders compromised on various funding areas. His initial budget included $8 billion in tax cuts, but the budget agreement set aside $3 billion for cuts, credits, rebates and aid to local government.

The spending targets would use nearly all of the state’s $17.5 budget surplus, but it would carry the unspent cash into the following biennium, which is what they call the two-year budget cycle around the Capitol. 

A new law requires that the state’s budget office — known as Minnesota Department of Management and Budget — include inflation in spending projections,  which dropped the surplus from nearly $19 billion to $17.5 billion because government, like all things, is getting more expensive.

The majority of the budget surplus — $12.5 billion — is one-time money. It’s sort of like gambling winnings; you can buy something nice with it, but it’s not like annual income, so lawmakers can’t use it to fund ongoing programs.

Again, where is my Walz check?

Hortman at a Tuesday press conference said the $3 billion set aside for tax credits and cuts includes room for “nice-sized” checks, though she didn’t offer specifics. 

Walz’s proposal would send rebate checks to about 2.5 million Minnesotans. His plan included $2,000 checks to Minnesota families with income below $150,000 and $1,000 checks for single filers making less than $75,000.

The $3 billion in tax cuts could also include eliminating or reducing the state’s tax on Social Security benefits. Democrats, some of whom campaigned on eliminating the tax on Social Security benefits, have been at odds over eliminating the tax. Opponents point out fewer than half of Minnesota Social Security recipients pay any tax on their benefits, and the wealthiest Minnesotans would benefit the most. Still, some kind of cut is likely. 

Other likely DFL priorities: A child tax credit to help parents pay for the rising cost of child care, and property tax relief, which has come into focus as people are receiving ballooning property tax bills.

“We will leave it to the tax chairs and the commissioner of revenue representing the governor to negotiate exactly what fits into that bill,” Hortman said.

Republicans criticized DFL lawmakers’ budget targets, saying that they didn’t include enough tax cuts.

“With more than $17 billion in surplus, the paltry amount of tax relief being offered leaves Minnesotans who are already struggling with rising costs behind,” Senate Minority Leader Mark Johnson, R-East Grand Forks, said in a statement.

What else are we getting out of this?

K-12 education is the biggest beneficiary of the spending agreement. Perhaps not coincidentally, the state’s teachers union, Education Minnesota, was a key supporter — politically and financially — of the DFL’s midterm campaign that delivered the trifecta. 

But there are also real concerns that Minnesota’s once-vaunted education system is still struggling to recover from the pandemic. Enrollment has declined, test scores are down, and by many accounts, teachers are burned out and students are struggling with mental health issues.

The budget agreement seeks to ameliorate these problems by increasing education funding by 10% to $23 billion.

Lawmakers have multiple proposals in the works to increase education spending for Minnesota’s 870,000 K-12 students.

One proposal, which is co-authored by Hortman, would increase the general education funding formula by 20% for fiscal year 2024 and tie the formula to inflation in the following years. Under this proposal, funding in fiscal year 2024 would increase from $6,863 to $8,236 per pupil.

Another proposal would increase funding for special education. Minnesota districts are required to provide special education services for students, but they don’t receive enough state or federal funding to pay for it. To pay for it, school districts dip into general education dollars, which often means cutting programs or asking local homeowners for higher property taxes.

Lawmakers call this funding gap the special education “cross-subsidy,” and DFL lawmakers have proposed eliminating it, which costs about $1.6 billion for the 2024-25 biennium.

What are some other big-ticket items?

Housing is another big winner. The agreement adds $1.2 billion to spending on housing, seeking to add affordable housing supply and give assistance to the 43% of renters who spent more than 30% of their income on housing.

Minnesota has one of the biggest road networks of any state in the country, demanding constant upkeep. And metro and greater Minnesota transit systems also have great needs to lure riders back after the pandemic. Transportation chairs in the House and Senate will get an extra $1 billion more than usual.

In the coming weeks, we’ll learn more about what specific programs and services all the new spending will support. 

Minnesota’s current biennium budget is about $52 billion, with nearly 40% of funds allocated for K-12 public schools.

Republicans are not happy about the spending increase.

Rep. Pat Garofalo, R-Farmington, tweeted: “DFL’s budget is an unprecedented expansion of government spending. It is also completely unsustainable. Minnesota is in the worst 10 of population loss to other states. (Economic) growth is projected at less than 2%.”

What happens now?

The budget targets could change as the Legislature’s last day of May 22 nears, but committee chairs in the Senate and House will now begin to draft the big budget bills, known as omnibus bills, that stretch to hundreds of pages.

DFL leaders announcing their budget target this early in the session was unexpected, as these agreements are usually finalized towards the end of session.

Walz attributed the timing to the DFL trifecta.

“The era of gridlock is over,” Walz said.

On top of the major budget areas, there are some unknowns: What will lawmakers do about the state’s share of debt on the U.S. Bank Stadium? Minnesota issued about $500 million in bonds, and lawmakers could decide to pay off the remaining $377 million in debt to save hundreds of millions in interest.

Lawmakers may also have to allocate funds to complete construction of the Southwest Light Rail Green Line extension, which is nearly a decade behind schedule and $1.5 billion over budget. The Metropolitan Council, which is overseeing the project, estimated it needs another $764 million to complete the project, and lawmakers may choose to bail it out. If the project is shut down, the Met Council would be forced to pay back the federal government, which awarded a $929 million grant for the project.