The state of Minnesota releases budget forecasts twice a year, in February and November. During legislative sessions in odd-numbered years, when biennial budgets need to be passed, the February forecast is especially important because it is used to set committee and agency spending targets to ultimately pass a balanced budget.
Often, there aren’t many differences between the November forecast from one year to the February forecast in the next year, just 3 months later. This year, however, was not like most years.
You may recall that the November forecast from 2024 projected a deficit in the 2028-29 biennium. The bulk of the “blame” for that was attributed to the automatic inflationary adjustments in the disability waivers that had been enacted during the 2023 legislative session. As a result of that projection, the Governor’s budget proposal, that was released in January, contained a number of provisions designed to limit the growth of disability waivers, in effect taking planned investment away from our sector to the tune of just over $1 billion over 4 years. The action alerts and testifying ARRM has promoted over the past 2 months have been to build awareness and opposition to the proposed cuts.
Those of us on ARRM’s policy team have been anxiously awaiting the February forecast to see what direction the projected imbalance would go based on the latest information. Unfortunately, when the summary was released on Thursday morning, the news was not good.
Minnesota Management and Budget (MMB) publishes the budget forecasts, and they base their projections on national and state data. While they have to rely on things that exist in current statute or are virtually certain to occur, they also have to make numerous assumptions about economic trends and related factors. In the 3 months since the November forecast was produced, MMB noted better than expected GDP growth and employment trends at the federal level in late 2024, which is forecasted to lead to higher consumer confidence and spending going into 2025. However, they significantly weakened their outlook for 2026-2029 based on significant economic uncertainty in the U.S. in light of recent domestic tariffs, retaliatory tariffs from trading partners, projected tax cuts, deportations of large numbers of workers, and the effects on inflation. Minnesota’s economy will likely follow a similar path. So, taking that macroeconomic information to the state level, what had been a projected deficit of $5.1 billion in 2028-29 has grown by nearly $1 billion to approximately $6 billion.
DHS also releases forecast documents to provide a focused look at the financial outlook for the state’s human services programs. In the November 2024 forecast, a number of factors were cited that contributed to significant increases in projected spending for the disability waivers over the 2026-2029 timeframe.
- Higher than expected payments per participant in all 4 waivers based on claims data
- Higher than expected inflationary adjustments in 2026 and 2028 based on revised consumer price index (CPI) and wage data from the Bureau of Labor Statistics (BLS)
- Higher than expected enrollment in the CADI waiver
- Reduction in the federal Medicaid match, effective October 2025, resulting in increased state expenditures
The DHS November forecast provided some conjecture about what was driving the increase in cost per waiver recipient. They noted that there had been a noticeable upward trend in rates authorized for new services, as well as an uptick in both the number and amount of rate exceptions for DWRS services. They also mentioned growth in the number of recipients and the number of units per recipient of nonresidential services. One possible factor that they theorized might have had an impact was the elimination of financial penalties to lead agencies for exceeding waiver budget allocations. I believe this unfairly blames lead agencies when it is more likely that DWRS framework rates have not kept up with the costs of delivering the services, especially in payroll costs, and lead agencies acknowledge those market forces when they approve rate exception requests.
It's important to note that in legislative testimony given by DHS staff in the 2025 session, the growth in the CADI waiver was attributed to a growing number of CADI recipients remaining on that waiver, and not transitioning to the Elderly Waiver (EW), when they reached age 65. They pointed to a corresponding lower enrollment experience in EW.
The February DHS forecast outlined a set of factors that led to the changes from the November forecast.
- Increased upward adjustments to the projected inflation rates, leading to higher scheduled rate increases in 2026 and 2028
- Recalibration of the financial impacts of the Waiver Reimagine program
- Continued higher trend in the payments per waiver recipient, based on more recent data
- Higher than expected growth in the number of DD waiver recipients, mainly among children and youth
- Increased state costs due to ongoing delays in the transition from PCA to CFSS
There are 2 additional items to note. They don’t impact disability waivers directly, but contribute to significantly higher Medicaid expenses in general. First is an increase in utilization of expensive weight loss drugs, which could help lower healthcare costs in the long run. The second, and much larger item, is a retroactive correction to claims paid to tribal residential facilities for behavioral health and substance use disorders. These claims were originally paid with state and federal matching funds. However, it was determined that they were not eligible for the federal match, so the state must repay the federal government, and bear the full cost of these claims going forward, both of which were reflected in the February forecast.
While the 2 legislative chambers and the Governor must agree on the final budget, ARRM and our stakeholder partners will continue to advocate for service providers and those they support to preserve the investments that are so badly needed. Please watch for future action alerts as the legislative session continues. The mandated adjournment date is Monday, May 19 and if a budget is not passed by that date, a special session will be required. The current budget expires on June 30.