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Minnesota is in the early stages of its experiment regarding how much of a federal government’s textbook redistribution and social welfare interests and responsibilities a state government can take on with a balanced budget requirement and without incurring fiscal and economic consequences. These policies have elevated the state’s exposure to federal tax and fiscal policy changes, but the results of the 2024 national election may make the experiment a much bigger budget lift. Federal fiscal policy risk is a recurring bullet point in these release presentations. In most years without a COVID-like emergency, state budget implications from the federal government’s tax and spending decisions are unlikely to be too momentous – especially in an era in which federal fiscal responsibility is defined as debt financing. Next year may be a different story. While Minnesota continues to digest and potentially expand on its “transformational” progressive tax and fiscal policies, no less “transformational” ideas regarding the federal/state finance relationship lurk in the outcome of the national election. And unlike the DFL’s state successes this biennium, successes in this federal transformation are less beholden to having full control of both legislative branches. Minnesota’s Fiscal Reliance on the Federal Government With so much attention always focused on the state general fund and the state’s own source revenue collections, it can be easy to forget the important and growing role federal resources play in state service delivery. According to MMB’s 2024 end of session consolidated funds statement, the state is expected to receive $43.0 billion in federal grants this biennium constituting 35.9% of total available resources. That’s up from $20.3 billion or 28.9% of total state available resources just ten years ago. The vast majority of these resources come in the form of both mandatory and discretionary categorical grants which can only be used for a specifically aided program and usually are limited to narrowly defined activities. Categorical grants come in four forms: [1]
Block grants make up the remainder of federal grant support to states. They are used for a specifically aided set of programs but usually not limited to narrowly defined activities allowing greater state discretion of the use of these funds to achieve program purposes. Historically, block grants have constituted a tiny share of federal grant-making but fund some high profile programs like Temporary Assistance to Needy Families (TANF) and Community Development grants. According to the Congressional Research Service, in FY 2018 only 1.6% of all the federal funded grants made to state and local governments were block grants. Budget reliance on federal resources differs greatly across state government departments and agencies. According to MMB, twenty-nine department and agency budgets in FY 24-25 are supported to some extent by federal grants, ranging from $31 billion for Human Services to $54,000 for the Perpich Center for Arts Education. The table below identifies the top 5 by both dollars and share of total expenditures. Highest MN Agency/Department Dependency on Federal Resources
Source: MMB Agency Expenditure Overview Sheets (August 2023) Calculations by MCFE Fiscal exposure can come from both absolute and relative federal dependency. As the table shows, three of the five agencies appear in both columns suggesting these are the areas where the greatest potential budget exposure from major federal fiscal policy changes resides. State/local education budgets are clearly at risk simply because of the amount of federal education aid they receive, but at 12.2% of total expenditures, education’s relative dependency on the federal government support ranks 9th in the state also behind transportation (22.0%), public safety (18.8%), and agriculture (12.8%). Another factor affecting state fiscal exposure is the degree of federal discretion in the allocation of funding. At one end of the spectrum are project categorical grants over which federal administrators exercise a very high degree of control. Recipients apply for funding to the appropriate federal agency and compete against other potential recipients. At the other end are open-ended reimbursement categorical grants and other formula categorical grants employing statute-based formulas requiring congressional action to change. In the middle are other formula categorical grants, including project grants, in which the interpretation of statutes, executive orders, and use of administrative rule-making regarding the distribution of funds results in conditions attached to the grant. Boiling Frogs and Black Swans Minnesota's baseline risk exposure is practically certain to increase in coming years out of federal debt concerns. Several years ago, the Volcker Alliance identified federal deficit reduction as one of the six major threats to long term state fiscal sustainability due to “almost certain” reductions in federal grants to states in the future.[2] Federal Reserve Chair Jerome Powell observed this year, “We’re running big structural deficits, and we’re going to have to deal with this sooner or later, and sooner is a lot more attractive than later.”[3] How Congress handles the 2025 expiration of the Tax Cuts and Jobs Act (which has been described as “a ticking debt bomb”) will provide an important data point about how ready lawmakers are to deal with the issue and how soon and to what extent the fiscal policy risk exposure may materialize. At present, it does not appear either side is ready to embrace the Fed chair’s advice. According to the Penn Wharton Budget Model, the fiscal effects of the Harris campaign proposals would increase primary deficits by $1.2 trillion over the next 10 years on a conventional basis and by $2.0 trillion on a dynamic basis that includes a reduction in economic activity. Trump campaign proposals would increase primary deficits by $5.8 trillion over the next ten years on a conventional basis and $4.1 trillion on a dynamic basis. Raising federal taxes to tackle this issue would make attempts to concurrently raise revenues for the state more difficult. Just as Minnesota has long prioritized its own service responsibilities at the expense of local government aids in difficult budget times and ever-growing competition for state resources, so too the federal government will prioritize its primary responsibilities – most likely defense, interest on the debt, Medicare, and Social Security (both facing trust fund depletion in just over ten years) – at the expense of federal support to states. In 2023 federal grants to state and local governments accounted for 17.7% of all federal outlays. After subtracting just these four key areas, federal support to state and local governments constituted nearly half of all remaining federal spending making it a target almost by default.[4] Under-appreciated by state lawmakers is the elevated federal fiscal policy risk arising out of the outcomes of the 2023 budget session. Enacted tax policies have resulted in greater reliance on a smaller and/or more volatile income tax base. At the same time the number and size of new tax expenditures and agency spending programs significantly increased the competition within the general fund for resources going forward. Moreover, the nature of many of these new spending programs makes them difficult, if not politically impossible, to downscale should economic and budget conditions deteriorate. Importantly, Minnesota segregates federal funds from the general fund budget. As a result, with one major exception (Medical Assistance) if federal funding support is cut, there is no direct action needed to cut general fund spending. If general fund resources are not available to make up for lost federal support, cuts mostly just happen. However, this belies the political reality of existing, recently-enacted, and “wished for” state programming and spending interests all seeking to replace lost federal support within a much more competitive state general fund environment. State activities, services, and responsibilities exposed to reductions in federal support would certainly seek alternative support in state appropriations or dedicated revenue streams further placing new stresses on the state general fund. Especially for core areas like education, transportation, and human services, any potential loss of federal support resulting in the prospect of reducing services and taking over formerly federal obligations is bound to trigger bipartisan angst and calls for replacement revenues. Adding to the pressure, according to MMB, over half of the state’s full time equivalent employment in 2024 is supported outside of the state general fund, presumably a not inconsequential amount of that coming from federal funding. The creeping and bipartisan normality of debt-enabled financial support for state and local government makes the likelihood of any major shakeup of the status quo federal/state finance relationship in the near-term remote. But if federal budget realities bring to mind the boiling frog metaphor regarding state budget risks, political realities and the 2024 presidential election offer a potential “black swan” event: a rare, high-profile, hard-to-predict event beyond the realm of normal expectations having significant impacts for the state budget. Learning from History A sense of how future federal fund flows to states may change as a result of the November election can be learned by looking at fiscal year budgets arising out of the first Trump administration. Every year these budgets featured large proposed cuts and reforms to a wide variety of federally funded entitlement and discretionary programs affecting state and local government services. One policy argument was to “shift governmental responsibilities back to constitutional priorities” which translates into shifting more program responsibilities and their costs onto the states. As an example, his final proposed budget for FY 2021 included $1.9 trillion in cuts to nondefense discretionary programs (over multiple years) reducing or eliminating a number of grant programs in areas such as community development, K-12 education, and social services. These budgets also included proposed cuts to mandatory programs including SNAP, Medicaid, and TANF. In several areas categorical grants were to be replaced with block grants to states offering more flexibility in the use of resources. These budget proposals offered plenty of bark, but proved to have little bite due to the need for Congressional approval. In fact, with regards to discretionary federal spending, the opposite occurred. The federal Budget Control Act of 2011 imposed tight caps on annual discretionary spending through 2021. But in 2018 the Bipartisan Budget Control Act was enacted raising discretionary spending caps by $143 billion with an average 2.4% annual increase over the remaining 3 years. The result was $1.45 trillion in higher “regular” discretionary spending and baseline levels for the 2017-2027 period plus $120 billion more in interest costs.[5] Interestingly, this act became law with all three branches of the federal government under Republican control. This history suggests threats to state finances are mitigated by lawmakers of both “colors” remaining quite sensitive to the welfare of their constituents and needs of government officials back home. However, the federal deficit relative to GDP is now almost twice as it was in 2017 (pre TCJA) making subordinating federal debt realities to taking care of the home front now more difficult. What makes the executive branch of the federal government unique is that it has a variety of methods and levers at its disposal to influence the availability and distribution of federal funds to states after Congress has appropriated them. And from all indications, plans for a return to the Oval Office include an even more expanded and assertive use of these executive branch powers than what already exists. Proposed and Existing Tools in the Toolbox “I will use the president’s long-recognized Impoundment Power to squeeze the bloated federal bureaucracy for massive savings.” Former President Donald Trump, June 20, 2023 The headline-making idea for expanding executive branch authority on spending matters is impoundment – withholding congressionally appropriated funds from their intended use. The history of impoundment authority goes back to the early 1800’s although it wasn’t until in the middle of the 20th century that presidents began routinely using the authority based on policy disagreements. The issue came to a head during the Nixon Administration, which by 1973 was impounding between $12 and $18 billion in congressionally appropriated funds, equivalent to between $80 and $125 billion in today’s dollars.[6] In 1974, Congress took steps to reign in this authority with the Congressional Budget and Impoundment Control Act of 1974 which proponents of impoundment have declared unconstitutional. This has all the appearances of a battle that will eventually wind up in the courts. Interestingly, the Supreme Court has never directly considered the extent of the President’s constitutional authority to impound funds.[7] Based on recent Supreme Court rulings and interests regarding unitary executive theory matters, the Court seems likely to be willing, if not eager, to hear such a case. But even if impoundment does ultimately receive the Court’s blessing, its potential use on federal fund flows to states may not be as high a priority as one might expect. That is because federal grant-making remains one of the most important, effective, and legitimate mechanisms for a president to promote policy change and accomplish policy and political objectives concurrently. Implementing administration political and policy priorities through the administrative details of federal budget execution and spending – or what one scholar has described as the “dark continent of federal budgeting research” – has long been a significant feature of both Democrat and Republican administrations. Evidence of this can be found in the geographic distribution of federal funds. A significant body of scholarship has examined presidential influence on the geographic spending of appropriated funds. For example, a study of 24 years of federal spending at the county level found presidents “reliably direct dollars to specific constituents to further their political goals,” concluding “rather than strictly pursuing visions of good public policy or pandering to the median voter our results suggest that presidents systematically prioritize the need of politically important constituents.”[8] Another examining the federal outlays to states over an 18-year period found states that ideologically lean towards the president or with a governor belonging to the party of the president tend to be rewarded with more funds.[9] There is even evidence to indicate executive branch influence over federal fund flows is a greater source of inequality in the distribution of federal resources than congressional influence and parochialism. As one scholar has described it, “For an artful president intent upon redirecting federal outlays to a preferred constituency, the opportunity for mischief is substantial.”[10] The primary mechanism to accomplish this is through political influence over the administrative process and the agencies themselves. It begins with the Office of Management and Budget (OMB) which has control over the apportionment of federal funds. OMB provides funds to agencies by time periods, activities, projects and programs within an account giving OMB significant influence over agency actions. Political appointments within agencies themselves further help to ensure fund distribution aligns with presidential goals and objectives. “Tools” exist at all stages of the federal grantmaking life cycle – from policy to enforcement – to advance presidential policy priorities and objectives.[11] For example:
Both Republican and Democrat administrations – successfully and unsuccessfully – have used these “tools” to implement policy agendas. However, these actions remain subject to standard administrative law constraints. Conditions can’t be imposed unconnected to the language of grant statutes. Actions taken can’t be arbitrary and capricious. Compliance is required with the federal Administrative Procedures Act. These are the essential guardrails against abuse. This is also the practical substance of what many people like to call the administrative “deep state.” What Would Be Different? Gaining greater influence over the administrative gears and mechanics of federal budget operations appears to be a top policy priority of a second Trump administration. President Trump has expressed an intent to “shatter” the deep state if elected, and the strategy for doing so is a focal point of “Project 2025” a.k.a. the Presidential Transition Project of the Heritage Federation, the now “disavowed” policy architect for a second Trump administration.[12] Doing so could result in a fundamental transformation of form, function and norms in federal funds distribution in three primary ways: Elevated Politicization of Grant Administration – There is no escaping the fact that making grant award decisions is a quintessentially administrative exercise. Historically this has required and depended on the technical and knowledge-based expertise and professionalism of a merit-based civil service. This professionalization of federal civil service represents a critical development of the last hundred years as an alternative to the spoils-based regimes of the 19th century and the graft, corruption, lack of accountability, and general incompetence this system represented. According to Project 2025, political appointees would sign-off on every apportionment that goes through OMB. Because of the immense workload this would represent, the reform – with some breathtaking irony – would have to substantially grow its own preferred and more politicized version of the administrative “deep state.” Currently, there are six Resource Management Offices (RMO) each led by a politically appointed Program Associate Director (PAD). The proposed reform calls for the creation of an unstated number of smaller RMO’s based on more narrowly defined subject areas accompanied by an equivalent numerical expansion of PADs. It also calls for the creation of an entirely new second administrative level of “Deputy PADs.” This new layer of politically appointed bureaucracy would sign off on appropriations. Existing Deputy Associate Directors (DADs), whose positions require meeting knowledge, technical, and management standards in their respective areas of responsibility, would no longer approve apportionments. Elevated Political Favoritism in Grant Distribution – As the previous discussion of scholarly research showed, under current law and practice, the executive branch already has considerable opportunities to direct competitive grants in ways that reward favored political constituencies and withhold them from opponents. Giving political appointees start-to-finish oversight of the grant design and review process and ignoring or dismissing merit-based considerations could be expected to exacerbate this type of treatment of competitive grants. No less importantly, as legal experts have noted, “frustrated” states would have little recourse in these decisions citing the difficulty in stating a claim or establishing improper political influence. Use of Federal Funds Control for Punishment and Retribution -- In his first administration President Trump exhibited an impulse and desire to withhold or cut off funds for actions that displeased him or out of political animus. Disaster declarations, over which the President has sole control, offered some of the highest profile examples. But retaliation also took place at the federal agency level in which agency heads used the existing tools of grant enforcement for political retribution. For example, the Department of Transportation terminated a grant of almost $1 billion to California without any prior notification, staff-level communication, and without detailing or seeking corrective actions by imposing new conditions days after a Twitter war erupted between the governor and the President.[13] Administrative law experts regard grant enforcement as one of the most worrisome areas of greater executive branch control because there are relatively few ways to push back on abuses. Many abuses are not reviewable by the courts; for example, presidential actions are not reviewable under the Administrative Procedures Act. Actions like inconsistent sanctions, selective enforcement, and determinations of arbitrary and capricious activity all carry a high bar of motive and proof, and courts are already reluctant to impose on the enforcement decisions of an agency.[14] Of primary concern to state lawmakers would be the ability to terminate existing multiyear grants to Minnesota based solely on a declared change in administration goals or priorities. Before 2020, that was illegal. The only way to unilaterally terminate a grant was if the grantee failed to comply with the terms and conditions of a federal award or “for cause.” In 2020 the Trump Administration’s OMB deleted the “for cause” option, replacing it with an option for an agency to terminate unilaterally “if an award no longer effectuates the program goals or agency priorities.”[15] New OMB rules going into effect this October significantly tightens these unilateral termination rights by requiring Federal agencies and pass-through entities to clearly and unambiguously include all termination provisions in the award terms and conditions. But such agency rules can be reversed and language reinstated as long as proper administrative procedures are followed (or alternatively as one former national official told us, “just change it and dare it to be contested.”) This ability for administrations to use executive orders to manage federal operations and implement or change how laws should be interpreted and administered illustrates how unreliable one administration’s policy initiatives or safeguards can be. Another example indirectly related to federal fund flows to states arises out of proposed changes to the federal workforce. At the very end of the first Trump administration, a new executive order was issued (“Schedule F”) which intended to reclassify thousands of protected civil service positions with expertise in their policy fields to “at will” employment and give the President and political appointees greater control over hiring and firing decisions and actions taken. The Biden Administration not only rescinded this executive order before it could go into effect, but this year finalized its own rule that aims to clarify and strengthen existing protections for civil service and slow any future effort to undermine those protections. But President Trump has prioritized a return of Schedule F upon his election. And as one expert observed last year when the new Office of Personnel Management rules safeguarding against Schedule F were being developed, this enacted protective effort may turn out to be more Maginot line than defensive fortress: “At this point, they have 16 months to be able to prepare to have a draft of a new executive order or a new set of regulations that can be put in place pretty quickly… They don’t need to do this on January 20—if it takes two months, it’s still a victory… One big question is how much of a speed bump it would create for a Republican administration, and I think it’s probably a speed bump, but not more than what you would find in a parking lot.”[16] The Supreme Court’s Uncertain Perspective Ultimately, a lot of actions an administration may want to take regarding the distribution of federal funds may also come with a day in court. Just because an administration wants to interpret grant statutes differently doesn’t necessarily mean the arguments will pass judicial muster. The first Trump Administration suffered multiple losses regarding these types of actions. One study found “rather than winning most legal challenges to agency actions, as is the historical norm, the Trump Administration’s win rate was 23% on aggregate.” Moreover, for cases in front of judges appointed by President Trump, either as the assigned district judge or as a member of an appellate panel, the win rate rose to 50% but still much lower than previous studies have found in assessing partisan affiliation against agency success rates.[17] Nevertheless, as another scholar observed “several of the most contested policy decisions had divided circuit courts and may well have survived Supreme Court review had they not been dismissed under the Biden Administration.” This raises the important question of how any cases before the Supreme Court dealing with federal fund flows to states would be decided. On the one hand, the current composition of the Supreme Court would seem likely to support the executive branch having much greater authority on matters of spending policy, whether it be impoundment or through federal grant policy. On the other hand, grants management is fundamentally an administrative activity, disdain for the administrative state notwithstanding. With the Court’s recent overturning of the Chevron deference, we might expect less room for an administration to be able to leverage and interpret broad, capacious statutory language to implement its own policy preferences and instead require Congress to “spell out” in grant statutes, who is eligible, under what unambiguous conditions and circumstances, and how it can be used (in much more detail than Congress would likely want, or more importantly is equipped, to do.) The General Fund Exception: The Potential Earthquake of Medicaid Finance Reform As noted previously, because Minnesota segregates federal funds, if federal funding is cut, no direct action would be needed to cut state general fund spending. Medical Assistance, Minnesota’s Medicaid program, is the exception. This program is in state law and would require the legislature to change program benefits or eligibility to reduce spending. Medical Assistance also has the greatest exposure to federal funding changes and would be the epicenter of one of the greatest seismic events in state budget history should federal funding change. Federal funds for Medical Assistance total $23.0 billion in the current FY 24-25 biennium representing 59% of total state Medical Assistance spending, and over half (58%) of all of the federal funds received by the state. Looking ahead, total state Medical Assistance expenditures are projected to increase by $4.78 billion in the FY26-27 biennium with the federal government projected to pay for $2.3 billion of that increase.[18] As an open-end reimbursement grant program, federal administrators have the lowest degree of discretion over who receives general revenue sharing. Its funding and eligibility rules are established by federal law and allocated automatically to states by a formula specific in legislation and cannot be changed without Congressional approval. Medicaid operations, however, are hardly immune to executive branch influence. A 2014 “Survey of the Future of Government Service” conducted by Princeton University asked 3,550 career-appointed and career executive branch executives how much direct influence the president/White House exerted over agency spending post-appropriations. The survey found the Center for Medicare and Medicaid Services (CMS) reported the second highest level of presidential influence among 110 federal departments and agencies.[19] This is mostly accomplished through the administrative rule-making process. For example, just this past May, the CMS finalized a Medicaid rule introducing significant changes to financing and enforcement guidelines for states’ use of managed care for Medicaid benefits projected to increase federal Medicaid costs by between $50 billion and $220 billion over a decade.[20] However, the design of the program itself and its financing has been a simmering political issue for many years. Today, state Medicaid program “need” is largely defined by the states themselves with respect to eligibility levels and services the state offers. The cost is shared with the federal government through the Federal Medical Assistance Percentage (FMAP) which determines the amount of federal Medicaid money for each state. FMAP is based on state per capita income. As a high per capita income state, Minnesota receives the one of the lowest percentage cost shares in the nation (51.49% in FY 2024; the federal minimum is 50%). However, because of Minnesota’s comparatively greater Medical Assistance program accessibility (higher levels of income eligibility) and program coverage (services provided) the amount of federal support per Medicaid enrollee is 4th highest in the nation, 24% above the national average. Federal support per person in poverty is 8th highest in the nation, 37% above the national average.[21] For many, this “provide more to get more” design runs counter to a belief that Medicaid should instead compensate for differences in state fiscal capacity and population need considerations in providing government support for health care. This equalization objective conflicts with current allocation of federal Medicaid funds that amplifies disparities providing relatively wealthy states like Minnesota with more resources per person in poverty than it provides relatively needy states. It’s an issue the federal Government Accountability Office (GAO) has frequently discussed regarding Medicaid: "In prior work spanning more than three decades, we have emphasized that, in federal-state programs such as Medicaid, funds should be allocated to states in a manner that is equitable from the perspectives of both beneficiaries and taxpayers. To be equitable from the perspective of beneficiaries, a funding allocation mechanism should take into account demand for services, which varies with the size and characteristics of the target population and geographic cost differences, which affect the level of funding needed by each state to provide a comparable level of services to each person in need. In general, the demand for services depends not only on the size of the target population, but also on the amount or level of services required, which may vary with the characteristics of the population. To be equitable from the perspective of taxpayers, a funding formula should ensure that taxpayers in poorer states are not more heavily burdened than those in wealthier ones. To do so, it must take into account each state’s ability to finance its share of the costs of a given program from its own sources, which we refer to as state resources. Our prior work has found that the FMAP does not adequately address the demand for services, geographic cost differences, and state resources." “Medicaid: Key Issues Facing the Program,” GAO, July 2015 What the GAO is describing is an equalization-oriented, “LGA-ification” approach to distributing federal Medicaid dollars — filling a “need-capacity gap.” This represents a major philosophical difference and shift in both Medicaid program logic and finance design which has been described as “the collision of Medicaid world views — a national health care program versus a national welfare program.”[22] How would Minnesota fare under such reform? Two indicators suggest the answer is “not well.” The first is the likely necessary transformation from a categorical grant design to a block grant design. Like the distribution of LGA, the process begins with a large appropriation for the program. This would be a marked departure from the current finance system in which the federal government is obligated to state Medicaid program decisions. Block grants are less likely to keep up with enrollment and cost growth. According to the Congressional Budget Office, a Medicaid block grant plan proposed by Republicans in 2017 would have cut Medicaid’s federal funding by more than 25% over 10 years and 30% over 20 years. This would be especially impactful for states like Minnesota providing greater eligibility and service coverage with their Medicaid programs. The second concerns state share in the distribution of resources revolving around need-capacity gap measures and the relative ability of states to fund their own Medicaid programs. The use of state per capita income (PCI) in the current FMAP cost sharing formula has several problems viewed the through the lens of equalization objectives:[23]
The GAO has long suggested “total taxable resources” (TTR) would be a preferred measure of a state’s “ability to pay” for its Medicaid program and an alternative to PCI. TTR is compiled annually by the U.S. Department of the Treasury and is a comprehensive measure of taxable income in a state. Importantly, TTR is a measure of state capacity to tax, not actual state tax effort. In other words, it is unrelated to a state’s tax system and whether or not a state imposes a tax on various sources of income. It measures the relative ability of states to fund their Medicaid program. To provide some general perspective on how the distribution of federal funds might shift under an equalization design, the table presents the top and bottom states based on TTR per person in poverty. Top and Bottom 10 States: Total Taxable Resources per Person in Poverty
Sources: Department of the Treasury and U.S. Census Bureau, 2022, Calculations by MCFE Minnesota fiscal capacity to support its own Medicaid program is 26% above the national average with 40 other states objectively presenting themselves as more challenged in their “ability to pay.” Consideration of need factors, like the relative cost of health care in a state and higher costs of services associated with specific Medicaid populations, would ultimately influence Minnesota’s share of federal dollars. Minnesota’s above average cost of health care delivery – roughly 5-10% above the 50-state average based on BLS health care industry wage statistics -- would work in the states favor. However, below 50-state average population shares of senior and disabled populations, the much more costly potential Medicaid cohorts, would likely work against the state.[24] Even assuming current federal support levels would be grandfathered in, future Medicaid funding growth and program support would likely be much more dependent on the state’s own ability to pay for it. None of this can happen without Congressional approval. Even a federal trifecta of Republican control does not guarantee reform given the significant fiscal implications for states of both hues. However, block granting Medicaid was a Trump proposal during his first term and has been a congressional Republican policy interest for a long time. Combined with the ability to redirect federal funds away from predominantly blue states to predominately red states and do so under the Democrat’s own banners of greater fairness and equity, the effort may be too irresistible not to pursue. An Unpredictable “Partner” Minnesota is hardly alone is dealing with federal fiscal policy risk. Looking at state reliance on federal funds, most other states are more dependent on the federal government. According to the Pew Center, Minnesota ranks 40th in the nation in the percentage of state revenue coming from the federal government (although 13th on a federal aid per capita basis). The fact that “others have may it worse” would offer little comfort should the prospects of federal cuts and spending reforms materialize. Evaluating the likelihood and impacts of federal funding changes in a second Trump administration is little more than speculation. It is certainly possible attempted federal budget cuts and grant reforms would largely flounder as they did during the first Trump term in office. The “destruction of the administrative state” may turn out to be primarily political rhetoric with the federal government clumsily bumping along more or less as it has in the past. On the other hand, there is a clear history and interest in strengthening executive branch influence and control over government spending and assertively using an expanded “toolkit” to make this happen. Moreover, Governor Walz’s elevated profile in the national presidential election combined with the state’s leadership in progressive policy-making may make the state a prime target for politically motivated fiscal punishment and budgetary retribution. One thing is certain. Whether it be for political realities, federal budget realities, or a combination of both, the expectations and reliability of our federal “partner” -- as intergovernmental finance relationships now like to be called – deserves to be viewed with an increasingly careful and jaundiced eye in our 2025 budget deliberations and beyond.
[1] Congressional Research Service, Federal Grants to State and Local Governments: A Historical Perspective on Contemporary Issues, May 22, 2019 [2] “Six Major Threats to Fiscal Sustainability, Report of the State Budget Crisis Task Force” Volcker Alliance, 2012 [3] “Soaring debt and deficits causing worry about threats to the economy and markets” CNBC, May 19 2024 [4] Federal Budget for FFY 2023, Historical tables 8.1 and 12.1. Calculations by MCFE [5] Riedl, “Trump’s Fiscal Legacy: A Comprehensive Overview of Spending, Taxes and Deficits,” Manhattan Institute May, 2022 [6] Committee for a Responsible Federal Budget, “Donald Trump's Proposal to Use Impoundment Authority” August 16, 2023 [7] Constitution Annotated: https://constitution.congress.gov/browse/essay/artII-S3-3-7/ALDE_00013376/ [8] Kriner and Reeves, “Presidential Particularism and Divide-the-Dollar Politics,”, The American Political Science Review Vol 109, No. 1 (February, 2015) [9] Larcinese, Rizzo, and Testa, “Allocating the US Federal Budget to the States: The Impact of the President”, Public Economy and Public Policy Series, London School of Economics [10] Berry, Burden &. Howell, “The President and the Distribution of Federal Spending, 2010 [11] A great review and discussion of executive branch responsibilities, influence, and control over federal grants, administrative safeguards, and the first Trump administration’s “boundary pushing” of the existing framework, can be found in “Executive Branch Control of Federal Grants: Policy, Pork, and Punishment,” 2023Pasachoff, https://scholarship.law.georgetown.edu/facpub/2560/ [12] In late July, the Executive Director of Project 2025 resigned and a press release announced its policy operations would cease. Accompanying this development, President Trump and his campaign aggressively denied any connection to this initiative despite the fact that the Executive Director was director of the Office of Personnel Management in the first Trump administration, a top advisory board member of Project 2025 was the director of the OMB in the Trump’s first administration, and -- according to one report -- at least 140 people who worked in the Trump administration contributed to the report. In April of 2022, one week after the announcement of Project 2025, President Trump said, “The critical job of institutions such as Heritage is to lay the groundwork. And Heritage does such an incredible job at that.... And they're going to lay the groundwork and detail plans for exactly what our movement will do and what your movement will do when the American people give us a colossal mandate to save America and that's coming.” Denials notwithstanding, it would be naïve to think this disassociation is not a political response due to concerns about damage being inflicted from the public reaction to various policy ideas contained in report. It would also be naïve to think that the tax and fiscal policy agenda of “Project 2025” and the people behind it do not remain the intellectual foundation and infrastructure for a second Trump term (while also providing the human resource base for filling something on the order of 4,000 political positions for policy execution.) As Vice President candidate J.D. Vance remarked, “The Heritage Foundation isn’t some random outpost on Capitol Hill; it is and has been the most influential engine of ideas for Republicans.” [13] Pasachoff, pg 1186 [14] Pasachoff, pg 1190-1193 [15] Pasachoff, pg 1184 [16] “Regulations Aimed at Derailing a Schedule F Revival Proposed by OPM” Government Executive, September 15 2023 [17] Noll, “Tired of Winning: Judicial Review of Regulatory Policy in the Trump Era, , 73 ADMIN. L.REV. 353 (2021) [18] Minnesota Department of Human Services, February 2024 Forecast: Executive Summary and Trend Data, February 23, 2024 [19] As reported in “Political Control and Presidential Spending Power” Lewis, Working Paper 1-2017, Center for the Study of Democratic Institutions, Vanderbilt University [20] “CMS Finalizes Medicaid Rule Likely to Increase Spending” Committee for a Responsible Federal Budget, May 24, 2024 [21] KFF Medicaid Fact Sheets, 2023 and U.S. Census Bureau, Calculations by MCFE [22] Altman, “The Collision of Medicaid World Views” KFF, August 12, 2024 [23] “Medicaid: Key Issues Facing the Program,” GAO, 2015 [24] Census data puts Minnesota 32nd in state population share over 65 among the 50 states and 45th in the nation in population share with disabilities. |
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