CapWatch:
May 19, 2025

Minnesota State CapWatch

Budget Target Agreement Announced

Last Thursday, Gov. Tim Walz, Senate Majority Leader Sen. Erin Murphy (DFL-St. Paul), Speaker of the House Rep. Lisa Demuth (R-Cold Spring), and Speaker Emeritus Rep. Melissa Hortman (DFL-Brooklyn Park) held a joint press conference to announce that they had reached a “global budget deal.” The chairs of the various finance committees had been waiting on the overall framework to establish the parameters under which they could negotiate their budget bills. With that information in hand, conference committees met throughout the weekend to work out differences in policy and budget in order to reach their targets.

The announcement of a global budget target was met with vocal opposition from some DFL legislators in both the Senate and House of Representatives who opposed the proposal to eliminate eligibility for MinnesotaCare for undocumented adults, effective January 1, 2026. The People of Color and Indigenous (POCI) Caucus in particular expressed opposition, holding a press conference to criticize the deal. While some of the smaller budget bills were finalized over the weekend, it remains to be seen whether legislative leaders will secure the votes needed to pass a number of the larger budget bills.

Framework of the Budget Agreement

The global budget agreement would establish a roughly $66 billion General Fund budget over the next two years. This constitutes a $283 million reduction in FY 26-27 and a $1.8 billion reduction in FY 28-29 from the forecasted budget. The budget agreement leaves a $2 billion shortfall that will need to be resolved in the next budget cycle for FY 28-29 but balances the budget for FY 25-27. Legislative leaders are touting this budget as a 45 percent reduction to the overall structural imbalance.

Highlights of the budget areas (for FY 26-27) with omnibus bills include:

• No reduction to K-12 education General Fund for FY 26-27;
• A transfer of $115 million from the Health Care Access Fund (HCAF) to the General Fund of FY 26-27;
• $270 million reduction in human services spending in FY 26-27, with the details of those reductions to be finalized by committee chairs;
• An increase in the Medical Assistance reimbursement rates for mental health providers;
• A $115 reduction to transportation General Fund spending in FY-26-27;
• A $50 million increase to the Veterans and Military Affairs budget; and,
• A $107 million increase to Judiciary and Public Safety budget.

What’s In and What’s Out?

Finance committee chairs and conference committees worked over the weekend to hammer out differences in the budget bills. However, several big decisions were made as part of the overall budget deal regarding sticking points between the Senate, House of Representatives, and Governor Walz, including:

• A phased closure of the state prison in Stillwater, Minnesota;
• Lowering payroll tax cap from 1.2% to 1.1% for the Paid Family Leave Program;
• Funding the state’s “reinsurance” program for the individual market through the Health Care Access Fund in 2026, and through a health plan assessment with tax credit beginning in 2027;
• A repeal of electricity exemption on data centers;
• An increase of the cannabis tax to raise $90 million; and,
• Funding for the county SIS system.

Will Special Session be Needed?

Even though an agreement was reached, work still remains as of Monday, and it looks unlikely that the budget will be completed prior to the tonight’s midnight deadline to adjourn. A number of high-profile budget proposals continue to be negotiated, including the omnibus health and education bills and the omnibus tax bill. It also remains to be seen whether legislators can reach an agreement on a capital investment and infrastructure proposal. Staff will have to work around the clock to put all the bills together in order for the House of Representatives and Senate to vote on final passage. As it stands right now, it seems like a special session is likely to be needed.

Important Dates to Remember

May 19, 2025                                  Constitutional Deadline to adjourn the legislative session

Federal CapWatch

House Budget Advances Reconciliation Bill, But Divisions Persist

Late Sunday evening, the House Budget Committee narrowly approved the Republican reconciliation package, with four conservative members voting “present” rather than opposing the measure outright. The final vote was 17–16. Despite this procedural win, Speaker Mike Johnson faces significant challenges in securing broader support from both conservative and moderate factions within his conference. The coming days are expected to involve intense negotiations over core policy disputes, including the future of Medicaid funding, tax extensions, and clean energy incentives.

Key Tensions:

• Medicaid Cuts: Democrats argue the GOP proposal could result in more than 13 million Americans losing coverage. Republican leadership estimates the number at around 8 million. Changes to the federal match rate (FMAP) remain a point of contention between conservatives and moderates;
• Tax Policy: President Trump is urging congressional Republicans to act quickly on extending the 2017 tax cuts before they expire at year-end;
• Clean Energy Credits: Johnson has proposed accelerating the phase-out of tax credits established under the Inflation Reduction Act, with all credits potentially ending by 2028; and,
• Medicaid Work Requirements: GOP leadership is also considering moving up the effective date for expanded Medicaid work requirements to December 31, 2026 — a shift that moderates strongly oppose.

Negotiations resumed over the weekend after the committee initially failed to advance the bill on Friday. Johnson brokered a late-night compromise to get the bill through committee, though the opposition from Reps. Chip Roy, Josh Brecheen, Ralph Norman, and Andrew Clyde underscores the limited margin for error.

Next Steps:

• The House Rules Committee is scheduled to meet on Wednesday to review the reconciliation bill. Any new provisions from leadership would be incorporated through a manager’s amendment.
• Moderates are still seeking a better offer on the state-and-local tax (SALT) deduction. The current proposal caps deductions at $30,000, a level deemed insufficient by members from high-tax states. A revised SALT deal may be used to help secure additional votes.
• Leadership has made clear that the House will not adjourn for the Memorial Day recess until the reconciliation bill passes. However, significant policy differences remain unresolved. Senate Republicans are also expected to scale back or revise key House proposals, particularly on Medicaid and clean energy.
• The timeline is tight: House leaders hope to send the reconciliation bill to the President’s desk by July 4.

Senate Developments: Stablecoin Reform and the GENIUS Act

Senator Mark Warner (D-Va.) announced support for the GENIUS Act, a key piece of digital asset legislation focused on stablecoin regulation. As a centrist and a senior voice on finance issues, Warner’s support is expected to influence other Senate Democrats. The Senate could vote on the bill as early as this evening.