The Minnesota Legislature has about a month to answer a roughly $10.5 billion question.
What should the state do with a nearly $9.3 billion budget surplus that is likely the largest in history? How should another $1.2 billion in remaining federal coronavirus aid be spent?
At first glance, the politically divided Legislature has a lot it agrees on. Lawmakers want to return some of the surplus to taxpayers, give frontline workers “hero pay,” replenish the unemployment trust fund and increase state spending in the final year of the current budget.
But the agreement ends at those broad ideas. Look a little closer and there are billions of dollars’ worth of differences in the spending plans currently working their way through the Republican-led Senate and the Democratic-Farmer-Labor-controlled House.
A grand bargain is always elusive in divided government. This year, a big deal may be even more unlikely because everyone involved — the House, Senate and the governor — are up for election in November.
Nothing has to change.
The state already has a $52 billion two-year budget in place that expires in June 2023. Any unspent budget surplus will be on the books next year for the newly elected governor and Legislature.
However, if lawmakers remain stymied on how to spend the remaining stimulus money, Democratic Gov. Tim Walz is able to allocate it, within limits.
It’s important to keep in mind that state budgeting is a constant balancing act and it doesn’t happen in a vacuum. Lawmakers cannot tie the hands of future legislatures, but most new spending has ongoing costs.
Here’s a look at some of the key priorities, what they may cost over the next year and where there’s the best chance at a deal:
LOW-HANGING FRUIT
The biggest piece of common ground among current lawmakers is their focus on cutting taxes, rewarding pandemic frontline workers and replenishing the state’s unemployment trust fund. Doing all those things will cost billions and would give both parties wins to campaign on in the fall.
But as of now, proposals from Walz, Senate Republicans and House Democrats are markedly different.
Taxes: Both the House and Senate have proposed tax cuts including eliminating taxes on all or some Social Security benefits. These proposals would also have an ongoing impact on tax revenues.
The Senate wants to cut the rate of the state’s lowest tier from 5.35 percent to 2.8 percent at a cost of $3.38 billion over the next year. The House has proposed a series of tax credits aimed at making child care more affordable and lowering property taxes for seniors at a cost of about $1.6 billion.
Walz has offered a rebate to taxpayers he’s calling “Walz checks” that would give $500 to single filers and $1,000 to joint filers at a cost of $2 billion. The governor also has proposed other tax breaks and credits.
Hero pay: At the end of the last legislative session, lawmakers all but agreed to spend $250 million of the then-smaller budget surplus to reward frontline workers for their sacrifices during the pandemic. They hoped to agree on who would get money and how much by September.
That didn’t happen. Instead, lawmakers wrangled over other issues and now, with a much larger surplus, Democrats and Walz want to spend roughly $1 billion on hero pay. Republicans have held firm at the original $250 million and not advanced a new bill this session.
Unemployment: The state’s unemployment trust fund is in a $1.3 billion deficit after starting the pandemic with a balance of about $1.7 billion in 2020. Without government intervention, employers face unemployment tax increases of as much as 30 percent to make up the difference.
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Walz and Republicans want to avoid higher taxes on businesses by spending $2.7 billion to fully replenish the trust fund. Walz uses the surplus to do it, while the Senate taps both stimulus money and the budget surplus.
House Democrats have offered $1.8 billion to erase the deficit, but not fully repay the fund. The proposal is not currently part of their budget proposal.
The most likely compromise is the three sides cut a deal that addresses all three of these big items before the session ends May 23. But doing so could mean big sacrifices.
OTHER CHANCES TO COMPROMISE
Besides the most pressing issues facing lawmakers there are a bunch of other spending proposals and a chorus of stakeholders hoping for an injection of state cash from the budget surplus and stimulus money.
For instance, Walz and House Democrats have proposed over $1 billion in new spending on early education, public schools and colleges and universities. They say students need better access to mental health resources and schools need more money to pay for specialized services.
Senate Republicans have offered significantly less, a little over $51 million, saying that schools got historic funding increases just a year ago when the current budget was drafted.
Democrats have also proposed new spending to address homelessness, make health care more affordable and provide sick time to all workers.
Senate Republicans hope to spend more than $1 billion to address staffing shortages at long-term care facilities across the state. Such facilities struggled to find workers before the pandemic and staffing has gotten so low that Walz had to call in the National Guard to help.
To fund it, Republicans would tap unspent money currently set aside for the state’s reinsurance program, which helps cover high-cost patients, that lawmakers recently agreed to extend.
Republicans have also put forward plans to repair roads and bridges as well as legislation to improve public safety and recruit police officers.
Finally, lawmakers hope to pass a capital investment bill to repair state infrastructure. Borrowing for capital projects — a bonding bill — is typically the focus of the Legislature when they don’t have to craft a two-year budget.
State agencies and local government have asked for more than $5.5 billion in state borrowing and Walz has recommended about $2.7 billion worth of projects. So far, there has been little action from the Legislature.
A TICKING CLOCK
One thing is clear in all the competing ideas for the roughly $10.5 billion in budget surplus and stimulus money the state could spend — lawmakers are running short on time to decide.
The Legislature has until midnight Sunday, May 22, to strike a deal. The last day of session is reserved for farewell speeches from retiring lawmakers.
And remember, despite the state’s flush coffers, nothing really needs to change in Minnesota’s spending plans. Walz has already said he won’t call a special session if lawmakers cannot finish their work.
Both parties are expected to spend the next few weeks approving their versions of spending proposals that they can tout to their constituencies.
By mid-May, the real negotiations will begin and, unfortunately, given the time crunch, nearly all of the last-minute bargaining is done behind closed doors, out of public view.