Legislature Passes Covid Response, Federal Aid Projections, UI Trust Fund Not As Robust as Portrayed

The Minnesota House and Senate reconvened "distantly" Thursday to pass HF 4531, a COVID response bill.  It includes appropriations to deal with the state’s health and economic fallout plus a variety of administrative actions to accommodate the ramifications of the emergency declaration.  Examples of the latter include extending expiration dates for drivers licenses and related pieces of identification until 60 days after the termination of the emergency and temporary suspensions of required waiting periods for unemployment benefits. 

The Legislature’s bill has considerable overlap with the Governor’s proposed COVID response “supplement” to his supplemental budget.   The biennial budget impact is slightly lower from declining to appropriate $57 million for the Department of Human Services' Temporary Emergency Authority we highlighted in our last e-brief.   The Legislature’s bill does includes $32 million of special fund spending bringing “total COVID-related support” nearer the Governor’s target.  

Most of that special fund spending comes from a $30 million bump to the state’s Small Business Emergency Loan Program.  This is made possible by raiding the Minnesota 21st Century Fund (which finances mineral, steel, and related investments) and the Minnesota Investment Revolving Loan Account.   While this $40 million of targeted small business spending is $30 million more than what the Governor proposed, the relative lack of attention to small business concerns was a clear sore spot and source of frustration for many legislators in both the House and the Senate.   Fortunately, the federal government’s “Coronavirus Aid, Relief, and Economic Security Act’’ (CARES) appears poised to play a significant role in addressing more of these issues.

The centerpiece is the establishment of a $200 million COVID-19 Minnesota Fund also proposed by the Governor.  However it’s clear the legislature was not comfortable with the degree of executive branch autonomy in managing and disbursing these funds per the Governor’s proposal.   The bill includes a new Legislative COVID-19 Response Commission comprised of bipartisan leadership from both the House and Senate.  Any single expenditure exceeding $1 million would have to be submitted to the Commission for review, and the Commission would have 24 hours to make a recommendation.  If a majority of members from the House and from the Senate make a negative recommendation, MMB is prohibited from expending the money.  In addition the MMB Commissioner must prepare a biweekly expenditure report.

Federal Aid to the State is Taking Shape

The massive $2-plus trillion dollar CARES act, just passed by the Senate —and anticipated to be quickly ratified by the House and signed by the President — is the third piece of the federal government’s fiscal response to the crisis.  It includes one of the most important provisions with respect to Minnesota finances: $150 billion designated for state efforts to combat the COVID-19 pandemic.   This appropriation is in addition to an estimated $274 billion of other state support for the crisis and for supplemental funding for joint state-federal programs like unemployment compensation and Medicaid which Minnesota will share in.

Some details regarding the aid based on our reading:

  • Of the $150 billion in aid, $139 billion will be allocated to the 50 states.   Puerto Rico, D.C., other U.S territories, and tribal governments have $11 billion reserved for their use.
  • Most of this $139 billion will be allocated by state share of U.S. population.   However, no state will receive less than $1.25 billion.
  • The money can be used to cover only those costs that are necessary expenditures incurred due to the public health emergency with respect to the COVID.  Eligible costs for reimbursement are those incurred during the period that begins on March 1, 2020, and ends on December 30, 2020.   However, the federal government will not reimburse for spending that is already accounted for in state and local budgets prior to CARES enactment.  That would seem to suggest it might be prudent to let the President sign off on CARES first before the Governor signs off on MN COVID relief.
  • Funds would be made available no later than 30 days after enactment.

An interesting twist is that local governments with populations of 500,000 or more are also eligible for aid, but the amount they receive would be subtracted from the state total.   Local government share would be based on the following formula: (.45 x state aid total) x (population of the local government / population of state).

According to calculations by the Tax Foundation, Minnesota could expect to receive approximately $2.19 billion in aid.   There are only two local governments in the state which would meet the CARES criteria:  Hennepin and Ramsey counties.    If they would apply individually, we estimate Hennepin County would receive $220.3 million and Ramsey County $96.5 million leaving $1.873 billion for state distribution.

Minnesota’s Unemployment Insurance Trust Fund: Not as Robust as Portrayed

We have seen several news outlets reporting one big advantage Minnesota has entering into this difficult period is a very healthy balance in its Unemployment Insurance (UI) Trust Fund.  The Commissioner of DEED has said “the trust fund is in really good shape” and “as a whole, Minnesota is in good shape compared to many of our neighbors.”    In fact, according to the U.S. Department of Labor’s 2020 Trust Fund Solvency Report, the fund is considered below the minimum level for adequate state solvency going into a recession and Minnesota features the lowest solvency ratio of any state with which it shares a border.

According to the report, Minnesota had a balance of over $1.7 billion as of the beginning of 2020.  However, as the Department of Labor notes, “The dollar amount in the state trust fund is not a very useful measure of state solvency since no comparison is made to the fund’s benefit liabilities or state size.”   The simplest solvency measure is the “reserve ratio” which is the trust fund balance divided by the state’s total wages paid for the year.  On this basic measure, Minnesota’s reserve ratio of 1.3 still looks pretty good. 

But that still doesn’t take into account the level of benefits paid in a year.  The level of benefits paid in a year divided by the yearly wages is called the “benefit cost rate.”  The preferred solvency measure takes the reserve ratio and divides it by the average of the three highest benefit cost rates in the last twenty years.  The resulting value ("solvency ratio") compares the state trust fund balance to the average of the three highest years of benefit payments.  According the Department of Labor, “values greater than one are considered the minimum level for adequate state solvency going into a recession.”  Minnesota sits at .94.   For comparison purposes Iowa’s value is 1.47.   Minnesota is one of 22 states not meeting the eligibility requirements for interest free advances.  

To be sure, the UI trust fund is in much better condition than it has been in the past and is in good shape to withstand a short, sharp recession, especially with the federal government's help.   But our ability to weather a longer storm appears to be not as strong as has been depicted.