Supplemental Budget 2.0 - In for a Penny, In for $9.25 Billion

Based on the February forecast and the additional $1.5 billion in state surplus arising out of it, Governor Walz increased his supplemental budget proposal last week to augment an already ambitious fiscal agenda.   In addition to several budget enhancements to items included in his original proposal, the revision includes 42 new proposals generally in the $1-10 million dollar range, nearly one-third of which are in the Health and Human Services area.

Notable revised/new proposals include:

• A $1.3 billion increase in the one-time tax rebates to most Minnesotans.  Married joint filers up to $273,400 in income would now receive $1,000 while single tax filers up to $164,400 would receive a payment of $500  
• $73.4 million for a one-time, non-compounding supplemental cost of living adjustment to public pension beneficiaries
• $31.3 million to address recruitment and retainment needs in Minnesota’s caregiver workforce
• $21 million for cybersecurity measures

The table below provides a summary by major spending area (all totals in thousands).  The revised supplemental budget reflects a $9.01 billion increase in FY22-23 spending over current law and a $1.6 billion increase over the Governor’s initial supplemental budget presented in February.   Approximately $239.5 million in lower biennium tax collections – mostly due to federal conformity – are added to the proposed spending increases to arrive at the $9.25 billion general fund impact.

Source: General Fund Balance Analysis, MMB 3/17/22

The General Fund impact would consume essentially all of the current surplus (leaving a $257,000 budgetary balance heading into FY24-25) and about 89% of available resources when factoring in unused federal fiscal recovery funds.   This revision increases out-biennium net spending tails by $333.5 million to $5.83 billion — which consumes 93% of the currently forecasted FY 24-25 structural balance.  Using the February forecast for FY 22-23 as the baseline, the Governor’s revised supplemental budget represents 16.2% biennium-on-biennium projected spending growth for FY 24-25.

A couple of questions arise:

Do We Care About Forecast Risk or Not?--  It’s worth revisiting a couple of the interrelated risks identified by MMB in their release of the February forecast:

• Pandemic – The latest omicron variant is more contagious and East Asia is currently getting clobbered by it.  For example, Shenzhen is a city of 17 million and a massive industrial base for consumer goods, especially when it comes to electronics.   It announced a strict lockdown on March 13th in which all activities except for utilities, supermarkets, telecommunications, pharmacies and clinics are shut down.  Which is aggravating…
   
• Supply Chain Issues – Manufacturing and transportation shutdowns are causing major disruptions in international trade and logistics.  The airports and sea ports of both Shenzhen and Shanghai, among the largest in the world when it comes to merchandize freight, are being especially impacted.  Last week goods had to spend about 7 days in transit from Shenzhen to Hong Kong, a distance of 20 miles.  Resulting labor shortages also mean fewer flights which in turn means less capacity, higher prices, and longer lead times.  Which all contribute to…
   
• Inflation – Annual inflation rate in the US accelerated to 7.9% in February of 2022, the highest since January of 1982.  Excluding volatile energy and food categories, the CPI rose 6.4%, the most in 40 years. According to a BLS release, “The surge in energy costs due to war in Ukraine is still to come. The inflation was seen peaking in March but the recent developments in Europe coupled with the ongoing supply constraints, strong demand, and labor shortages will likely maintain elevated inflation for longer.”  That is causing some concern that, according to the head of the Minneapolis Fed, “if the economy is now in a high-pressure, high-inflation equilibrium the FOMC will need to act more aggressively and bring policy to a contractionary stance in order to move the economy back to an equilibrium consistent with a 2 percent inflation target.”

How all this uncertainty will actually play out is anybody’s guess.   But this is a supplemental budget that seems to take these risk factors quite casually.

Are these real governing agendas? --  Given the make-up of the Legislature, whatever comes out of this session will be unrecognizable compared to what the Governor is proposing.   The same can be said of the Senate Republicans' proposals which starts with $8 billion of permanent tax relief and will likely go up from there.  The practical purposes of everyone’s positions right now are electoral messaging and perhaps providing an abundance of items to serve as cannon fodder to arrive at some kind of negotiated agreement.  

However, it does raise the question, if either party controlled all three lawmaking bodies and actually had to govern under these proposed budget frameworks, would we still be seeing the proposed magnitude and scope of fiscal transformation these agendas represent?  With divided government, it can be politically expedient and convenient for everyone to propose budgets they know won't pass.  But if these bipolar visions of government are a statement of governing intent, this November promises to be one of the most fiscally significant and consequential elections in state history.