Is the Fourth Time A Charm?

Following the 2020 regular session and three special sessions, the state remains in a holding pattern with respect to a tax bill, a bonding bill, and budget repair.   With November elections looming and the clock ticking on the 91st Minnesota Legislature, legislative action – or lack thereof – in the next special session will have a lot to say about the state’s fiscal and political future.

In mid-August, in about the time it takes to play a round of golf, the third Special Session of 2020 came and went.  Its brevity was preordained as the dictates and demands of the state’s August bond sales prevented the state from doing anything substantively on state budget and fiscal matters.  Thirty million in CARES grants were approved to help service providers for adults with disabilities.   Some time was spent on the usual ill-fated attempt to terminate the Governor’s emergency powers.  The Senate interjected some unexpected and blood pressure-elevating political drama by refusing to confirm the governor’s Department of Labor and Industry commissioner after over a year in office citing performance concerns.  But with respect to state fiscal matters, tuning into the monthly state special sessions is reminiscent of watching summer television reruns -- the plot is familiar, the dialogue recognizable, and the end of season cliffhanger remains unresolved.

The Roadblock: Emergency Powers

Looking back to the end of the second special session, a negotiated conclusion seemed tantalizingly within reach.  A hybrid bonding and tax bill (which included full 179 conformity) plus a supplemental budget bill appeared to have the support of majorities in both legislative bodies and the governor.    The appearance of a finish line turned out to be a mirage as the House Republican caucus, whose votes were needed to pass the bonding bill, declared the package dead on arrival.   House republicans cited process objections (including being left out of the bonding bill’s final negotiations and combining a bonding and a tax bill in the first place); substance concerns (a light rail provision in the bonding bill was called a “poison pill”) and inadequate attention to the current deficit.

But the continuation of the governor’s existing emergency powers was the primary obstacle, or as one House member on the floor described it, what “tied everything together.”  House members argued the threat of COVID will be with the state for a very long time, state emergency powers law was never designed or intended to be used for such an indefinite and protracted period, and the Legislature needs to have a role in deciding how to respond to the pandemic.

Between the special sessions, staff discussions and proposals were exchanged between the Governor and the House Minority Leader Daudt on legislative emergency executive order review procedures, emergency management act authorities, and the termination of existing executive orders.   However, nothing came of this discussion resulting in the current stalemate.   What exactly transpired is uncertain and we only have an incomplete perspective on the offers and counteroffers.   According to a letter from the Governor to Minority Leader Daudt in the aftermath of the failed negotiations, here some relevant points regarding the compromise effort:

  • The Governor was willing to codify the elimination of 33 specific executive orders.  Many of these had already expired or were rescinded, modified, or supplanted by new orders as conditions and circumstances evolved (e.g. the “stay at home” order replaced by subsequent phased reopening orders).
  • House republicans sought the elimination of Executive Order 20-74 which constitutes “Phase 3” of the Stay Safe MN Plan.  This order provides the latest guidance, requirements, and measures for business reopening and public gatherings.   It is not clear if the House republicans proposed an even more “relaxed” version of this order or – we suspect much more likely -- simply eliminating all state-level restrictions and restraints.
  • House republican sought to eliminate the requirement that the Legislature must affirmatively act to end the peacetime emergency and instead allow either chamber to end the emergency by failing to ratify it.
  • House republicans sought to require affirmative majority of votes by the Legislative Coordinating Commission to extend any executive order beyond 30 days.
  • The Governor proposed to give the Legislative COVID-19 Response Commission (a bipartisan group already approved by the four caucuses for COVID management) the authority to terminate an executive order thirty days after the order is approved if a majority of the members from the House and the Senate vote to do so.   It’s worth noting the same “protection” the House now gives the Governor to exercise emergency powers would also exist here given the structure and configuration of the Commission.

The day after this post-mortem correspondence on the negotiations was transmitted, the Governor issued Executive Order 20-81 requiring masks to be worn in certain settings.  It’s an order certain to be added onto to any Republican “hit list.”   How wearing masks has come to be so hyper-politicized is guaranteed to be the subject of dissertations for years to come.  A June report by Goldman Sachs concluded a national mask mandate would buoy the country’s GDP by 5 percent.   It’s interesting to note 35 of the 50 states have mask mandates, eleven of which are under republican governors.

Governor Walz’s mask mandate has likely quietly and indirectly aided the state’s business community by making government a scapegoat and no longer putting businesses in the potentially awkward position of alienating customers with their own policies regarding mask use.   Yet from news and social media reports there remains large amounts of resistance to this perceived intrusion into personal liberty and government nannyism.  Lawsuits have been filed over the order, and a number of Minnesotans continue to circumvent this mandate claiming health issues prevent them from wearing masks.   In many of these cases these underlying health conditions might be diagnosed as civic neuropathy -- numbness to the idea that individual rights ought not be divorced from individual and societal responsibilities.

Between now and the next special session colorful political rhetoric will not be lacking – “dictatorial,” “tyranny,” and a “monarchy that may never end” have all been already employed in describing the current state of affairs.  What is in shorter supply is an understanding of how the legislature would tackle the pragmatic challenges accompanying a full and immediate repeal of the governor’s emergency power authority.    In a review of the 40 or so executive orders the governor wants to have remain in effect at this time, we count 85 references to Minnesota statutes, provisions, and administrative rules covering a wide variety of processes and procedures that have been been waived, suspended, or otherwise modified to respond to the spread of the virus and/or its impacts.  This count does not include Executive Order 20-07 giving state agencies the “flexibility to hire staff, schedule, assign, and reassign employees without adherence to existing limitations in collective bargaining agreements, memoranda of understandings, compensations plans, statutes, administrative rules, and administrative procedures and policies that present barriers to the needs of state agencies to efficiently and effectively mobilize and deploy their workforce…”   

Most, if not all, of these orders state they “remain in effect until the peacetime emergency is terminated or until it is rescinded by proper authority.”   Sifting through these orders and provisions to determine what to toss, what to keep, what to modify, how to modify, and for how long (might have we gained some better understanding of bureaucratic procedures and processes that aren’t necessary?) to deal with non-emergency or chronic COVID conditions would seem to raise the prospects of a multi-week special session unto itself, especially with a divided legislature.

Such homework would appear rather important to terminating the emergency, but little evidence exists that much thought has been given to these issues.  On the other hand, there appears to have been considerable bipartisan comity surrounding what one might expect would be a prime area of executive powers controversy: the use and disbursement of federal COVID dollars.   There have been no apparent major dustups over appropriations from the COVID Minnesota Fund or on CARES requests.  With respect to one particular potentially contentious topic – disbursement of federal aid to local governments -- Governor Walz acquiesced to both the Legislature’s greater local share of funds and distribution method.     Together, it raises the question of how much of the emergency powers agitation is being driven by political messaging as well as actual policy concerns.

The September special session will likely offer some insight on that.    With time running out it will be interesting to see if this topic still has the same session game-breaking influence.   Whatever frustration and anger reside in the public and among legislators about the continuation and Governor’s use of his emergency powers, the failure to pass a bonding bill and a tax bill with full 179 conformity will offer its own contributions to taxpayer frustration and perhaps anger.  

The Numbers: Two Deficits to Contemplate

Since the pre-COVID days of last November, MMB has reduced their forecasted tax revenue collections for the current biennium by $3.5 billion or 7.3%.  Each MMB forecast came with cautions and asterisks galore due to the tremendous unpredictability and volatility, but so far the numbers are tracking projections.   According to the July Revenue and Economic Update, closing revenues for FY 2020 are estimated to be $58 million lower than the May interim budget projection, or (0.3%).[1] 

FY 2021 got off to a seemingly good start as preliminary net general fund revenues for the month of July were 15.4% above forecast.  All major state tax revenues exceeded expectations as general sales tax revenues topped the monthly forecast by 47% or $71 million and corporate income collections exceeded forecast by 102% or $64 million.    As always, MMB is quick to note that “great caution” needs to be exercised in interpreting a single month’s worth of data that will also be subject to revision.   That interpretive caution is even more deserving considering the role and magnitude of the federal government’s fiscal response.    A truly remarkable statistic: in Q2 gross domestic product fell by 9.5% but current-dollar personal income rose more than six-fold in the quarter and real disposal personal income increased by $1.53 trillion.  While the phased in reopening of the state economy is certainly contributing to the positive revenue trends, higher than expected tax receipts are also reflecting the afterglow of the massive amounts and variety of federal stimulus and income support provided to individuals and businesses earlier this year.  Their discontinuation is likely to be seen in future revenue updates.  A recent analysis finds that, based on the latest data, eliminating the Federal Pandemic Unemployment Compensation supplement would lead to a 44% decline in local spending.[2]

MMB’s latest update also provides our first revised look at the upcoming biennium.   Based on the assumptions used for the state’s May interim budget projection, the planning estimate for FY22-23 is a deficit of $4.7 billion – a $5.2 billion flip from the $465 million surplus projected in February.  No detail was provided on revenues and expenditures to show how that number was derived.  The continued use of the May model inputs and assumptions did not sit well with some legislators who wanted another interim forecast based on updated information.   However, MMB argued that the forecast’s accuracy in projecting closing FY 2020 numbers makes it acceptable for use in planning.

Absent some unexpected developments, a November forecast featuring a projected multibillion dollar out-biennium deficit on top of an existing multibillion current biennium deficit is likely.   The pending tax and spending agreements expected to be on the table would create about $300 million in additional tails to add to the FY22-23 budget challenge.  (We don’t think the nearly $500 million from the budget reserve which was part of last year’s deal to pay for FY22-23 spending and achieve structural balance in the out-biennium has been factored into this planning estimate.)   Meanwhile over 90% of the federal CARES funds provided to Minnesota to deal with the health and economic expenditures from COVID’s fallout have been committed.     As of mid-August, of the $2.187 billion in CARES funds provided to the Minnesota, only $192 million remains unallocated to deal with any new and emerging COVID triggered spending needs through the end of the year.

All this demonstrates that THE critical development to watch for is the action of the federal government in providing another round of relief.  The prospects at this moment do not look particularly promising as Congress is dealing with its own political impasse on these matters.  Congress adjourned without agreement on three big issues relevant to the state budget: additional stimulus, unemployment insurance support, and additional aid to local governments to compensate for lost revenues as well as any virus-related matters.  

The President’s subsequent executive orders, intended as a workaround of the legislative gridlock, are weak tea with respect to the magnitude of fiscal challenges states, local governments, and citizens face.  They also entail some administrative problems.  The optional payroll tax holiday appears to be a nonstarter in the business community due to the payback requirements.   The new federal “lost wages assistance” program uses $44 billion in FEMA funds and requires states to construct essentially a new program to administer the additional $300 per week supplement to existing unemployment insurance (compared to the now expired $600 from the CARES Act).[3]   As of this writing over the half the states have applied and been approved to get a minimum of three weeks of additional payments.    Minnesota will be applying, but with demand so high and limited funds available, the duration of any support that eventually comes our way is questionable. 

In short, there is no escaping the fact that meaningful and substantive action requires Congress’ “power of the purse.”   With the bodies about $1 trillion apart and recessed until September 8, Minnesota remains in wait and see mode.  State budget repair has the look of a Texas hold ‘em poker game with everyone checking and rechecking in order to see the federal river card flipped before taking any action. 

The Politics: The Deficit as an Asset

With a healthy budget reserve, other time-buying maneuvers such as transfers and shifts at their disposal, and respectable odds that eventually some form of additional federal assistance is forthcoming, the patience lawmakers are demonstrating on state budget action is understandable.   But the virtuousness of patience does have its limits.    The tighter the timeframe demanded for remedial budget actions, the harsher the adjustments and resulting effects will be.   Many might have expected that six months into the pandemic, the control of the virus and our fiscal trajectory in responding to it would be a lot clearer.    That doesn’t seem to be the case and raises the question of how much more clarity we will have six months from now.  Even though taking some action now on the deficit would be prudent, that’s not likely to happen for a few reasons.

First, voting on specific tax increases and spending cuts just as citizens prepare to head to the polls is a high risk/low reward endeavor.   Especially in highly contested districts, it can amount to electoral seppuku.   In addition, both parties are adhering to pre-COVID positions in spite of the dramatically changed fiscal circumstances.  For example, when state labor contracts were being ratified as the COVID crisis began, there was zero DFL interest in reopening and renegotiating the second year of the contract even though it created hundreds of millions of dollars in tails in the out-biennium and increased the prospects of state workforce reductions.  Similarly, there has been no apparent Republican moment of retrospection or reconsideration of the tax cuts enacted last year nor any interest in adjustments to rate schedules or other tax system features to try accommodate revenue neutrality while pursuing federal conformity actions.  As Speaker Hortman noted, “at the moment the political philosophies are so different, the question is, should we start attacking this year’s deficit today?  I don’t think that’s going to happen.”[4]

Finally, the existence of the deficit also functions as a political asset to both parties.  One of the major questions Republicans face is how much down ballot impact the presidential election will have. The prospects of a $5 billion state budget deficit in the hands of “unchecked” DFL control will undoubtedly be a prominent message to attract independents and bring any wavering Republican voters back into the fold.    Similarly, the tax ambitions of the DFL in recent years have been stymied by the existence of budget surpluses.   The deficit shifts the framing of these proposals from “want” to “need” heading into 2021.   Given the current political environment, some DFLers may think it pays to wait not just on budget repair, but on bonding and tax bills as well, banking on a takeover of both bodies this November.

Put it all together and budget repair is almost assuredly off the table.   The best we might expect is a “Hippocratic oath” of doing no further harm to the current biennium budget.   Instead, it appears we will use the surplus to navigate the current biennium deficit and enter the regular 2021 session hoping additional federal action and COVID’s evolution cooperate to keep us from facing the prospects of building a biennial budget facing a deficit akin to that coming out of the Great Recession.   All this makes for an easier November but also a 2021 session to remember.

Footnotes

[1] The original update in early July estimated a positive closing variance for FY 2020 of $168 million, but noted that not all the final income tax payments for 2019 had been received and processed.   An update to the update on July 31 flipped net income tax receipts to $226 million below the May projection resulting in the negative variance for FY 2020.

[2] “The Effect of Fiscal Stimulus: Evidence from COVID-19” Casado, Glennon, Lane, McQuown, Rich, and Weinberg, NBER Working Paper No. 27576, August, 2020

[3] Because of FEMA matching requirements under the Stafford Act which funds this program, only workers receiving at least $100 a week in state employment benefits would be eligible for the additional payment.

[4] “Despite projected deficit, Minnesota in no rush to implement budget cuts” MinnPost, August 7, 2020