Finish Line

Music may “hath charms to soothe the savage breast,”[1] but music can’t hold a candle to what capital equipment expensing and $1.9 billion in capital projects spread across the state can do to mollify lawmakers.     After months of increasingly antagonistic rhetoric about the continuation of the governor’s emergency powers, accusations of bad faith negotiations, and internecine party squabbles, the Legislature passed a combo bonding/tax/supplemental budget bill in its fifth Special Session.  Seldom has a bill been a target of so much disparagement during its legislative journey and ultimately pass with such bipartisan support.

To be sure, its passage was far from a kumbaya moment as both House and Senate members on their respective floors leveled some strident criticism of both legislative process and bill substance.   Criticism of process centered on backroom negotiations, legislative maneuvering (the House adjourned sine die after passing it creating a “take it or leave it” proposition for the Senate), and perhaps the mother of all violations of the state constitution’s single subject rule.  It’s fair to say this constitutional provision now functions like the 55 mile-per-hour speed limit on I-94 in the Twin Cities:  regularly ignored, never enforced, and adhered to only out of a sense of civic obedience -- in which the practical result is needing more time to arrive at the destination.

Yet in the end, the elusive three-fifths majority in the House was achieved with plenty of votes to spare.  And even though the bill on the Senate floor was likened to, among other things, rancid milk, garbage, and Mr. Potato Head (some metaphors aren’t quite as intuitive as others), those sentiments didn’t stop it from passing on an overwhelming 64-3 vote.  

Interestingly, it turned out relatively little tweaking was needed to transform a bill declared “dead on arrival” earlier this summer into something signed by the governor.   According to House Fiscal Analysis, the general obligation portion of the $1.89 billion bonding bill increased only by about $17 million from the July version.  As might be expected, much of that modest increase went to House Republican districts.   Supplemental budget appropriations went from $58 million in July down to $31 million at the beginning of the Special Session #5 before rebounding to $44.8 million at the end after salary increases for state troopers and personal care attendants were added in final negotiations.  The biggest change from July lay in the tax article as the agreement permitted only one “cost” item from the Senate Republicans’ tax want-list to be included.   Unsurprisingly, that item was Section 179 expensing.  It has a conspicuous budget impact, and its inclusion was immediately brought up by Democrats whenever Republicans questioned the fiscal responsibility of the overall package.  Yet 179 conformity had considerable bipartisan support, was clearly a condition of the Senate’s buy-in, and had long been recognized as something which ought to be done.    Table 1 summarizes the General Fund impact of the bill. 

The direct general fund impact is $187.3 million in the current biennium and $218.1 million in the next biennium. However, the current biennium impact is mitigated by three spending offsets:

• State bond refinancing this August has yielded an estimated $41.7 million in current biennium debt service savings.
• The federal government has again extended (now through December) the temporary 6.2 percentage point increase in the federal match for the state’s Medical Assistance program saving the state $59.5 million.[2]
• A $105 million transfer to the General Fund from the State’s Premium Security Plan account which provides reinsurance payments to health insurers to cover the cost of high claims in the individual market. (Even with the transfer the plan is still projected to have sufficient resources to meet demand through the current scheduled ending date.)

Additional current biennial savings may materialize if local governments are unable to commit all of their federal CARES appropriation in the few weeks and these funds revert back to the state.  It is a mortal lock that the state will do everything in its power to find ways to spend all unused state and local CARES dollars to mitigate general fund spending within the relatively broad confines and constraints of federal guidance.  In addition, at the end of this calendar year, any unobligated funds from the COVID-19 Minnesota Fund created earlier this year must be transferred back to the General Fund.  However, any savings from these potential offsets is not likely to be large.   Local governments also have every incentive to spend all their state appropriation to mitigate the health and economic impacts of COVID.  And as of mid-October, only $18.8 million of the COVID-19 Minnesota Fund remains unauthorized.

Even with the tax relief, bonding, and supplemental spending, HF 1 still reduces the current biennium deficit by $28.8 million thanks to these offsets.  The same can’t be said for FY 22-23 as the Governor’s signature tacked on about a quarter billion dollars of fiscal impact onto whatever deficit materializes in the November forecast. 

There is some good news on the budget front from MMB.  October revenue and economic update show Minnesota revenue collections solidly exceeding the May 2020 interim budget projections.   Net general fund receipts for the first quarter of FY 2021 are $593 million, or 12.7% more than projected in May.  Collections from nearly every tax supporting the general fund is exceeding its forecast.   Yet MMB notes that estimated income tax payments are still 2% lower than the same period one year ago and general sales tax receipts are about 3.8% lower than the same period a year ago.  That’s not necessarily a Great Recession-like collapse, but any year-on-year declines in the state’s two tax revenue workhorses foreshadow problems.  And the challenge is compounded with a counter-cyclical increase in demand for government services.   For example, Minnesota has already been identified as one of three states whose Medicaid rolls have grown by over 13.5%.[3] 

The evolution of the virus and the November elections will have a considerable influence on how the 2021 biennial budget debate plays out.   But our budget destiny really resides in Washington.   Another big package of relief that this time includes aid to compensate for lost state and local tax revenues would be the welcome music needed to soothe lawmakers’ temperaments.  Without it, the unpleasantness marking this year’s regular and special sessions will almost assuredly crescendo.