The Significant Problem for Legislators in Prioritizing State Spending

March 30, 2021

By Tom Freeman, Director, Faegre Drinker Biddle & Reath LLP. Tom is NAIOP Minnesota’s lead lobbyist.

When the pandemic hit last year, state budget analysts had the arduous job of trying to predict the potential impacts to the state’s economy while the information on the COVID-19 virus was changing daily. For the first time in modern history, Minnesota Management and Budget (MMB) did a budget forecast in May of 2020 that predicted a $2.46 billion deficit. MMB is required to present two budget forecasts annually: one in February and one in December. The May forecast warned of tremendous volatility, very low state gross domestic product (GDP) and little hope of continued federal stimulus money. Nearly a year later, with the aid of federal monies and a GDP almost double the state forecast, our state now has a $1.6 billion surplus, but the volatility remains. The table has been set for the legislature and Governor Walz to pass a biennial budget by the end of May. We will explore if they can compromise and find a budget deal.

The major priorities for legislative leaders and the Governor are COVID-19 relief, continued funding for testing and vaccine distribution, business relief grants to impacted industries, and summer-school programming among the normal state budget priorities. The main problem this year is that the lion’s share of the budget surplus is one-time money. Only 15 percent of the surplus is a structural surplus which means Minnesota’s structural budget only has a surplus of $250 million. This presents a significant problem for leaders as they try to prioritize state spending.

Minnesota is one of a few states that do not automatically conform to federal tax changes. As a result, the February forecast includes taxing Paycheck Protection Program (PPP) loans. The business community’s key priority at the capitol this year is exempting these loans. The cost of the exemption is roughly $438 million and was passed by Senate Republicans in March to put pressure on the House Democrats and Governor. This issue will continue to be discussed in end-game negotiations and will be part of any budget deal the Senate Republicans agree to pass.

House Democrats released their budget targets last week and indicated that they, in a similar fashion to Governor Walz, will increase revenue in their state budget. The state budget does not include inflation and they argue that because some parts of the economy are having a tremendous year they ought to “pay their fair share.” This allows them to prioritize spending on K-12 education, public safety reform, housing assistance, small business relief in the wake of the pandemic and Minneapolis businesses significantly impacted by the civil unrest last summer. Senate Republicans released their budget targets two weeks ago. In addition to the PPP loan tax exemption, their budget includes a five percent cut to government administrative costs, unemployment funds and monies for broadband. Both legislative bodies will likely spend money from our state’s budget reserve signaling that spending out of this account will be part of a final budget.

The legislative session is constitutionally set to end on May 17. Given that the legislature is operating in a virtual setting, we have little expectation that they will get done on time. One factor that will be sure to force legislative leaders of both parties to compromise is a fear that Governor Walz could spend the federal money on his own. Because of a provision in state law, the Governor could spend all the federal stimulus money as he sees fit. The Senate Republicans have been fighting the Governor at every turn on his use of executive powers during the pandemic and if the May 17 deadline passes, it will be harder for Republicans to negotiate a deal that equitably prioritizes their vision for the state.