Caution, savings in Governor Walz's proposed budget

Clark Goldenrod, Betsy Hammer, Nan Madden
Mar 12, 2020

Governor Tim Walz's FY 2020-21 supplemental budget proposal released today focuses on passing a significant capital investment or bonding package and making small, strategic investments in several areas of the state's budget. It leaves much of the state's projected surplus unspent with the goal of "ensuring fiscal stability and addressing emergency response and preparedness needs across the state."

In the midst of a global pandemic due to COVID-19 (coronavirus), officials and the public are responding to a rapidly changing environment. The governor's budget takes a prudent path. It seems certain that the state's actual economic performance will be less than assumed in the February forecast and the projected $1.5 billion surplus is too optimistic. 

The supplemental budget describes Walz's proposed changes to the two-year state budget passed last year. For FY 2020-21, Walz proposes $355 million in net additional general fund spending. In the next biennium, he refills the state's budget reserve, undoing a decision made last session that would have substantially weakened it. 

Governor Walz's FY 2020-21 supplemental budget proposal   Net general fund impact
 Health and Human Services  $137 million
 Capital Projects and Grants  $69 million
 Public Safety and Judiciary  $67 million
 E-12 Education  $27 million
 Debt Service  $20 million
 State Government and Veterans  $13 million
 Environment  $11 million
 Transportation  $7.4 million
 Jobs, Economic Development, and Commerce  $2.1 million
 Agriculture and Housing  $300,000
 Total  $355 million

Preparing for an uncertain future
The governor takes two smart strategies to prepare for an uncertain budget and economic future. First, he leaves a substantial amount of the projected surplus, almost $1.2 billion, unspent or "on the bottom line." 

Second, he promotes future budget stability by rebuilding the state's budget reserve. For years, policymakers have responsibly added to the reserve so that when a recession hits and state revenues plummet, the state can avoid drastic cuts in critical services and respond to the challenges Minnesotans face. Right now, the budget reserve is finally at its recommended level of about $2.3 billion, but last session policymakers decided to withdraw almost $500 million at the beginning of FY 2022-23. Walz's proposed budget would reverse this decision. This is especially important at a time when the economy is starting to turn, and state revenues may decline with it. 

Health and Human Services

Walz's proposed supplemental budget makes the largest investments in Health and Human Services, totaling a net $137 million for FY 2020-21. 

His budget recommendations include nearly $21 million for the Public Health Response Contingency Account. This funding is intended to support the state's COVID-19 response, including increased staffing, lab supplies, personal protective equipment, and local public health needs. This is consistent with the bill language signed into law earlier this week.

The governor's proposed budget also would increase state reimbursement rates to child care providers to 30 percent of market rates, and update reimbursement rates every three years. These changes will bring Minnesota into compliance with federal requirements and avoid financial penalties. The changes are funded primarily by federal dollars in FY 2021 with a more significant $84 million in state funding for the FY 2022-2023 biennium. Current reimbursement rates are at the 25th percentile based on 2011 market rates and are woefully inadequate, making it hard for families to find providers and creating financial strain on providers. The proposal also includes $2 million for economic development grants to support child care providers.

The supplemental budget includes funding so that tribes and counties do not have to repay money to the state. Recent DHS errors resulted in overpayments, including $29 million to reimburse tribal governments and $9 million to reimburse counties.

Recent harmful federal rule changes would take food off the table for many Minnesotans. Walz's proposed budget importantly includes $18 million in state funding to ensure food benefits for about 8,000 Minnesotans who would lose access to the federal Supplemental Nutrition Assistance Program, or SNAP.

Public Safety
Another area of more significant investment in the governor's proposed budget is Public Safety, with a proposed general fund impact of $67 million. Almost half of that, $30 million, goes to the state's Disaster Assistance Contingency Account. The governor's budget notes that the account is currently empty, and is putting forth money to respond to natural disasters over the next year and a half. 

E-12 Education
Walz's E-12 Education proposal totals $27 million for FY 2020-21. His largest investment in this area is intended to support the mental well-being of students. The governor also makes several small strategic investments aimed at making the state's education system work for all Minnesota students, whether they're Black, Brown, or white. These include reestablishing Full Service Community Schools grants, which provide wraparound services for "racially isolated or low-performing schools"; funding for equity coaches to support teachers; a new requirement that all students learn about tribal nations; and restoring funding for tribal Head Start programs. 

Consistent with the understanding that current economic conditions are significantly more serious than anticipated at the time the February Forecast was released, Walz's budget maintains the state's existing tax revenues. 

The one proposal in the tax area is to tax retail sales of nicotine solution and vaping devices. This is one component of an initiative to deter youth from using vaping products; the health portion of the budget also includes a public education campaign focused on addressing youth tobacco, nicotine, and e-cigarette use.

What comes next?
Minnesota policymakers will need to be nimble as they make decisions this legislative session, and respond to a rapidly changing environment. New policy ideas are being introduced every day to respond to the public health and economic concerns of Minnesota residents. Walz's budget demonstrates the right approach: recognizing the uncertainty of the state’s fiscal situation, prudently rebuilding the budget reserve and leaving funds on the bottom line, and prioritizing investments to advance equity and the economic security of workers, families, and communities.