A first look at Governor Walz’s supplemental budget proposal

The state of Minnesota has resources to draw on to start building a more equitable future, focusing on what Minnesotans and their communities need to thrive, and dismantling the deep divides in opportunity across lines of race, income, and geography. The recent November forecast projected a historic $7.7 billion state general fund surplus for the current FY 2022-23 budget cycle and a $6.0 billion structural balance for FY 2024-25. The state also has federal resources to deploy, including $1.2 billion in American Rescue Plan flexible funds and funding from the Infrastructure Investment and Jobs Act.

In the final weeks of January, Governor Tim Walz released his supplemental budget proposal under the three priority areas of economic opportunity, supporting children and families, and protecting health and safety; as well as his infrastructure proposal (often referred to as the “bonding bill”).

His proposals include important elements that would get us closer to a future where all Minnesotans can thrive – including paid family leave, earned sick time, affordable child care and health care for more Minnesotans and their families, and improved access to higher education. However, we are concerned that he has proposed to allocate about one-third of the state’s projected surplus into the Unemployment Insurance Trust Fund, providing a tax benefit to all employers that pay into it, regardless of whether they are struggling or very profitable.

Here’s our first look at some of the items in the governor’s budget proposal, especially in the areas of education, health care, child care, other supports for workers and families, infrastructure and climate change, tax changes, and Unemployment Insurance.  

The proposal also would expend $1.2 billion of state ARP fiscal recovery funds in FY 2022-23.

For context in understanding the budget figures, keep in mind that we are already in the FY 2022-23 two-year budget cycle. Proposals with an ongoing impact likely will start in FY 2023, so there is one year of funding in FY 2022-23 and two years of funding in FY 2024-25.

E-12 Education

The governor’s budget proposes $790 million in additional net funding for E-12 education in FY 2022-23 and $1.7 billion in additional funding in FY 2024-25. 

His education proposal would increase funding for school districts through the basic student formula, the largest source of state funding to school districts. Walz proposes an increase of 2 percent in FY 2023, or $137 per student. The governor’s education proposal also includes an initiative for free breakfast and lunch for all Minnesota students.

Walz also proposes $155 million in FY 2022-23 and $370 million in FY 2024-25 for full-day pre-kindergarten for the “most underserved four-year-old children” delivered in a range of child care and early learning settings. The administration estimates that this initiative along with existing pre-K funding would be expected to reach over 22,000 students across the state. The governor also proposes a substantial $75 million per year increase in funding for early learning scholarships.

Together, these four proposals account for 70 percent of Walz’s education investments for the FY 2022-23 biennium.

Walz also includes a number of important supports for students and teachers, such as:

• Several mental health initiatives, including school-based mental health screening and funding for social workers.
• Measures intended to advance racial justice within the school system, including culturally specific learning and expanding and supporting the Black, Indigenous, and People of Color (BIPOC) teaching workforce.

Health and Human Services

Walz’s Health and Human Services budget proposal includes $555 million in net additional funding for FY 2022-23 and $2.2 billion in additional funding in FY 2024-25. His proposal includes significant investments in addressing families’ child care needs and actions to support Minnesotans’ well-being through better access to affordable health care.

The governor is proposing several policy changes to make health care more accessible, including a MinnesotaCare “buy-in” that would enable Minnesotans with incomes above current eligibility limits to purchase this affordable health insurance coverage. Proposed MinnesotaCare changes also include funding for community-driven improvements to health care and a simplified reduced premium schedule. The proposed changes total $48 million in FY 2022-23 and $98 million in FY 2024-25.

The governor also proposes to expand MinnesotaCare to cover undocumented children ages 0 to 18, starting in 2024. This proposal is expected to extend coverage to 1,700 children at a modest cost of $1.6 million in FY 2022-23 and $12 million in FY 2024-25.

Another major win for families and children would be 12 months of continuous Medical Assistance eligibility to eliminate gaps in coverage for children from ages 0 to 20. The supplemental budget allocates $6.5 million in FY 2022-23 and $75 million in FY 2024-25.

Many Minnesota families would be able to afford child care as a result of the governor’s proposed investments. The proposal includes $81,000 in FY 2022-23 and $515 million in FY 2024-25 to forecast and fully fund the Basic Sliding Fee Child Care Assistance Program to cover all eligible families who want to participate. This would move hundreds of families off waitlists and would serve an estimated 16,000 families, enabling them to better afford child care so they can work and go to school. Walz’s proposal also expands the definition of families who can qualify for child care assistance to include an estimated 2,000 foster care families, relative custodians, successor custodians, and guardians.

The governor’s budget proposal includes $32 million in FY 2022-23 and $71 million in FY 2024-25 to stabilize and strengthen our child care system through grants to providers so they can build capacity and retain workers. There is also $64,000 in FY 2022-23 and $275 million in FY 2024-25 allocated to increase the reimbursement rates paid to child care providers, which are currently far below the federally recommended level to ensure families have choices in providers.

The governor also sets aside $176 million in FY 2024-25 for the “interaction of child care program changes”, which represents the fiscal interactions between the changes in Basic Sliding Fee forecasting, changes in reimbursement rates, and expanding the definition of eligible families.

These child care assistance provisions, combined with those on early learning scholarships and pre-kindergarten described in the Education section above, represent a substantial investment in bringing down the cost of child care across the spectrum of choices available to Minnesota families.

The governor proposes a large investment in home visiting, which provides parenting support and education related to health and child development for families with pregnant people and children under age 5. Minnesota currently only serves a fraction of eligible households, and the proposed budget invests $127 million in FY 2022-23 and $524 million in FY 2024-25 to expand the number of families reached.

The governor’s budget provides major proposals to ensure Minnesotans have enough to eat, including a one-time capital improvement item to help food shelves expand capacity ($15 million in FY 2022-23), and support for food shelves, food banks, and meal programs ($5 million in FY 2022-23 and $3 million in FY 2024-25). Another important provision is for Tribal food sovereignty, which would fund programs for food security in Tribal Nations and American Indian organizations ($7 million in FY 2022-23 and $5 million in FY 2024-25).

The budget includes proposals to support economic stability for very low-income Minnesotans through investments in the Minnesota Family Investment Program (MFIP) and General Assistance (GA), which provide modest financial assistance to very low-income families and individuals respectively. The plan would reduce excessive paperwork and stabilize benefits for those whose incomes fluctuate monthly. The governor’s proposal also would increase General Assistance benefits for the first time in over 35 years, raising the maximum benefit to $344 per month.

Higher education

The governor’s budget proposal would allocate an additional $124 million in funding for higher education in FY 2022-23 and $234 million in FY 2024-25. The University of Minnesota would receive the largest share of this increase with $43 million in FY 2022-23 to address the rising cost of attendance and advance equity for low-income and Black, Indigenous, People of Color (BIPOC) students. Minnesota State would receive $39 million in FY 2022-23 to maintain operations, support education programs impacted by the pandemic, and improve access to services like mental health support and workforce training.

The governor also proposes an additional $42 million in FY 2022-23 for the Office of Higher Education for initiatives largely intended to improve student outcomes and address long-standing disparities. This proposal includes a pilot program for college application fee waivers, expanding the Emergency Assistance for Postsecondary Students (EAPS) grant program, and establishing the Student Parent Center Grant Program to support expectant and parenting college students. This would work to improve enrollment rates and provide a range of resources and services to address pandemic-induced hardships that expectant and parenting students face.

The proposal also would increase funding for financial aid for students through the State Grant program and would modify eligibility requirements so more students can qualify. One change relates to a problem arising from the fact that the State Grant formula calculation assumes all students receive the Pell Grant. However, Minnesota “Dreamers” who came to the country as children and do not have legal status are ineligible to receive federal Pell Grants. Walz’s proposal would increase the grant award for these students so that they’re able to receive financial aid comparable to their citizen counterparts.

Supports for workers and their families

In the pandemic, many more Minnesotans came to recognize how the lack of a robust system of supports for workers and their families means that illness can turn into financial hardship, and workers who keep the economy going still struggle to pay the bills.

The governor’s proposal includes creating a statewide paid family and medical leave system, and implementing statewide earned safe and sick time standards for workers. Paid leave is important for workers and the economy. It allows workers to take the time they need to care for themselves and their families while giving employers more stability in their staff since paid leave is linked to reduced turnover. The earned sick time provision would require Minnesota employers to provide workers with up to 48 hours of paid sick leave per year. The paid family and medical leave proposal would charge employers a 0.6 percent premium on employee wages starting in 2024 to establish a statewide insurance program for workers who need significant time off to care for themselves or their families.

Across his budget, Walz proposes a number of elements to support essential workers. The largest of these proposes that $1 billion go to payments to frontline workers in health care, child care, grocery, food service, transportation, public safety, retail, long-term care, manufacturing, and other sectors. The administration reports payments of $1,500 would go to about 667,000 workers each, which would be funded by some of the state’s flexible American Rescue Plan (ARP) dollars. This proposal builds on some unfinished business from last year. As part of the 2021 state budget agreement, policymakers agreed that $250 million should be spent on payments to essential workers, but these funds have not yet been distributed because of a deadlock between the House and Senate on which workers should be included.

In addition, the budget includes proposals specific to supporting workers in community health, health care, agriculture, and other sectors.

Walz’s proposal would also fund a state Office of New Americans to improve immigrants’ and refugees’ ability to access state services and to reduce employment barriers. Immigrants and refugees who call Minnesota their home are already working, learning, and living in our communities. It is important to give all Minnesotans – regardless of who they are or where they were born – a fair shot in today’s economy, and allow everyone to thrive and more fully be a part of our communities.

Infrastructure and climate change

From investments in broadband and housing, to the state’s roads, bridges and bike lanes – the governor’s proposal includes several proposals regarding our state’s infrastructure and transportation systems. Many of these proposals are aimed at improving Minnesotans’ well-being by strengthening the state’s ability to respond to the effects of climate change.

The proposal includes an additional $170 million in FY 2022-23 for broadband infrastructure. The pandemic has made clear the importance of broadband access for many to work and learn from home, and the administration estimates that this additional investment and federal funding would provide all Minnesota households with access to broadband.

Walz would leverage federal matching funds from the Infrastructure Investment and Jobs Act through a total of $595 million in state general fund and transportation fund resources, which would be invested in the state’s transportation infrastructure. A portion of these funds would go to state and local roads and bridges, and the other portion would be used for other projects including transit, electric vehicle infrastructure, and bicycle and pedestrian infrastructure. This package is in addition to transportation investments proposed in Walz’s capital budget.

The governor's budget proposal includes a $200 million investment in FY 2022-23 to extend the Blue Line light rail from downtown Minneapolis to the northwest suburbs, which is estimated to be completed by 2028.

Housing is also an important priority in the governor’s budget. His supplemental budget proposal includes $100 million in one-time funding to preserve existing affordable housing. The administration estimates this investment will preserve 2,850 affordable homes for renters and homeowners. This is in addition to the $310 million in housing finance investments included in the governor’s capital budget proposal, which came out earlier this month.

The governor’s budget proposal recognizes the importance of mitigating the impact of climate change and includes:

• $54 million in FY 2022-23 to help communities mitigate increased stormwater flows as climate change leads to more frequent and heavy rainfalls;
• $42 million in FY 2022-23 to modernize Department of Natural Resources facilities and other infrastructure to adapt to climate change;
• $34 million in FY 2022-23 in one-time start-up costs to establish a quasi-public “Green Bank” to provide loans for entities to use cleaner and more reliable sources of energy;
• $20 million in FY 2022-23 for grants to businesses to purchase electric vehicles and charging infrastructure; and
• $2 million in FY 2022-23 and $4 million in FY 2024-25 to leverage federal funds from the Infrastructure Investment and Jobs Act programs to reduce transportation-related greenhouse gas emissions or build climate change resiliency.

The governor’s proposal also recognizes the continued uncertainty of the path of the COVID-19 pandemic and the likely need for further responses to it. He proposes using $350 million of general funds and $150 million of the remaining ARP flexible funds to create a COVID-19 emergency response account to respond to emerging needs more nimbly.

Public Safety and Justice

Walz’s public safety budget includes several proposals to reform our criminal justice system, from small ticket items like eliminating the high cost of phone calls for individuals who are incarcerated to better maintain ties with their families and communities, to a $10 million proposal for community policing grants, modeled after a federal program that uses a preventative approach – supporting social services and “economic revitalization” to deter crime.

It’s well documented that Black and Brown people are disproportionately policed, arrested, and incarcerated in our current criminal justice system. It’s essential that policy changes made this year intended to make Minnesota a place where all are safe center the voices and experiences of Black and Brown communities.

Tax changes

In addition to the support for frontline workers described above, the governor also proposes expending $704 million in one-time direct payments of $175 for single taxfilers with incomes up to $164,400 and $350 for married joint filers with incomes up to $273,470. The payments would go to more than 2.7 million Minnesota households that filed a 2020 income tax return or filed for a 2020 property tax refund (known commonly as the Circuit Breaker for homeowners and Renters’ Credit for renters.) The income limits are intended to exclude the small share of Minnesotans with incomes high enough to reach the state’s top income tax bracket.

Walz also proposes some changes to existing tax credits used by lower- and middle-income families to better afford basic expenses:

• The proposal would make several changes to improve the K-12 Education Tax Credit. The income level at which a family can qualify for the maximum credit amount would be increased from $33,500 to $70,000, substantially increasing the number of families that qualify, and this “threshold” amount would be increased in future years to keep up with inflation. Eligibility would be based on a family’s adjusted gross income, rather than total household income; this makes it easier for families to know whether they qualify. The administration reports that this would make 38,600 more families eligible for this tax credit, which returns some of what families spend on their children’s educational activities. This proposal would provide an additional $12 million in tax credits in FY 2022-23 and $26 million in FY 2024-25.
• The state’s Child and Dependent Care Tax Credit would also be expanded to provide larger tax credits and allow more middle-income families to qualify to receive it. The income level at which families can receive the maximum value of the credit would be increased from $53,100 to $70,000, and the amount of credit families can qualify for would be increased by 30 percent in 2022 and 2023 only. This is a tax credit that refunds some of what families pay for child or dependent care. In addition, the special credit available to parents of newborns without child care expenses would be available to parents regardless of their marital status (currently it is limited to married couples). This would increase the total amount of this tax credit going to Minnesota families by $18 million in FY 2022-23 and $27 million in FY 2024-25.
• The Working Family Credit, a tax credit for workers and families earning lower wages, would become available to households who meet all other requirements to qualify for the credit but currently are excluded because they file their income tax returns using an Individual Taxpayer Identification Number (ITIN). This would expand the credit by $10 million in FY 2022-23 and $21 million in FY 2024-25.

In addition, the Walz budget would allow taxpayers using ITINs to receive homestead status on homes they own. This would lower their local property taxes and allow these homeowners to qualify for the homeowner property tax refund (if they meet other criteria to qualify). This would cost a modest $3.6 million in FY 2024-25, and like the Working Family Credit change described above, is a positive step toward making our tax system more inclusive.

The governor also proposes a net $93 million in tax reductions in FY 2022-23 and $29 million in tax cuts in FY 2024-25 for a set of tax changes to conform Minnesota’s tax laws to federal tax law changes. More details on this proposal are needed to understand who would benefit.

Walz’s tax plan includes some provisions that seek to provide more resources to local governments to fund essential public services, and thereby reduce reliance on local property taxes. This includes:

• Exempting local governments and nonprofits from paying sales taxes on materials and supplies used in construction and building projects ($95 million in FY 2022-23, $142 million in FY 2024-25 in general fund savings to these entities.)
• Create public safety aid to cities, counties and tribal governments, based on their population ($100 million in aid in FY 2022-23, $195 million in FY 2024-25.)
• Create Soil and Water Conservation District aid, a new state funding source to these local government bodies. $22 million in general fund resources in FY 2022-23, $12 million of which would replace a scheduled aid payment funded by the Clean Water Fund; $44 million in general fund aid in FY 2024-25.

Walz also proposes $7 million in FY 2022-23 and $10 million in FY 2024-25 in additional funding for the Angel Tax Credit, a tax credit for investors or investment funds that make certain types of investments.

Finally, Walz’s proposal to legalize the use of cannabis by adults has multiple elements; in terms of tax policy, it would create two tax mechanisms that are estimated to raise $64 million in general fund resources in FY 2024-25.

Unemployment Insurance financing

Walz’s budget would put $2.7 billion into the state’s Unemployment Insurance (UI) Trust Fund. This proposal would use roughly one-third of the state’s projected surplus but it is not specifically targeted to businesses facing tough times.  

The dramatic job losses seen under COVID demonstrated the importance of Unemployment Insurance benefits in keeping workers and the economy afloat during times of job loss; federal policymakers took action to fill gaps in many state UI systems so that more jobless workers and their families got the help they deserved.

Employers pay Unemployment Insurance taxes, which go into the UI Trust Fund in order to pay UI benefits for jobless workers. Funds are built up in the Trust Fund over time so they are there when needed. If the Trust Fund does not have enough resources to cover UI benefits to jobless workers, states can receive loans from the federal government.

As a result of the pandemic, Minnesota’s UI Trust Fund was depleted, and the state took a loan from the federal government. When this happens, there is an existing process for rebuilding the trust fund and paying back the loan gradually over time through additional UI tax assessments on employers. These additional assessments would largely begin starting this year. Walz’s proposal would instead use general state resources to refill the Trust Fund and pay back the federal loan, as a replacement for the tax assessments on employers.

If providing assistance to employers is a priority this session, a better way would be through targeted support to those businesses and nonprofits that are truly struggling. That would leave more of the surplus to go toward strengthening the Minnesota individuals, workers, families, and communities that were severely harmed by the pandemic, and supporting an equitable recovery.

What’s next?

This is a supplemental budget year, and any changes policymakers make will build on the two-year budget they passed last summer. While that budget included some important responses, it fell short of fully responding to the health and economic impacts of the pandemic, or the deep disparities in opportunity and long-standing areas of disinvestment that were worsened by COVID. It is imperative that policymakers use 2022 to make transformative investments to build a more equitable future.