2021 Minnesota Legislative Update: Biennial Budget

COVID-19 defined the 2021 regular session of the Minnesota Legislature. When it convened on January 5, 2021, the Legislature had been meeting in special session monthly since June 2020 to consider terminating Governor Walz’s coronavirus-related peacetime emergency declaration, the basis for the numerous executive orders he has issued addressing pandemic response. Frustration about the length of the peacetime emergency and breadth of the governor’s executive orders contributed to the rejection of two of the governor’s commissioner picks in the Republican-controlled Senate in September 2020.

Throughout the 2021 regular session, the Legislature convened with the Capitol complex and state agencies closed to the public, many legislators and all staff working remotely, and committee hearings and floor sessions held online. These restrictions significantly hampered the Legislature’s ability to consider and process legislative proposals. While bills were introduced at a normal pace for a budget-setting year, only 31 bills were enacted into law by the time the legislature adjourned on May 17 — a historic low.

The Legislature’s primary task was to set the state’s biennial budget for FY2022-23. When it convened the state was facing a $1.27 billion budget deficit for the FY2022-23 biennium. As the session progressed, the picture steadily improved. Minnesota Management and Budget’s (MMB) February forecast projected a $1.57 billion surplus. Increased revenue from corporate, income and sales taxes as the state and country began to emerge from the pandemic were key drivers in this nearly $3 billion swing. In April, Congress passed the American Rescue Plan which provided an additional $2.8 billion to the state.

Even with a significant surplus, the Legislature and Governor Walz needed a lengthy special session, including the prospect of a government shutdown, to agree to and enact a biennial budget. On the regular session’s final day — Minnesota’s constitution required the Legislature to adjourn on May 17 — Governor Tim Walz (DFL), Senate Majority Leader Paul Gazelka (R – East Gull Lake) and House Speaker Melissa Hortman (DFL – Brooklyn Park) announced a preliminary agreement on a budget. The agreement called for a $52 billion budget for the FY2022-23 biennium, an increase of approximately 7.7% or $3.7 billion from the last biennium. It also provided $934 million in tax relief for small businesses that received Paycheck Protection Plan loans and individuals who received unemployment insurance benefits during the pandemic. The agreement set individual budget targets for committees, a timeline for reaching agreement on outstanding spending and policy issues and a process for resolving these issues.

Over the next month, legislative leadership and committee chairs worked to finalize and pass the budget bills necessary to keep Minnesota’s government operating. These negotiations were complicated by the significant number of policy provisions contained in the House and Senate budget proposals needing resolution. Issues regarding police reform and the governor’s executive authority to address the pandemic were particularly difficult to resolve. The final budget bills were passed on June 30, averting a government shutdown by a few hours.

State Budget Highlights

The following are spending and policy highlights in the recently passed budget bills.

Agriculture

The omnibus agriculture policy and finance bill spends $139.4 million, with $118.7 million going to the Department of Agriculture, $12.1 million to the Board of Animal Health and $8.6 million to the Agricultural Utilization Research Institute.

Key spending and policy provisions include:

• $1.7 million to upgrade analytical lab equipment
• $9 million for incentive payments to advanced biofuel produces, renewable chemical producers, biomass thermal producers and building siding producers
• $6 million in grants for equipment to meet state biofuel replacement goals

Commerce

The first bill passed in special session — the omnibus commerce, climate, and energy finance and policy bill — spends $84.9 million in general fund revenue and disburses another $103 million over the same period from the Renewable Development Account, a state-administered fund designed expressly for the purpose of developing renewable energy sources in Minnesota.

Key spending and policy provisions include:

• Establishing a student loan borrowers’ bill of rights
• Creating a catalytic converter theft prevention pilot project
• Creating an enhanced toxic toy enforcement program

The bill also extends the cold weather rule period when utilities may not disconnect customers, establishes an advisory committee to develop a statewide energy transition plan, and creates an energy transition office to assist communities and workers at electric plants as they go offline and retire.

The bill includes $21 million to fund solar initiatives for E-12 schools and higher education institutions. There were no other large-scale alternative energy projects funded.

E12 Education

The omnibus E-12 education bill spends $21.2 billion in the next biennium, including $554.2 million in new spending. The bulk of the money goes towards increasing the per-pupil general education formula 2.45% in FY2022 and another 2% in FY2023. This is the largest per-pupil formula increase in over a decade.

Other key spending and policy provisions include:

• Extending the 4,000 voluntary pre-kindergarten and school readiness plus seats that were set to expire
• Funding for initiatives aimed at increasing the number of teachers of color in the classroom including Grow Your Own and teacher mentorship grants
• Prohibiting lunch-shaming

A number of policy provisions did not make it into the final budget and could reappear next year, including teacher licensing and hiring changes.

Environment

The $1.66 billion omnibus environment and natural resources policy and finance bill was passed after heated negotiations. At one point, Senate Republicans threatened to not pass a bill unless the clean car air and emissions standards were dropped. Ultimately there was no delay in implementing Governor Walz’s clean car standards.

Total appropriations by agency include $25.77 million for DNR, $5.04 million for the Board of Water and Soil Resources, $3.23 million for the Pollution Control Agency and $1.27 million to Explore Minnesota Tourism.

Other key provisions in the budget include:

• Prohibiting the manufacture and sale of food packaging containing perfluoroalkyl substances, or PFAS. This ban goes into effect on January 1, 2024.
• $61.39 million appropriation in fiscal year 2021 and a $70.88 million appropriation in fiscal year 2022 from the environment and natural resources trust fund for projects across the state aimed at protecting, conserving, preserving and enhancing the environment and state’s natural resources. Last year, this funding was not passed.
• Giving DNR and the Board of Animal Health concurrent authority to regulate farmed white-tailed deer under certain sections of law to help respond to chronic wasting disease.

The bill did not contain House provisions to address climate change or environmental justice nor House provisions regarding aquatic species and conservation districts.

Health and Human Services

The $18.8 billion Health and Human Services bill (Chapter 7 - MN Laws) was described as both a “behemoth” and “one for the generations.” Almost all controversial policy was removed from the bill during the negotiation process.

These were some of the concerns addressed in the final compromise:

• A continuation of the Minnesota Premium Security Plan (MPSP) or reinsurance. The ultimate compromise was a continuation of the individual insurance premium stabilizing program, on a slightly smaller scale, for one year.
• A continuation of market-driven solutions to address the high costs of prescription drugs.
• An extension and expansion of the pandemic policies relating to telehealth. This included an update to modernize the statue terminology from telemedicine to telehealth. This rapidly progressing area of medicine required compromises that would ensure consumers receive the maximum benefits from the delivery of telehealth. The compromise includes a sunset of the new law and a report to the legislature to frame future policies regarding telehealth for the state.

Higher Education

The omnibus higher education finance and policy bill spends $3.51 billion. The Minnesota State system received 45% of the $3.51 billion, the University of Minnesota 40% and the Office of Higher Education 15%.

Key spending and policy provisions in the budget include:

• $1.58 billion for the Minnesota State system
• $1.39 billion for the University of Minnesota
• $546 million to the State Grant program
• Increasing tuition caps at Minnesota State system schools to 3.5%.

Jobs and Economic Development

The $1.6 billion omnibus jobs and economic development finance and policy bill prioritizes helping employees and employers recover from COVID-19. The budget is 11.3% higher than the previous biennium, with $694.3 million coming from the federal government.

Key spending and policy provisions in the budget include:

• $150 million for the Main Street Economic Revitalization Program
• $75 million for grants to serve businesses impacted by COVID-19
• $20 million for the Minnesota Investment Fund
• Requiring high-rise public housing building to be retrofitted with automatic sprinkler systems
• Permitting high school students to qualify for unemployment insurance

Many of the House-sponsored labor and employment provisions did not make the final bill, including paid family and medical leave, earned sick and safe time, rehiring protections for laid-off hospitality workers, and stricter worker safety requirements for the meat and poultry industry. The Senate did not hear any of those provisions in committees during the legislative session.

Public Safety and Police Reform

The House and Senate debated police reform issues until the bitter end of the special session. The $2.64 billion bill funds the Department of Corrections, State Patrol and Bureau of Criminal Apprehension.

The House had a significant list of proposals that the Senate felt went too far and could not agree to. Ultimately, the compromise left a lot to be desired for some in the House DFL and it is expected they will continue to push on these issues next session. The bill did contain a number of police reform policy changes, including:

• Requiring “sign and release” warrants for certain infractions, such as missing a court appearance
• Establishing a crime for a person to reveal personal information about a police officer if it poses an imminent and serious threat to the officer’s safety
• Regulating the use of no-knock warrants
• Requiring 911 operators to refer calls to mental health crisis teams in certain situations
• Reforming civil asset forfeiture laws
• Reforming jail safety rules
• Establishing new policies addressing the use of confidential informants
• Requiring police chiefs to report to POST Board all disciplinary actions taken against police officers for the purpose of identifying patterns of behavior suggesting an officer is in crisis or may violate a board-mandated model policy

State Government

The omnibus state government finance and policy bill spends $1.25 billion in the next biennium. The bill provides funding for various agencies, boards and commissions and includes a handful of election provisions.

Key spending and policy provisions include:

• Ending the COVID-19 peacetime emergency declared by Governor Walz on July 1
• Funding for Market Bucks, which matches SNAP spending dollar-for-dollar (up to $10) at participating farmers markets
• Creating a Legislative Commission on Cybersecurity
• Establishing year-round Daylight Saving Time if permitted by the federal government
• $3.5 million in local grants for ballot drop boxes and election equipment

Transportation

The omnibus transportation finance and policy bill spends $7.27 billion over the next biennium on roads, bridges and transit, including a general fund spending increase of $220.4 million. Total appropriations by agency include $6.49 billion for MnDOT, $516.3 million for the Department of Public Safety and $235.7 million for the Metropolitan Council.

Key spending and policy provisions include:

• Authorizing $413 million in trunk highway bonds, including $200 million for the Corridors of Commerce program, $100 million for general state road construction and $113 million for state road construction projects under MnDOT’s Regional and Community Investment planning category.
• $57.5 million general fund appropriation for arterial bus rapid transit projects. This appropriation fully funds the E Line (serving the University of Minnesota, Downtown, Uptown and Southdale) and mostly funds the F Line (serving Central Avenue in Minneapolis and University Avenue in Anoka County).
• Broadening permissible use of funds from a previously authorized Minneapolis value capture district to allow for other types of transit lines beyond streetcars.
• Establishing a study of metropolitan area transit service post-COVID, including an examination of the long-term prospects of Northstar commuter rail.
• Ending driver’s license suspensions for some violations (including unpaid traffic tickets) and reducing barriers to license reinstatement.

Several controversial funding and policy provisions in the House transportation proposal did not make it into the final agreement. None of the transportation and transit related tax increases proposed by the House — a half-cent sales tax increase in the metropolitan area to fund transit, a 4% “luxury vehicle surcharge” to the motor vehicle sales tax and indexing the gas tax to inflation — survived. A provision allowing the Metropolitan Council to issue administrative citations, in addition to criminal ones, for failing to pay transit fares was also excluded.

Taxes

The omnibus tax bill provides roughly $1 billion in tax relief to Minnesotans over the next four years. The largest portion, approximately 80%, is provided for COVID-19 relief and recovery to individuals, businesses and families that have struggled over the past year and half.

Key provisions of the bill include:

• Full federal conformity regarding the Paycheck Protection Program (PPP)
• An exemption up to $10,200 for unemployment compensation
• Increasing the market value exclusion to $150,000 for commercial/industrial properties from the state general levy
• Extending the historic rehabilitation tax credit by one year
• Establishing a working group to make recommendations to the Legislature regarding distribution of $250 million for front-line workers.

What’s Next

A September or early fall special session is anticipated. During budget negotiations, Governor Walz and legislative leaders agreed to spend $250 million in federal fiscal recovery funds to provide pandemic-related bonus pay to front-line workers, including long-term care workers. A working group of legislators and executive branch officials — 3 appointed by the Governor, 3 appointed by the House and 3 appointed by the Senate — are required to meet and make recommendations to the Legislature by September 6th. In developing these recommendations, the working group must consider factors including a front-line worker’s increased financial burden and increased risk of virus exposure due to the nature of their work. A special session will be needed to implement these recommendations. A bonding bill, which was discussed but not agreed to before the legislature adjourned, may also be considered.

The next regular session convenes on January 31, 2022. Sessions in even-numbered years are generally shorter in duration and focused on capital investment, but — for several reasons — next session may be an exception. First, the governor and legislative leaders agreed to defer spending decisions on approximately $1.15 billion in federal fiscal recovery money with the understanding that legislators would appropriate these funds during the 2022 session (The $250 million in front-line worker bonuses expected to be appropriated in special session later this year is included in this amount). Second, because of the pandemic-related restrictions at the Capitol this past session, there was little consideration or action on most policy proposals. With an earlier start date and a Capitol complex that will once again be open to legislators, staff and public there will likely be greater consideration of policy proposals and later committee deadlines. Finally, with collections continuing to exceed projections there will likely be a significant surplus next session. With all 201 legislators and the governor up for re-election in November 2022, any surplus will spur debate over additional spending or tax relief.

If you have any questions or would like additional information regarding this summary, please contact one of our team members.