Billions from feds: Headache or blessing for Minn. budget writers?

A cascade of federal money about to wash into Minnesota from the latest pandemic relief bill injects another unstable element into the debate over a new two-year state budget.

Preliminary estimates are that more than $7.9 billion of federal aid is coming to Minnesota government entities and programs through the American Rescue Plan enacted in March. Add in billions of dollars more in direct stimulus payments for taxpayers, as well as some other funding boosts for subsidized health care programs, and the economic impact will be even greater.

The first thing to know about the infusion of federal money is that it won’t be as simple as plugging the dollars into Minnesota’s budget.

Some of the money will come in very soon. Other dollars might not be accessible for another year or two. And while that multibillion dollar estimate is eye-popping, the portion under state control amounts to only about a third of the pie.

Even so, House Speaker Melissa Hortman said the overall impact is substantial.

“The federal government assistance is like giving us jet fuel and sending us taking off and now we have to kind of repair the airplane in flight,” said Hortman, DFL-Brooklyn Park. “Understanding how all of that federal money will be used and how it’s directed while we’re putting together a $52 billion budget will be the biggest challenge of the session.”

As the House and Senate charge ahead with competing budget plans starting this week, the federal money will come into play. To what extent is the question.

Some money requires matching dollars to fully unlock. Other funds go into federal programs managed by state and local agencies — programs such as heating assistance or subsidized housing vouchers. School districts, colleges and local governments are in line for a combined $4 billion dollars off the top.

That leaves about $2.6 billion in somewhat flexible federal aid to the state.

Senate Finance Committee Chair Julie Rosen, R-Vernon Center, said the Legislature should get to dictate where it goes.

“Two hundred-one legislators are ready to work and figure out the appropriate way to spend this money,” Rosen said, adding, “We’ve been boxed out, the Legislature.”

Unless they can come to an agreement, DFL Gov. Tim Walz would get the sole say under an existing system for designating federal awards. Rosen is troubled by that scenario.

“It’s not just one person that should be able to be spending the $2.5 billion,” she said.

Rosen said the mere presence of the money along with a $1.6 billion projected state surplus should cancel out any push for a tax increase, which Walz has proposed.

“We’re not going to allow the use of that money to be used as extortion for a tax increase or any other area we cannot agree with,” Rosen said. “And raising taxes is one area we’re not willing to go down.”

Another consideration is what types of things to use the money on. For aid that’s a one-shot blast — that’s the case with most of this money — things without an ongoing cost could get a leg up. Think construction projects, broadband expansion, small business viability grants.

House Majority Leader Ryan Winkler, DFL-Golden Valley, said the tax increases proposed by Democrats are largely on top earners and are intended to support vital programs years into the future.

“We cannot let one-time federal help get in the way of the long term investments that are essential for Minnesota’s success,” he said.

School districts are going through the same exercise as they await word on their allocation of $1.4 billion from the federal relief package.

Scott Croonquist, executive director of the Association of Metropolitan School Districts, said it’s important to avoid a fiscal cliff, where the money runs out but built-in costs associated with it remain.

“For example, school districts really can’t hire new staff with that federal funding because when we get to year two, how are you going to pay those staff when the federal funds are gone?” Croonquist said. “That’s the big challenge.”

Every school district in the state will fare differently because the allowances will depend somewhat on the number of students who meet poverty thresholds.

Similarly, a share of more than $530 million in child care assistance will hinge on income qualifications of families served.

Ann McCully, executive director of Child Care Aware of Minnesota, said the federal help also will make a difference for providers struggling to pay mortgages, maintain adequate cleaning supplies and generally find stability after a rocky stretch.

“Bottom line funding to help programs stay open or reopen,” she said. “To get back on their feet and come out of this pandemic.”

But McCully and public school leaders for that matter have a common worry: That state lawmakers will hold the federal money against them when approving the next two-year Minnesota budget.

“One of our concerns — a very direct concern — is that now we’re seeing and hearing legislators saying, ‘Well, there’s all this federal money, so therefore we don’t have to invest state dollars.’ And our concern is one more biennium from now we’re going to be back in the same place we are now.”

One thing that could work in their favor is timing. It will be weeks or even months before the federal government provides parameters for the assistance and then actually delivers it. 

The Legislature is under pressure to reach a budget agreement before the session’s May 17 adjournment, meaning lawmakers could be forced to act before they have all those details.