Bailouts, cuts, or tax hikes: The numbers that blow up the DFL’s paid family and medical leave scheme

The DFL’s plan for paid family and medical leave (HF0002 and SF0002) continues its way through the legislature. As I wrote in the Pioneer Press this weekend:

There is no fiscal note for the present bill, but its key elements are identical to a proposal from the 2021-22 legislative session. Then, payouts were estimated at $781 million annually, covered by the revenue from the payroll tax. But this was based on some very favorable assumptions. It assumed that the average length of leave taken would be 6.6 weeks and the average weekly benefit would be $568. 

This is a pretty simple calculation. The fiscal note for the previous proposal — HF 1200 — assumed an ‘”Annual Usage” of 198,682, with each of these folks receiving benefits of $598 a week for 6.6 weeks. This gives a total annual cost ($598 x 6.6 x 198,682) of $784 million (given as $781 million in the fiscal note).

Are these assumptions — which come from the Institute for Women’s Policy Research — robust? What happens to the cost estimates if they are not?

Length of leave taken

The first assumption is that, while workers are eligible for 24 weeks of paid leave, they will, on average, only take 6.6 weeks, or a little more than a quarter of those offered. If, however, those Minnesotans utilizing this scheme take just half of the weeks they are entitled to, which is not an unreasonable assumption, then the number in the fiscal note calculation rises from 6.6 weeks to 12.

Level of payout

The second assumption is that these workers receive, on average, a payout of $568 a week. But the average annual salary in Minnesota is $66,000, which makes the state’s average weekly wage $1,269 ($66,000 / 52). The current bill proposes to pay out:

(1) 90 percent of wages that do not exceed 50 percent of the state’s average weekly wage; plus

(2) 66 percent of wages that exceed 50 percent of the state’s average weekly wage but
not 100 percent; plus

So, 50% of that $1,269 — $635 — would be replaced at a rate of 90%, giving a payout of $571 ($635 x 0.9); the second 50% would be replaced at a rate of 66%, giving a payout of $419 ($635 x 0.66). Together, the total weekly payout for the worker on the average weekly wage in Minnesota would be $990 ($571 + $419). That is 65% higher than the assumed payout in the most recent fiscal note.

Clearly, the assumption is that lower-paid workers are more likely to use this scheme, which is why the average payout in the fiscal note is so much lower than it would be for the worker on the state’s average wage. This illustrates that this scheme is as much about income redistribution as it is about insurance against family or medical emergencies.

But there is reason to doubt this assumption. As I noted on the weekend:

…the DFL assures us that if you like your paid family and medical leave plan, you can keep it. Under the proposal, businesses could opt out of the state-run program.

They would, however, have to pay an accounting fee and would need to offer their own benefits that are at least on par with the state’s program. 

But if your business’ scheme has to match the state’s scheme, why not just use the state’s scheme and save the heavy cost of complying with the opt-out? Clearly, the intention of this bill is to draw all of Minnesota’s workers into the state scheme. That being so, the state’s average weekly wage is the appropriate one to use for this calculation.

Number of recipients

Based on the above, I noted that:

If…we conservatively assume that the average length of leave taken is 12 weeks and the average payout is $990 a week…the cost of the program spirals to $2.4 billion annually. At that point either the General Fund coughs up $1.6 billion, the payroll tax – paid entirely by the worker, remember – goes up to 1.73%, or payouts are cut by 40%.

And this retains the fiscal note’s assumption that only 6.6% of Minnesota’s workers (198,682 / 3,006,426, the average number employed for 2022) would take up the scheme. If that number turned out to be higher the sustainability of the scheme erodes even further at the currently proposed rates of payroll taxation.

A new fiscal note is urgently needed. As it stands, the paid family and medical leave scheme would be a ticking time bomb in the heart of the state’s budget.