Proposed Minnesota paid leave program comes with big startup costs, generous benefits

ST. PAUL -- Minnesota Democrats’ ambitious two-year budget plan — with $17.9 billion in new spending — includes the creation of a paid family and medical leave program that has hefty startup costs.

The joint budget targets announced by Democratic-Farmer-Labor Party leaders include nearly $670 million to kick-start the benefit program. But a fiscal analysis by the nonpartisan Legislative Budget Office found getting the program up and running could cost as much as $1.7 billion.

The high costs are largely to allow the state to begin paying benefits around the same time it starts collecting revenue from a new 0.7 percent payroll tax. The tax on wages could be split between workers and employees.

The state Department of Employment and Economic Development would have to hire more than 400 workers by 2026 to administer the program, which proponents say would look a lot like Minnesota’s unemployment system. Only about 24 percent of workers currently have access to paid leave and 13 other states have some type of benefit requirement on the books.

Measure draws supporters, opponents

The proposal is controversial with a bevy of supporters and critics. A broad coalition of unions, faith groups and health advocates back the new system while businesses large and small have criticized the measure as an unnecessary mandate and a new tax.

“This program does not create a need for leave; that need already exists,” said Sen. Alice Mann, DFL-Edina, the chief sponsor of the bill, during a Thursday committee hearing. “This bill simply changes the way we treat people when they go on leave so we keep families in Minnesota economically stable.”

Sen. Julia Coleman, R-Waconia, said a state-run program was prohibitively expensive.

“The high price tag means that it’s not feasible to implement this program without a massive new payroll tax for all employees and employers,” Coleman said. “That is why it is even more critical that we consider my free-market approach through private insurance.”

Here’s a closer look at how much the state program would cost and who it would benefit:

Once a new state-run paid family and medical leave program is up and running, state officials estimate it would raise about $1.25 billion a year in revenue from the 0.7 percent tax on wages. More than $1 billion would be paid out annually in benefits, while about $75 million would cover administrative costs.

Getting the program up and running would be costly. The Legislative Budget Office released a fiscal analysis Tuesday that showed about $1.7 billion would be needed to create the program if lawmakers want to begin paying benefits at the same time the tax starts getting collected in 2025.

Democratic leaders have agreed upon about $680 million for the proposed program in the next two-year budget, so they’ll either have to commit more money or change the legislation to make the initial costs lower.

Theoretically, the seed money for benefits could be repaid to the state’s general fund over time.

Ongoing costs of the program would be covered by the new 0.7 percent tax that could be split between workers and employers. For instance, an employee earning $1,000 a week would pay about $3.50 more in taxes.

State officials estimate about 200,000 workers could receive benefits from a paid leave program each year.

About 65,000 recipients would receive benefits because of a personal health problem. Another 61,000 would see wages replaced for taking time off to care for a sick child, spouse or parent.

About 18,250 people would receive benefits after giving birth and roughly 56,150 could get paid leave to bond with a newborn or recently adopted or placed child.

Christopher Magan / St. Paul Pioneer Press

In terms of costs, state officials estimate that about $450 million of yearly benefits would go toward paying leave for people recovering from a personal health issue. About $351 million would go to people who’ve recently had a child join their family.

About $205 million would go to replace wages for workers taking leave to care for a sick family member.

Under the proposal, workers would be eligible for up to 12 weeks of medical leave and 12 weeks of family leave annually. There’s been debate about capping the total amount of paid leave possible at 20 weeks.

Workers would receive a portion of their salary with a minimum weekly benefit of $200 and the maximum tied to the state’s average weekly wage, which is $1,345.

Given the high startup costs and their opposition to a new tax, business leaders have urged a more measured approach. They say the current proposal is too expensive and its one-size-fits-all mandate would be hard on small businesses.

They’ve pushed lawmakers to exclude employers with fewer than 50 workers, double the eligibility window to 180 days after being hired and cap how much future premiums could grow once the system is up and running.

As an alternative, Republicans have proposed allowing private insurers to offer paid family leave policies. Insurers already offer short- and long-term disability coverage for workers who have medical problems.

The Minnesota Chamber of Commerce says about 80 percent of its members already offer some type of paid leave. Employers who offer leave benefits equal to the state program can avoid the payroll tax, but have to pay an oversight fee to the state.

The proposed state-run paid family and medical leave program is different than another DFL proposal to require businesses to provide workers with mandatory earned sick and safe time. That legislation would allow workers to earn one hour of time off for every 30 hours worked that’s capped at 48 hours a year.

Lawmakers estimate enforcing a sick-time mandate would cost about $2.5 million annually. The bill passed the House in February.

The paid leave legislation has been debated by a half-dozen committees in both the House and Senate. The latest to take it up was the Senate Jobs and Economic Development Committee. The committee debated the bill Thursday and made some changes before advancing it on a voice vote to the finance committee.

Democrats will have to hold together their one-seat majority in the Senate in order to pass the legislation, unless Republicans decide to support the bill, which is unlikely. The path in the House is a little easier because DFLers have a six-seat advantage in the chamber.

Gov. Tim Walz and House and Senate leaders said the bill is a top priority this year. It was the second piece of legislation introduced in each chamber this legislative session.

“We know when you do this, not only is it morally the right thing to do, economically it is the right thing to do,” Walz said Tuesday during a rally at the Capitol. “It keeps people stable. It keeps our economy working. It makes sure people can stay in the jobs they are doing while taking care of the things that are most important, your family.”