Budget solution means our revenues still don’t match up with our priorities

July 15, 2011

Late Thursday afternoon, Governor Dayton and legislative leaders came to an agreement on a framework for the state’s budget that will have a profound impact on Minnesota’s future economic vitality and fiscal health. The agreement increases the size of the shift in payments to school districts, borrows $700 million from the future through tobacco bonds, and reduces funding for vital public services by more than $2 billion.

Lawmakers agreed to approximately $2.2 billion in cuts to services that will impact our quality of life and our current and future economy. While the details will be worked out over the next few days, cuts of this magnitude will likely mean fewer vulnerable Minnesotans will have access to basic health care insurance, some individuals with disabilities will lose vital community-based services that allow them to avoid institutionalized care, many people will find it harder to get to work as mass transit options decrease, students will find it more challenging to access higher education, fewer individuals will get the training they need to find and keep jobs, and some parents will no longer be able to access affordable child care so they can work. More details on the possible impacts are available in our recent analysis of the Governor’s and Legislature’s budget proposals, and we’ll be sure to blog as details of the deal emerge.

The Governor and legislative leaders also agreed to $2.8 billion in one-time solutions, including $1.4 billion by continuing the current shift in payments to school districts, another $700 million in a new shift in payments to school districts, and $700 million in tobacco bonds. So, instead of paying upfront for an educational system we value, we have said we will pay for it sometime in the future. That is unsustainable. And this heavy reliance on one-time solutions means the state will be back facing deficits in another two years.

Minnesotans are proud of our quality of life – our highly skilled workforce, amazing outdoor spaces and vibrant culture are what attract people and businesses to this cold weather state. However, maintaining this quality of life requires investments in our people, our communities and our infrastructure. We do not have a revenue system that raises enough to meet the state’s priorities, and this budget deal does not correct that current inbalance.

Unfortunately, the reliance on one-time resources also means Minnesota’s bond rating is very likely to be downgraded (again), making it more expensive for the state to borrow for capital projects in the future. Just last week, Fitch Ratings downgraded Minnesota’s bonds from AAA to AA+. Their decision was triggered by the state’s recent track record of using accounting gimmicks and one-time resources to address budget deficits. While Fitch had anticipated that lawmakers would use $1.4 billion in one-time solutions to solve the current deficit, the final agreement actually doubles that amount to $2.8 billion. This signficant and repeated use of one-time resources could trigger other rating agencies to take action. A lower credit rating means higher borrowing costs not just for the state, but also school districts, cities and counties across Minnesota.

It’s time to face reality. We are no longer kicking a can down the road, it has become a 55-gallon drum. Minnesotans value healthy families, educated workers, vibrant communities, thriving outdoor spaces and a strong infrastructure – all of which are building blocks for our future economic growth – and we need to step up and pay for them. And that means ensuring that the revenues we collect match up with the investments we need to make to meet  our expectations.   

-Christina Wessel


Governor’s current budget offer relies on one-time measures and deep cuts in services

July 14, 2011

On Thursday, policymakers took a significant step in the ongoing discussion of how Minnesota will meet its needs over the next two years. At stake are decisions that will have a profound impact on the state’s future quality of life and economic vitality.

On Thursday morning, Governor Dayton announced an offer that increases the size of the shift in payments to school districts, borrows $700 million from the future through tobacco bonds, and reduces funding for vital public services by more than $2 billion. Late Thursday afternoon, legislative leaders accepted this basic framework. Here are the major elements:

  • $1.4 billion in savings by continuing the current shift in state payments to school districts. Normally, the state pays school districts 90 percent of their annual aid in one fiscal year, and a 10 percent settling-up payment in the following fiscal year. In the 2010 Legislative Session, policymakers changed the formula to a 70/30 percent split to help reduce the state’s budget deficit by shifting the payments into the FY 2012-13 biennium. The Governor and Legislature have agreed from the beginning of the session to delay repaying school districts into the future.
  • $700 million in additional savings by increasing the shift in payments to school districts, going from a 70/30 split to a 60/40 percent split. 
  • $700 million by issuing tobacco bonds that would sell off future tobacco payments in return for a lump sum payment today. We recently blogged on our many concerns with this one-time source of revenue, which borrows from the future.

That leaves $2.2 billion in spending reductions. The details of these cuts have not been agreed to by the Governor and legislative leaders. However, earlier in July, Governor Dayton released a document that sheds some light on how more than $2 billion in cuts could be distributed among the areas of the state budget:

The one detail in the Governor’s offer is that these spending reductions cannot include the Legislature’s proposal to decrease the state government workforce by 15 percent by 2015. If you are looking for more information on the potential impact of $2 billion in cuts, our recent analysis of the Governor’s and Legislature’s budget proposals discusses the cuts that were on the table during the legislative session. 

The Governor’s offer also calls for a $500 million bonding bill, and specifies that the final budget deal would not include either the Governor’s tax proposals or the Legislature’s policy proposals.

Legislative leaders and the Governor are now working out the details of the agreement. The Governor could call a special session as early as next Monday or Tuesday so lawmakers can vote on the compromise.

-Christina Wessel


Court rules some social services should be funded during the shutdown

July 13, 2011

On Wednesday, Judge Kathleen Gearin accepted recommendations from Special Master Kathleen Blatz that a number of social services be funded during the state government shutdown. Here is a rundown of Wednesday’s rulings.

Child care. Judge Gearin originally ruled that only federally-funded child care assistance should continue during the state government shutdown. On Wednesday, she amended the order to include all child care assistance, including Basic Sliding Fee child care assistance, because it is “a functional impossibility” to separate federal and state funding for these services (see pages 8 to 10 of the order). Although this is positive news for many Minnesota families, Judge Gearin did deny funding for migrant child care and migrant day care because funding for these services is separate.

Employment support services. Judge Gearin clarified that employment support services for participants in the Minnesota Family Investment Program (MFIP) and Diversionary Work Program (DWP) should be funded because job skills training and job-search assistance are an essential component of MFIP as a “welfare to work” program (see pages 5 to 6).

Food assistance. Judge Gearin clarified that while the Minnesota Food Assistance Program has explicitly been funded since the initial order, other food support programs should also be listed as critical core functions, including food shelf grants, senior nutrition programs and home-delivered nutrition services (see page 7 for a complete list of grants).

Child protection and adoption. Judge Gearin clarified that funding for a number of child protection and adoption assistance services should continue during a state government shutdown (see pages 10 to 12 for a complete list of grants). However, the court denied funding for parent support outreach grants, saying  “while the services and programs provided by these grants are very important to the long-term prevention of child abuse and neglect,” they are not an immediate critical core function.

Homeless programs and transitional housing. Judge Gearin clarified that grants that “involve the provision of shelters, transitional housing, and support services to homeless individuals and families, including homeless youth,” should be funded during the shutdown (see page 13 for a complete list of grants). In a separate order issued last Thursday, Judge Gearin ruled that other housing access services for individuals eligible for Medical Assistance home care or Medicaid waiver services should not be funded during the shutdown.

Services for refugees. Judge Gearin clarified that administrative grants needed to provide cash assistance for refugees should be funded, as should medical assistance for refugees. However, Judge Gearin denied funding for the Refugee Social Services grant, which provides employment support and English-language assistance (see pages 14 to 16).

Services for seniors. Judge Gearin clarified that grants providing seniors with nursing services, transportation, caregiver/respite services, home health aide visits and home-delivered meals should be funded during the shutdown (see page 16).

Deaf and hard of hearing services. Judge Gearin clarified that grants that provide services and equipment to deaf, deafblind and hard of hearing Minnesotans should be funded, as should services that help parents learn to communicate with their deaf or hard of hearing children (see page 17).

HIV/AIDS medical services. Judge Gearin clarified that funding for medical and case management services for citizens with HIV/AIDS should be funded during a shutdown (see pages 17 to 18).

Mental health grants. Judge Gearin clarified that providing services to individuals with serious and persistent mental illness should continue to be funded during the shutdown, noting that a coverage gap would affect their health (see pages 18 to 19 for a complete list of grants).

Chemical dependency treatment. Judge Gearin clarified that treatment services for individuals suffering from chemical dependency should be funded during the shutdown (see pages 20 to 21 for a complete list of grants). In a separate order issued on Monday, Judge Gearin ruled that other programs that help those recovering after receiving chemical dependency treatment, “may be critical to the long-term health and sobriety of participants,” but should not be funded during the shutdown.

-Christina Wessel


Special Master hearings yield a little good news

July 8, 2011

More government funding will flow in response to orders issued by Judge Kathleen Gearin on Thursday. The decisions are the result of a series of hearings over the last few days before court-appointed Special Master Kathleen Blatz.

On June 29, Judge Gearin issued a ruling that outlined what funding should continue during a Minnesota state government shutdown. Since then, dozens of nonprofits and businesses have petitioned the Special Master to clarify whether their funding was covered in the initial order, or to ask the Court to expand the order to include their funding. So far, Judge Gearin’s decisions have focused mostly on clarifying the initial order, rather than expanding it. On Thursday, she ruled that:

  • Emergency services, such as the Emergency General Assistance Program and Emergency Supplemental Aid Program should be funded during a shutdown, as should payments for short-term shelter and utility needs paid through the Minnesota Family Investment Program (MFIP) consolidated fund.
  • Training for individuals who are blind, whether run by the State Academy for the Blind or by another entity, are critical core functions and should be funded.
  • Special education is a critical core function of government and should be funded.
  • The background checks necessary to continue critical core functions are also vital and the state government staffing needed to perform those checks should be funded during a shutdown. 

Not every petitioner got good news on Thursday. Judge Gearin ruled that housing access services, while an important support for individuals eligible for Medical Assistance home care or Medicaid waiver services, does not reach the level of a critical core function and will not be funded.

Separately, the Court ruled over the holiday weekend that food shelf distribution should start up again and allowed the Minnesota Zoo to reopen.

More rulings are expected in the coming days.

-Christina Wessel


Minnesota’s bond rating drops amid budget instability

July 7, 2011

On Thursday, Fitch Ratings downgraded Minnesota’s bond rating from AAA to AA+, impacting $5.7 billion in state general obligation bonds. The news comes at a critical time in state budget discussions and underscores the need for a long-term solution that addresses the imbalance between the revenues we are raising and the cost of meeting the state’s needs.

The downgrade is a small warning flag that wasn’t triggered just by Minnesota’s current budget impasse; the flag also went up because of the state’s recent track record of using accounting gimmicks and one-time resources to address budget deficits. Fitch cites the decision to delay payments to school districts as an example. In financial speak, these one-time solutions are called “non-recurring” measures and bond agencies don’t look favorably on states that overuse them.

The Business Wire reported on the Fitch decision:

The downgrade reflects the state’s reliance on non-recurring gap-closing measures over the course of the recession, the difficulties in reaching consensus on a plan to address the resulting large budget gap for the biennium that began on July 1, the likelihood that the final budget agreement will again include non-recurring solutions, and an increasingly contentious budget environment in the state in recent years.

Back in April, a Politics in Minnesota article predicted that a budget showdown could negatively impact the state’s credit rating. The article noted that the state maintains a AAA from Standard & Poor’s. However, Moody’s Investors Service downgraded Minnesota to Aa1 back in 2003, citing concerns about the state’s use of “volatile, short-term fixes” – it hasn’t upgraded the state’s rating since then.

And on Thursday afternoon, just before the announcement from Fitch, an independent commission chaired by former state legislators Senator Stephen Dille and Representative Wayne Simoneau also recognized that we are on a dangerous path: “Minnesotans are suffering, our reputation has been hurt and our credit rating is endangered.”

Why does it matter? The drop in credit rating makes it more expensive for the state to borrow money for capital projects. But the effects don’t stop there, other units of government are also hurt: “Rating agencies take into consideration the state’s creditworthiness in assessing the reliability of bonds issued by school districts, municipalities and counties across Minnesota,” reported Politics in Minnesota.

If Minnesota hopes to preserve, and perhaps even improve, our credit rating, then we will need a quick resolution to the budget standoff that focuses on responsible long-term solutions.

-Scott Russell


Tobacco bonding would borrow from our future

July 7, 2011

In the waning hours of negotiations on June 30, legislative leaders put an old proposal on the table: tapping our future tobacco settlement money for some one-time, up-front cash. It’s a plan that would borrow money from Minnesota’s future to pay our bills today.

In 1998, Minnesota was part of the charge in suing tobacco companies to recover health care costs related to tobacco use. As part of the settlement, tobacco companies are required to make annual payments to Minnesota, which flow into the state’s general fund. According to the most recent estimates, Minnesota expects to receive nearly $320 million in tobacco payments in FY 2012-13.

The legislative leaders have suggested issuing “tobacco bonds” that would sell off future tobacco payments in return for a one-time, lump sum payment today. How would it work? Investors would buy these bonds in the private market, earning interest on their investment. The state would use the proceeds from the bond sale to reduce our current budget deficit. Future tobacco payments would be used to pay the principal and interest to investors.

There are many reasons to reject the idea:

  1. It’s a short-term fix. The one-time influx of money won’t help solve the state’s long-term imbalance between the revenues we are raising and the cost of meeting our needs.
  2. Selling tobacco bonds now is just borrowing from our future. Minnesota is expected to receive just over $300 million in tobacco settlement money in FY 2014-15. If we sell the tobacco bonds now, all of that $300 million could potentially be committed to repaying the bondholders and would no longer be available for funding important services for Minnesotans.
  3. Issuing bonds is expensive, reducing the value of the one-time payment. According to a report by Connecticut’s Office of Legislative Research, selling tobacco bonds “is an expensive transaction to complete, involving fees for investment bankers, brokers, accountants and lawyers.” Plus, you have to pay interest to the investors.
  4. A number of states have already issued tobacco bonds, and the current outlook isn’t too positive for investors. According to Forbes, “In November 2010 Standard & Poor’s downgraded 51 tobacco bonds in 16 states to junk status, citing decreasing tobacco use.” With that kind of history, Minnesota tobacco bonds would likely need to pay higher interest rates to attract investors, again making the bond sale less profitable.

Legislative leaders have pulled the tobacco bond proposal off the table for now. There are some good reasons to hope it does not resurface. Instead, policymakers should be pursuing revenue options that will benefit us in the future, rather than borrow from the future.

-Scott Russell


First day of the state government shutdown

July 1, 2011

As we enter the first day of the Minnesota state government shutdown, we wanted to take a few moments to reflect on what is still running and direct you to resources you may find useful.

Earlier this week, the court ruled on what government services should continue in the event of a shutdown (our earlier blog discusses Judge Kathleen Gearin’s order). Here are some examples of what is still open, either because the court ruled it a critical core service, or because it has an alternative funding source:

  • Judge Kathleen Gearin ruled on Wednesday that constitutional offices should remain open, that means the offices of the Governor, Lieutenant Governor, Attorney General, Secretary of State and State Auditor will continue to function during a shutdown.
  • Judge Bruce Christopherson ruled on Tuesday that Minnesota’s court system must remain open to protect the constitutional rights of individuals.
  • Programs that are federally-funded through Temporary Assistance for Needy Families (TANF), Medicaid (known as Medical Assistance in Minnesota) and the Supplemental Nutrition Assistance Program (formerly known as Food Stamps) will continue to operate.
  • State-funded health care programs, such as MinnesotaCare, will continue to serve individuals and health care providers will be paid.
  • Nursing homes, regional treatment centers and veterans homes will remain open and providers will be paid.
  • The Unemployment Insurance system will remain functional during a shutdown. To deal with the anticipated rush of state worker claims, a schedule for when eligible individuals should apply has been created.
  • Although state-run Driver and Vehicle Services (DVS) offices are closed, offices run by other entities will remain open and process limited functions like driver’s license renewals, tabs and plates. To find an open office, visit mndep.com.
  • Although the Minnesota Zoo will be closed (a decision that is being appealed), they have announced that their summer concert series will continue and the IMAX theater will be open.
  • Most state forests and trails are open for day use, as are public water accesses. State parks are closed.
  • Although you cannot purchase a fishing license, the DNR will continue enforcement.

Judge Gearin’s decision contains a more detailed list of what funding will continue. The document isn’t too long, so it is worth a read.

Of course, there is a great deal that is not being funded. And some of those funding decisions are being challenged or need further clarification. The court-appointed Special Master, former Minnesota Supreme Court Justice Kathleen Blatz, started holding hearings beginning on Friday morning to hear from entities that are petitioning the court to have elements of funding continue during a shutdown. A list of the entities appearing before the Special Master on Friday has been posted on the Second District Court’s website. Some of the issues being discussed include support for background studies and housing access services.

Although an estimated 23,000 state employees will be laid-off as of Friday, the unions reached an agreement with the state to save costs: laid-off state employees won’t be paid severance or vacation during the shutdown, although they will continue to be eligible for health care benefits. State employees will also be eligible for Unemployment Insurance benefits.

More information on how the shutdown is impacting Minnesota’s nonprofit sector is available from the Minnesota Council of Nonprofit’s government shutdown resource page.

And if you want a chance to speak up, Minnesota Public Radio is collecting people’s stories, questions and insights on the government shutdown.

Of course, behind all of this is a conflict between two fundamentally different philosophies about the future of Minnesota. If you want to reflect on what policymakers are fighting over during this shutdown, then review our recent analysis, A Tale of Two Visions: Comparing Governor Dayton’s and the Legislature’s FY 2012-13 Budgets.

-Christina Wessel


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