2010 Legislative Session closes with many opportunities lost

June 17, 2010

Our new analysis released today takes a comprehensive look at the tough issues faced in the 2010 Legislative Session and the multistep process followed to bring it to completion. And we find that it was a session that can be characterized by the opportunities lost.

Clearly policymakers faced several tough issues this session. A nearly $1 billion deficit in the current budget cycle and a shortfall in the next round approaching $7 billion when the impact of inflation is included. Uncertainty about whether the courts would uphold the Governor’s unallotment decisions. Health care coverage for extremely vulnerable Minnesotans.

These challenges were resolved in three steps. First, policymakers agreed in March to $312 million in spending cuts and special fund transfers covering most parts of the state budget.

Second, the governor and legislature agreed to a compromise version of General Assistance Medical Care to maintain health care coverage for very low-income vulnerable adults, which reduced the state’s deficit by $147 million.

And third, a negotiated budget agreement passed at the end of the session addressed the remaining deficit. This agreement did not include the progressive revenue proposals or plan to cover low-income Minnesotans through Medicaid that had been earlier passed by the legislature. It accepted most of the Governor’s unallotments, including a substantial shift in school funding.

Because of heavy reliance on one-time spending cuts and timing shifts, these budget decisions did not make progress on reducing the future budget shortfall, leaving a profoundly difficult problem for the next legislature and governor to tackle next year. Read more in our analysis, 2010 Legislative Session closes with many opportunities lost.

-Nan Madden

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Minnesota one of few states to scale back tax credits for low-income families

May 10, 2010

Most states have been facing budget shortfalls. But Minnesota is one of a few states in the nation that has cut tax credits for low-income households during the recession, according to a recent paper by the Center on Budget and Policy Priorities.

Such actions are counter-productive, as tax credits are one strategy to help low-income working families survive during the economic downturn. These policies not only help those most vulnerable to the recession, but they also help spur the recovery. People with little money spend those tax credit dollars quickly, and those dollars circulate in the local economy.

Governor Tim Pawlenty unalloted the Renters’ Credit in 2009, cutting funding by 27 percent or $51 million, impacting nearly 300,000 low- and moderate-income households. This year, the Governor and Legislature passed a jobs bill that eliminated a $30 million motor fuels tax credit for low-income people in FY 2011 and used the money instead for angel investment and other business tax credits.

The recent Minnesota Supreme Court ruling puts into question the Governor’s unallotments, giving Minnesota an opportunity to rethink its policies and better position itself for the economic recovery.

On  Monday, the legislature put forward a budget balancing-proposal that takes a balanced approach – both raising revenues and cutting spending. The revenue proposal – a new income tax bracket on high-income households – seeks to reverse the trend of rising regressivity in our tax code, which has shifted more of the responsibility for funding services on to low- and middle-income Minnesotans. That is a welcome step towards rebalancing the tax system, but we should not at the same time ratify the unallotment cut to the Renters’ Credit, which is a critical tool in offsetting the regressivity of the property tax system.

-Scott Russell

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Legislative Session nears end: Where does the budget stand?

May 6, 2010

With less than two weeks left in the 2010 Legislative Session, policymakers are facing some very significant challenges. So, it seems like a good time to review where we are at.

To date, the legislature has resolved $459 million of the state’s projected $994 million deficit for FY 2010-11. The major components are a $312 million omnibus supplemental budget bill and $147 million in savings from the General Assistance Medical Care compromise. Currently, both the House and Senate are moving a K-12 omnibus bill and a health and human services omnibus bill as part of their plan to balance the budget.

But there are two important wild cards facing policymakers this year.

  • First, in their budget proposals, the Governor and House have been counting on $408 million from the federal government in an extended enhanced Medicaid matching rate to help solve a major portion of the $994 million budget deficit. These funds would prevent Minnesotans from losing access to health care during these tough times. Currently, Congress is expected to pass the extension later this month as part of legislation extending unemployment benefits. However, the action would come after the legislative session has ended – and there is the possibility that it may not pass at all.
  • Second, the State Supreme Court’s unallotment decision has reversed the Governor’s unallotment of a special diet program, at a cost of approximately $5 million. However, there is the possibility that the decision could reverse all of the Governor’s unallotment actions. If that’s the case, policymakers could be faced with a $700 million problem. Why not the full $2.7 billion in unallotments? Well, $1.8 billion can be saved by ratifying the Governor’s shift in education spending – the House already has that provision in their K-12 omnibus bill. Then there is another roughly $200 million that the Governor has the administrative authority to implement outside of unallotment. That would leave $700 million in question.

So, does all this need to be figured out before the legislature adjourns on May 17th? Technically, no. Our Constitution requires that we have a balanced budget by the end of the biennium, so policymakers have until June 30, 2011 to figure it all out. And with the Governor’s unallotment threat removed, he has lost a powerful tool to force a resolution.

However, that doesn’t mean it’s fiscally responsible, or even fiscally feasible, to leave all of these issues unresolved until the next legislative session begins.

Why not? First, the budget clock is ticking. The longer we wait, the more money has gone out the door, leaving less money to cut from and less time to bring in new revenues. In other words, a long delay could result in fewer choices and more drastic budget decisions.

Second, the state has a cash flow problem – meaning when we collect revenues doesn’t always coincide with when we need to write checks. Current projections suggest that the state is heading towards a cash flow crisis, when we will not have enough cash in the bank to pay our bills on time nearly every month starting this September. If we leave a large unresolved deficit, it is more likely that we will need to turn to short-term borrowing from an outside source to help our cash flow.

Timely action is important, but that doesn’t mean all of these issues must be addressed before the session ends. For example, it makes sense to wait and see if Congress passes the Medicaid extension. However, it would be responsible to have a plan in place in case the funds do not materialize by an agreed upon date.

Moreover, it is important that any legislation reflect a balanced approach and an open process.

Whether the Medicaid funds fall through, or the Governor’s unallotments are overturned, the situation just underscores the need to put revenues on the table. If we face a worst-case scenario, resolving the deficit entirely through budget reductions would require brutal cuts to health care for vulnerable citizens, services for people with disabilities, supports that help Minnesotans get and keep jobs, and many other critical areas. These cuts would hit families just as they are struggling to emerge from a deep recession and they would place our state at a competitive disadvantage. We have recently published a report that examines different revenue options and how much they would raise.

The decision-making process must also be an open one. However policymakers ultimately resolve the state’s deficit, the public must have the opportunity to hear the proposals and provide input. A few leaders making decisions behind closed doors may seem expedient, but it also leaves hundreds of thousands of Minnesotans without a voice.

-Christina Wessel

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State Supreme Court limits Governor’s unallotment authority

May 5, 2010

The Minnesota State Supreme Court has ruled that Governor Pawlenty’s unallotment of the Minnesota Supplemental Aid-Special Diet (MSA-SD) program last year exceeded the authority granted by the state’s unallotment statute. MSA-SD provides cash supplements to disabled Minnesotans whose health conditions require them to follow strictly prescribed diets.

Although the case before the Supreme Court focused on the unallotment of this specific program, the decision has far-reaching implications. In the court’s words:

We cannot conclude that the Legislature intended to authorize the executive branch to use the unallotment process to balance the budget for an entire biennium when balanced spending and revenue legislation has not been initially agreed upon by the Legislature and the Governor. Instead, we conclude that the Legislature intended the unallotment authority to serve the more narrow purpose of providing a mechanism by which the executive branch could address unanticipated deficits that occur after a balanced budget has previously been enacted. (from page 18 of the decision)

Because the legislative and executive never enacted a balanced budget for the 2010-2011 biennium, the use of the unallotment power to address the unresolved deficit exceeded the authority granted to the executive branch by the statute. (from page 21 of the decision)

What are the practical implications of this ruling on the state’s current budget deficit? The Supreme Court’s decision was focused on the Governor’s unallotment of MSA-SD. This ruling voiding the Governor’s unallotment of this program does not have any current budget implications because a lower court had already issued a temporary restraining order reinstating payments to these disabled individuals.

It is still unclear whether the Governor’s other $2.7 billion in unallotments are immediately impacted. If the other unallotment actions aren’t reversed by this ruling , it at least opens the door for affected parties to bring forward additional lawsuits to overturn other unallotment actions. There is already a lawsuit pending regarding the Governor’s unallotment of the Renters’ Credit. So, we’ll have to wait and see what the budget implications will be.

What are the implications of this ruling for future unallotment actions? The Supreme Court did not rule that the unallotment statute is unconstitutional, so the Governor’s unallotment authority remains in place. However, it did rule that the Governor cannot use the unallotment power until the Legislature and Governor have first arrived at a balanced budget solution. That takes a very powerful tool out of the Governor’s arsenal. Just yesterday, Pawlenty demanded that the Legislature cut an additional $536 million out of the state’s budget: “If they won’t do it, I’ll do it for them,” said the Governor. With the threat of unallotment removed, the Governor will be forced to return to the old practice of negotiating an agreement with the Legislature to solve the state’s remaining budget deficit.

Of course, this is just our first look at the Supreme Court decision. We’ll let you know if the experts (meaning people who actually have a law degree) come up with a different interpretation.

-Christina Wessel

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Senate Tax Committee passes omnibus bill: Whimper, not bang

April 23, 2010

The Minnesota State Senate passed its omnibus tax bill without fanfare Wednesday. SF 3327 is a policy-oriented bill with only a small budget impact. The Senate omnibus tax bill generates $3.3 million in FY 2011, essentially a tiny infusion for the state’s ailing cash flow account.

The Senate omnibus tax bill includes mostly noncontroversial provisions sought by the Minnesota Department of Revenue. “It’s a pretty lean tax bill,” said Committee Chair Thomas Bakk.

This is the third major tax bill passed by the committee this year, with the other two making $106 million in cuts in aids to local governments (which was later incorporated into the supplemental budget bill) and the “job creation” bill that included investment credits and economic development provisions. Most years, aids to local governments, economic development and technical provisions are usually all found in one omnibus tax bill.

It could be the last Senate Tax Committee meeting of the session. Bakk said no more hearings were scheduled.

The House Tax Committee will discuss their omnibus tax bill on May 3.

Last year, the legislature passed an omnibus tax bill that raised revenues as part of a balanced approach to address state budget shortfalls, in addition to cuts in spending. That bill was vetoed by the Governor.

However, events could bring the committee back. For instance, if the Minnesota Supreme Court rules that Governor Pawlenty overstepped his authority in use of unallotments last year, that would reopen a range of taxing and spending decisions.

Federal funding also leaves a large question mark. Both the Governor’s budget and the House targets assume an extension of additional federal Medical Assistance funding. Minnesota would receive an estimated $408 million in FY 2011, but Congress has not yet approved that money. Soon policymakers will need to come up with a contingency plan if those dollars are not ultimately approved by Congress, and that provides another opportunity to discuss raising revenues as part of a more balanced approach to the economic crises that helps Minnesotans get through these tough times and better positions the state for when prosperity returns.

–Scott Russell & Nan Madden

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Governor’s budget spares K-12, but cost shifts remain

February 22, 2010

The Governor’s K-12 Supplemental Budget proposal is both the easiest to understand and the most complex.

The easy part: The proposal does not cut state aid to local school districts. The complex part: The budget requests the legislature ratify the Governor’s 2009 unallotment decisions, including $1.8 billion in shifts to education spending.

The Governor’s proposal puts the legislature in a difficult spot. Some have argued that the Governor overstepped executive authority in making the unallotments. Yet ratifying at least part of the K-12 unallotment plan would reduce next biennium’s deficit and clarify a somewhat murky situation.

The $1.8 billion in school payment shifts actually have two components: the School Aid Payment Deferral and the Property Tax Recognition Shift. Here’s how they work.

Shift No. 1: School Aid Payment Deferral

The state staggers its school aid payments for any given year over a two-year period. It’s called the “90/10” formula. Prior to unallotment, districts got 90 percent of their aid in the current year, and the remaining 10 percent in the following year.

Unallotment changed the formula. It reduced the school aid paid in the current year, shifting costs forward to the next year. (It went from a 90/10 split to 73/27 split.) In the short run, it reduced the amount of money the state had to pay to school districts in FY 2010, saving $1.2 billion. While schools get the money eventually, such a shift can create cash-flow problems for districts.

Because unallotment only applies to the FY 2010-11 biennium, the shift is only temporary. The state budget forecast assumes the state will revert to the 90/10 school aid formula in the next biennium, which would require the state to make a catch-up payment, a one-time, $1.2 billion expense.

The Governor’s budget proposes leaving the 73/27 formula as is and continuing the shift. It would reduce the projected FY 2012-13 deficit by $1.2 billion. Putting the formula shift into law this session could clarify when the state intends to pay back the shift. But given the size of the FY 2012-13 deficit, it’s hard to see where the resources will come from anytime soon.

Shift No. 2: Property Tax Recognition Shift

Similar to the State Aid Deferral, the Property Tax Recognition Shift creates a one-time savings. It requires school districts to count a portion of their property taxes earlier than they used to. (For example, part of the property tax revenue school districts would have counted in FY 2012 under the old rules now gets counted in FY 2011.) This accounting change inflates school district budgets in FY 2011, allowing the state to reduce its aid payments to schools. The shift saved the state $600 million in FY 2011 under unallotment.

Unlike the aid payment formula change, the property tax recognition shift is assumed to be ongoing – it will continue unless the legislature acts to change it.

Some E-12 cuts, new spending

The Governor’s Supplemental Budget proposal would cut the Department of Education by $1 million this biennium, part of the standard departmental cuts (3 percent of unspent FY 2010 funds and 3 percent of FY 2011 funds). The Perpich Center for the Arts gets cut $390,000. The proposal also adds $360,000 of new spending, primarily for data collection and rule making related to academic standards and teacher/administrator preparation.

Funding for early childhood programs will be covered in a later blog. The bottom line is that the Supplemental Budget makes minimal cuts to early childhood programs funded through the Department of Education, but some significant cuts in early childhood programs funded through the Department of Human Services, notably Basic Sliding Fee Child Care.

-Scott Russell

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State Supreme Court ruling could overturn Governor’s unallotments

January 25, 2010

Last week, the state Supreme Court agreed to take up the case challenging the Governor’s unallotments. Now we can add the outcome of this case to the list of issues complicating the upcoming legislative session (already on the list: budget deficit and cash flow problems). Here are the facts of the matter:

The unallotment: The 2009 session ended with a stalemate over fixing the budget deficit. Governor Pawlenty didn’t call a special session, instead using unallotments to the tune of $2.7 billion to finish balancing the budget.

The court case: Back in October, six disabled and low-income Minnesotans filed a lawsuit challenging two of the unallotments. First, they challenged the elimination of the Minnesota Supplemental Aid-Special Diet (MSA-SD) program, which provides cash supplements to disabled Minnesotans whose health conditions require them to follow strictly prescribed diets. There are no other resources available to help them get the food they need. They also challenged the unallotment of the Renters’ Credit, which provides a property tax refund to low- and moderate-income renters in Minnesota. 

The case essentially involves two issues:

  • The first issue applies to both the MSA-SD program and the Renters’ Credit. The question involved is whether the unallotment statute could be used at all to balance the budget because the amount of the budget deficit was known (not “less than anticipated,” as the statute reads).
  • The second issue is narrower and only applies to the Renters’ Credit. If the unallotment statute can be used, it only allows the Governor to reduce appropriations. It does not allow the Governor to rewrite the statute. The Renters’ Credit statute says that 19 percent of rent is the amount of property tax paid for the purposes of calculating the Renters’ Credit. When the Governor unallotted the Renters’ Credit, instead of reducing the amount of funds, he changed the amount of property tax paid to 15 percent – effectively changing the statute.

The court’s decision: In late December, Ramsey County District Chief Judge Kathleen Gearin ruled that the unallotment statute could not be used because the budget deficit was neither unknown or unanticipated. She also ruled that the Governor’s use of the statute violated the separation of powers doctrine. As a result, she issued a temporary restraining order requiring the state to reinstate payments under the special diet program. The order is now on appeal.

Judge Gearin’s order did not address the Renters’ Credit unallotment. The Department of Revenue website has already issued instructions related to the Renters’ Credit that implements the Governor’s unallotment orders.

The next step: The Minnesota Supreme Court has agreed to hear the case. The Governor must submit his brief to the Supreme Court by February 9, the plaintiffs’ must respond by February 23 and the Governor may respond to the plaintiff’s brief by March 2. Oral arguments are scheduled for March 15.

The Supreme Court has the authority to overturn all of the Governor’s unallotments – not just the two challenged in the original case. So, until we know how the Supreme Court rules, we really don’t know what the implications will be for our state’s budget deficit. The Supreme Court will not hear oral arguments until mid-March, and it is very possible that they may not deliver their verdict until after the session ends on May 17.

-Christina Wessel and Scott Russell

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