Debt and roads will almost certainly be the dominant themes of the 2008 session of the Minnesota State Legislature, which begins Tuesday and must conclude by May 19. Typically, legislators go about their business in a more low-key fashion during even-numbered years at the Capitol, knowing that the state’s biennial budget has already been set and the main priority is deciding what capital improvement projects will be contained in the bonding bill. But this year’s session comes in the wake of the I-35W bridge collapse last August, which sharpened the drama surrounding Gov. Tim Pawlenty’s vetoes of two previous bipartisan transportation funding bills passed by the House and the Senate. And it comes at a time when Minnesota is at the forefront of a national recession that threatens to deluge last year’s carefully cobbled budget in a sea of red ink.
In a state budget forecast issued last November, the Minnesota Department of Finance projected that the current 2007-08 biennial budget would run a $373 million deficit without remedial action during this session. Since that time, according to state economist Tom Stinson, Minnesota has entered into a recession, having lost 23,000 jobs from June to December. In addition, the November forecast relied on oil prices dropping to $80 per barrel during the first quarter of 2008. We are now nearly halfway through the quarter and oil prices remain above $90 per barrel. And we are all well aware that the negative fallout from the subprime mortgage crisis and subsequent credit crunch has been deeper and more rapid than originally anticipated.
For all of these reasons, the size of our current budget deficit could approach, or extend beyond, $1 billion when the next forecast is released on Feb. 28. The longer term state budget woes — estimated in November to be a real-dollar deficit of $1.034 billion by 2011 — are likewise expected to grow.
For a variety of reasons, the DFL legislators who hold majorities in the House and the Senate will try to get a comprehensive transportation bill on Pawlenty’s desk before that Feb. 28 forecast. It is expected that the governor will veto such a bill, and although the DFL has enough party-line votes to override it in the Senate, they need the help of fiscally moderate Republican legislators to override in the House and get the bill enacted.
For those Republicans to buck the veto of their own party’s governor on a bill that will raise taxes is difficult enough without the added complication of a huge budget deficit prominently in the news. Regardless of how the transportation bill initially shakes out, however, it is in the interest of DFL leaders to expedite the process. If the governor’s veto is sustained, they need time to regroup and come back with an alternative bill that is more palatable to Republican moderates, if not the governor himself. And one way or another, the DFL transportation proposals have to be resolved before tackling the bonding bill, where Pawlenty has tried to blunt criticism of his transportation vetoes by proposing massive borrowing for local bridge and road construction, mostly at the expense of capital improvements in higher education.
The budget gap
With the memory of the bridge collapse still fresh in voters’ minds and Pawlenty’s own Department of Transportation estimating that the state needs upwards of $1.7 billion a year over the next decade to address its deteriorating roads and bridges, transportation is the one issue that can compete with the deficit and the bonding bill for bottom-line legislative action this session. Those involved in other significant sectors of the state budget, such as health care and education, not only have to work hard to make their reforms revenue-neutral, but may find their biennial funding sources being poached if the February forecast is especially grim.
Legislators are not totally bereft of resources to help fill the budget gap. As of November, the state had $653 million in its budget reserve and about $350 million in its cash flow account. But these are one-time monies that will not address any structural budget deficits, and, as projections indicate, would merely postpone a larger fiscal reckoning a year down the road. The governor and legislative leaders have agreed to close a tax loophole used by corporations who set up offices out of state that will bring in approximately $122 million per year — obviously not enough. If Pawlenty holds firm to his no-new-taxes stance and his vetoes of tax increases not tied to transportation are upheld in the House, where will the money come from?
One possibility is increased fees, which went up $394 million in the great 2003 budget crisis alone, and which create opportunities for capturing revenue on everything from parks to parking tickets to tuition to various licenses and court documents. Another is to delay education payments to schools, an accounting shift that netted $100 million in obviously temporary money in the previous biennium. Yet another tempting source that the governor has frequently tried to tap is the Health Care Access Fund (HCAF), which uses taxes paid by health care providers and health care premiums in the state to broaden access to the MinnCare program for otherwise uninsured Minnesota workers. The fund is scheduled to run at a surplus of $250 million this year, going up to $300 million by 2009.
But there is good reason to believe the HCAF surplus will remain out of general-fund budget negotiations this session and be instead earmarked for genuine health care reform. Pawlenty and the Legislature each appointed a health care commission and the two worked diligently and independently over the summer and came up with remarkably similar recommendations on how to dramatically change the health care system. To boil an incredibly complex subject into simplistic terms, the proposed changes would provide enough market reform, cost containment and private sector participation to please the governor while insuring a much greater percentage of those currently without coverage, which is the top priority of DFLers. Because it will take time and planning, will likely roll out in increments and has the HCAF as a dedicated funding source, agreeing on the formative steps of a comprehensive health-care reform plan has the potential to be one of the few feel-good partnerships of the current session — provided budget pressures and partisanship don’t tear it apart.
Education and other issues
Education, on the other hand, will probably do well just to get through the session unscathed. There is talk of boosting education funding by raising income taxes on the high-income earners — with the goal of making them pay the same percentage of their income as middle-class citizens — but it is difficult to imagine anything but transportation taxes surviving the governor’s veto in a non-budget year when Pawlenty is hosting the Republican Convention as a prominent vice presidential hopeful. Because putting referenda before the voters doesn’t violate Pawlenty’s tax stance, a long-negotiated bill that would put a sales tax increase on the ballot in an effort to dedicate funds for a variety of environmental, outdoors and arts initiatives might finally pass this session.
As with most non-budget sessions, there will also be a fair number of ambitious but still financially ambiguous commission reports submitted, and the occasional hot button topic that snags the legislative media cycle for a day or two. In the former category you can count on the Minnesota Climate Change Advisory Group, which is expected to report on how the state can realize its mandated goal of 25 percent renewable energy by 2025 and grow a green economy.
As for the hot buttons, there is likely to be a bill introduced calling for the state to opt out of the federal No Child Left Behind law, led by strange bedfellows on the right and the left of the political spectrum. And, of course, there is the ultimate hot button, the confirmation or rejection of Lt. Gov. Carol Molnau as Minnesota Department of Transportation commissioner.
Last, but certainly not least, there is the bonding bill. If the February forecast does indeed indicate shrinking revenues for the current biennium, the bill’s borrowing capacity will necessarily dip below its current target of $965 million (borrowing more than 3 percent of the general fund total spooks the bond rating agencies). At a time when the state’s construction industry has been particularly hard hit by the recession, both parties will trumpet the bill for its economic stimulus and job creation. But in winnowing down $4 billion in original bonding requests, there will be more winners than losers, and plenty of horse trading that could affect other legislation as lawmakers try to weave the proverbial silk purse for their constituents out of the sow’s ear of our troubled economy.
Britt Robson, formerly a staff writer and senior editor at City Pages, covers the state Capitol and politics. He can be reached at brobson [at] minnpost [dot] com.