Gov. Tim Pawlenty’s proposed budget cuts, released this morning, offered few surprises but lots of pain, state policy-watchers agreed.
“What the governor did was cut a big hole in Minnesota’s safety net,” said Jay Kiedrowski, a senior fellow at the University of Minnesota’s Humphrey Institute who was Minnesota’s finance commissioner under Democratic Gov. Rudy Perpich. “No longer do Minnesotans have the assurance that when they have hard luck they will have help.”
“We’re concerned that it looks like under his proposal, working people are going to lose access to health care,” said Nan Madden, director of the nonprofit Minnesota Budget Project. “We are disappointed in the lack of balance.”
“The unfortunate thing is everyone from the governor on says we have to make tough decisions, but they’re not — they’re not making the tough decisions,” said John Gunyou, finance commissioner under Republican Gov. Arne Carlson and current city manager of Minnetonka. “Unfortunately, no one will talk about tax and spending reform, they’re just cutting budgets.”
In addition to a 20 percent reduction in the corporate tax rate, Pawlenty’s supplemental budget (PDF) proposes $1.2 billion in spending cuts that he said will leave intact funding for services to veterans, “core” public safety programs and K-12 classroom spending.
Big cuts for local aid, health and human services
Under the governor’s proposal, state aid to local governments would be slashed by $250 million, health and human services by $347 million, higher education by $47 million, and other state agencies and programs by $181 million.
“There are no one-time gimmicks, there are no shifts,” Pawlenty insisted. “There are no reserves, no one-time solutions.”
Gov. Pawlenty’s proposed budget fix
He did, however, factor in $387 million in anticipated one-time federal stimulus funds to help struggling states finance Medicaid.
The governor also asked the Legislature to ratify his decision last summer to “unallot” $2.7 billion in state spending, which would mean school districts and other government agencies would simply not receive state aid they were supposed to receive a year late.
Because K-12 makes up 40 percent of the budget, and services to veterans another 10 percent, the cuts of the last few years have fallen disproportionately on health and human services, which make up slightly less than a third of state spending.
Tightened health programs
This year, Pawlenty proposed changing the eligibility guidelines for childless adults on state health insurance rolls from 250 percent of the federal poverty limit to 75 percent. The change would affect an estimated 20,000 people, according to state Health and Human Services Commissioner Cal Ludeman.
General Assistance Medical Care is set to end March 31. DFL lawmakers are looking for ways to extend the program, but the governor has hinted he would veto the current legislative proposal. GAMC provides health care to some 70,000 people each year; in 2008, more than 90 percent had income of less than $203 a month. One-fourth are homeless, a third have chronic medical conditions, and 60 percent are mentally ill or chemically dependent.
“We can’t be so smug about who we think we are that we price ourselves out of the market,” Pawlenty said.
The people who will be dropped from the program, MinnesotaCare, don’t have access to health insurance at work and won’t have realistic options, the Minnesota Budget Project’s Madden countered. “Most of them will be facing a private market with insurance they can’t afford,” she said. “So, most of them will be joining the ranks of the uninsured.”
The governor also called for reducing nursing home reimbursement rates by 2.5 percent and asked legislators to overturn a state law that requires long-term care facilities to charge all patients the same rates, whether they are receiving government subsidies or not.
Higher education “got off easy,” the governor said, with proposed cuts of $36 million to the University of Minnesota and an additional $10 million to the state university system.
When combined with $300 million in unallotments, the proposed reduction in aid to local government means most counties and cities will receive 25 percent less state funding, Pawlenty said.
According to the League of Minnesota Cities, Minneapolis will see a $29 million cut, while St. Paul will lose $12.9 million. “City governments are already making lots of other cuts,” said Kiedrowski. “Police and fire and roads will be affected.”
“When I talk to city groups I say we have to get used to living without state aid,” said Gunyou. Minnetonka no longer receives LGA money, the city manager noted. “The only revenue the state allows us to use is property taxes.”
In general, state agencies can expect a 6 percent budget reduction, which will mean an unspecified number of layoffs, Pawlenty said.
Peggy Ingison stepped down as Pawlenty’s finance commissioner in 2006 to become chief financial officer of Minneapolis Public Schools. Reached before Pawlenty’s announcement, she said school administrators were particularly concerned that the governor said he would not touch classroom spending, instead of using a broader term like education funding. “A while back, he was pushing this 70 percent solution: ‘If schools just spent 70 percent of their funding in the classroom, we’d be all right,’ ” she recalled.
Unallotment moves complicate budget cutting
Ratification of last year’s unallotments would cost schools $1.5 billion, she noted.
That controversial unilateral budget tactic is the subject of a lawsuit brought by six individuals whose specialized diet aid was slashed. In December, Ramsey County District Court Chief Judge Kathleen Gearin ruled that Pawlenty exceeded his authority when he made the unilateral cuts after the Legislature had adjourned. Pawlenty appealed the ruling to the state Supreme Court, which is expected to hear oral arguments next month.
If the two challenged unallotments are ruled illegal, things don’t get any easier for legislators. If lawmakers refuse to ratify Pawlenty’s decisions, they then will have to find an additional $2.7 billion in savings.
“There’s the philosophical policy debate, but the other issue is the practicality,” said Gunyou. “If those are not legal, or not ratified, then they still have to cut that same amount somewhere else. If they say they don’t want to do the unallotment, then they are looking at a $3.3 billion problem.”
In addition to the pain caused by the proposed cuts, policy-watchers said they were disappointed that Pawlenty again failed to propose structural changes that are needed to keep the size of the problem from snowballing. Minnesota has faced budget deficits in seven of the last nine years. Each time, Pawlenty has drawn fire for draining reserves and using one-time accounting shifts as partial ways to close those gaps.
The net effect, critics on both sides of the political aisle have argued, will be to hand the next governor an even bigger fiscal problem.
“This $1.2 billion shortfall is peanuts compared to the next biennium,” said Gunyou. Previously, a $5.4 billion deficit was projected for the 2011-2012 cycle. More shifts this year would add the current deficit to that amount for a total of $6.6 billion, which could be the equivalent of 15 or 20 percent of the state’s budget, he said.
Analysts were still sifting through the proposal’s fine print, but Pawlenty this morning argued that he had actually taken steps to reduce the future deficit to $2.4 billion. Kiedrowski called this a positive step.
Structural budget problems compound situation
Regardless of the eventual size of the future shortfall, the structural problems will be compounded by a shift in the state’s demographics. Because Minnesota’s population is aging, fewer people will be working and more will be using the most costly services, such as long-term care.
“We are not going to grow our way back to the prosperity of the last couple of decades,” Gonyou said. “So the gains will have to come from productivity.”
Public policy can best encourage increased productivity by investing in infrastructure and public education, he said. “There has to be a more thoughtful strategy here,” said Gonyou.
When it downgraded Minnesota’s bond rating recently, Moody’s cited the high number of one-time fixes and lack of cash reserves. “Given the one-time actions already incorporated in the adopted budget, including payment delays, fund balance transfers, use of federal stimulus money and depletion of budget reserves, the state has reduced flexibility to address continued budget challenges,” Moody’s reported.
“The negative outlook reflects Minnesota’s ongoing financial and economic weakness, resulting from revenue underperformance and leading to sizeable out-year budget deficits, and tightening liquidity. In addition, the outlook reflects depletion of budget reserves, negative GAAP balances, and heavy reliance on one-time resources to balance the state’s budget,” the analysts wrote.
MinnPost reported recently that Minnesota is second only to Alaska in the number of one-time fixes it has used.
During Pawlenty’s tenure, property taxes have increased by $3 billion, or 65 percent. Fees have doubled, reaching a total of $1.25 billion. State and local tax rates have increased for 90 percent of Minnesotans, while tax rates for the state’s wealthiest, those earning more than $130,000, have decreased.
In November, Pawlenty announced a proposed constitutional amendment to limit state spending to the amount of revenues that were brought in the door during the previous two-year budget cycle.
Lawmakers — several of whom are running to succeed Pawlenty — must now decide which of the governor’s proposals to accept. Unless they are able to raise taxes — unlikely with Pawlenty’s no-new-taxes pledge, they’ll have to be creative if they are to come up with alternatives, analysts said.
“I’ve struggled to think about what would I do if I were trying to put this together and I had put myself in this box of no new taxes,” said Ingison. “Is your legacy going to be IOUs or what?”
Beth Hawkins writes about education and other topics.