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New budget fails to take on Minnesota’s long-term problems

Lawmakers made little progress toward creative reform that could have set Minnesota on streamlined new tracks for delivering government services.

The state borrowed on the future and now it will be up to credit agencies to judge that decision.
REUTERS/Eric Miller
The state borrowed on the future and now it will be up to credit agencies to judge that decision.

Even while the state was severely strapped for revenue back in January, it was rich in visions for a Minnesota that could rise above the budget crisis and find better ways to meet our priorities.

Real excitement stirred the state. Civic groups, business leaders and professional associations offered a wealth of ideas for securing Minnesota’s well-being.

Now comes the reality check. And a sobering one it is.

It is not surprising that the people we elected to make the decisions at the state Capitol made little progress toward creative reform that could have set Minnesota on streamlined new tracks for delivering government services.

The partisan ramparts were just too fortified.

Jay Kiedrowski
Jay Kiedrowski

“To do reform you really need to bring a lot of people together and they have to work to develop a consensus,” said Jay Kiedrowski, former state finance commissioner and senior fellow at the University of Minnesota’s Humphrey Institute.

“In this legislative session, you didn’t see bipartisan groups working on difficult issues,” he said. “What you saw was the Republican legislature doing its thing and Gov. [Mark] Dayton proposing his thing. That isn’t conducive to making major reforms in government.”

This was a session of missed opportunities, said Jim Mulder, the former executive director of the Association of Minnesota Counties who ran for lieutenant governor last year on the Independence Party ticket.

“This Legislature and this governor totally focused on the math problem: how to balance the budget,” Mulder said. “You’ve got to do that, but what you should be doing first is some policy innovation.”

In fairness, there probably wasn’t time for a new DFL governor and a new crop of Republican legislators to pull off the innovations that had been envisioned.

“They were literally learning on the job, and with a compressed time frame, that’s difficult to do,” said Mark Haveman, executive director of the Minnesota Taxpayers Association. “In 2012 and beyond — both on the tax side and the spending side — this idea of reform is going to take hold.”

But how did they do on the basic issues that define Minnesota’s day-to-day problems and priorities?

“Jobs… jobs… jobs,” was the refrain that ran through last year’s political races.

The final deal included a bonding bill that Dayton said will put as many as 14,000 Minnesotans back to work on new university buildings, bridge and road improvements and flood hazard mitigation projects.

And it included a $251 million jobs and economic development package that funnels money into programs such as vocational rehabilitation, services for the disabled and new ventures in science and technology.

None of this adds up to bold jobs creation, said policy experts from different political perspectives.

Jim Mulder
Jim Mulder

“I don’t think they did anything,” Mulder said. “They really dropped the ball in terms of trying to bring together a new vision.”

Minnesota could see some long-term job gains from the bonding for new science research facilities, but the economic multiplier will be short-term at best for many of the other projects, he said. And the jobs bill does not measure up to the forceful movement the state needed toward a better economic environment.

Truth be told, the state is limited in its ability to create jobs. The same economic forces that prompted layoffs also clipped state revenues, said Nan Madden, who directs the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits. So the money simply isn’t there for massive job creation.

What state government can do quickly is support struggling families with benefits like unemployment compensation, job training and affordable child and health care, she said.

Nan Madden
Nan Madden

In that regard, Madden was relieved by what the Legislature didn’t do. It didn’t pass bills that she said would have cut thousands of Minnesotans from affordable health care and made it more difficult for low-income parents to get back to work.

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Also relieved by legislation that didn’t pass was Tom Hesse, vice president of Government Affairs at the Minnesota Chamber of Commerce.

“There were a number of tax increase proposals that did not become law,” Hesse said. “So right there, that’s good for the long run in job creation in the state.”

In terms of what did happen, the state streamlined its process for completing environmental reviews and granting permits to new projects. That will shorten the time and cost for companies to create new job-generating businesses in the state, he said.

Another measure likely to create jobs, Hesse said, is a sales tax exemption for data center equipment. Minnesota had granted such exemptions for manufacturing equipment. And now, with some national data center projects looking for new homes, it was time to extend that strategy to technology facilities.

Tom Hesse
Tom Hesse

In summation, Hesse agreed there was no major thrust toward creating jobs but rather incremental steps here and there.

Budget gap
If there is broad agreement on anything that came out of this final deal, it is disappointment that a good share of the budget problem is shoved into the future.

The deal delays another $700 million in payments to school districts. And it borrows $640 million from future tobacco lawsuit proceeds.

“One of the major priorities going into this legislative session was to get the state’s fiscal house back in order,” said Kiedrowski, the former finance commissioner.

This year’s budget crisis “was a result of the prior governor and Legislature kicking the can down the road, using gimmicks, one-time stimulus money and other means to technically balance the budget but leave a large deficit for their successors,” he said.

“In essence this session, the governor and the Legislature did the exactly same thing,” he said. “They weren’t able to agree and rather than compromise to come up with a fiscally sound approach, they decided again to use shifts — and, this time, a terrible idea of borrowing from future revenue to technically balance the budget.”

Still, the government did “start to turn the curve down on human service spending,” Kiedrowski said.

Meanwhile, it may have turned up the curve for the interest Minnesota must pay for billions of dollars in government bonds.

On July 7, as Dayton and the Legislature considered more one-shot deals to close their gap, Fitch Ratings downgraded the state’s credit rating. In particular, the credit agency was concerned about the plan to tap future payments cigarette makers will owe as part of a legal settlement to cover health care costs of smokers.

The state borrowed on the future anyway, and now it will be up to credit agencies to judge that decision.

Peter Nelson
Peter Nelson

Don’t blame the Republicans, argues Peter Nelson, a policy fellow at Center of the American Experiment.

Nelson is disappointed that GOP leaders were not able to push through their plan for a strategy called priority-based budgeting. Instead, they created a “sunset commission” to review state agencies and their functions on a regular basis.

But, Nelson said, “Republicans passed a balanced budget…. They showed that you can do it.”

The GOP budget, vetoed by Dayton, would have pared about another billion and a half from state spending for the next two years.  

It featured deeper cuts in human services with little harm to the Minnesotans served by state programs, Nelson said.

“If we have the time now to start digging into these programs, I think you can cut further,” he said.

Madden at the Budget Project takes away a different message: “The fact that we see in this budget a mix of cuts and shifts demonstrates that it was not possible to balance our budget through cuts alone, that the pain that would inflict would be too deep…. It really demonstrates that we have hit the limit on the strategy of just cut and efficiencies will bubble up.”

Boomers retirements
State Economist Tom Stinson and State Demographer Tom Gillaspy have warned for years that Minnesota must prepare for potentially devastating demographic change. (See MinnPost’s report.)

The state is poised to transform from young to old, from a work-based economy to a retirement-based society. Nearly as many Minnesotans will turn 65 during this decade as in the previous four decades combined. And the aging ramps even higher during the next decade.

Tom Stinson
Tom Stinson

While the need for action is urgent, almost nothing was done this year.

“This session really put on hold the question of how we deal with the fact that Minnesota is getting older,” Stinson said.

By 2020, he said, Minnesota will have about the same number of people over age 65 as it will have school-age kids. In terms of limited state dollars, that means the need for senior services is going to compete with education funding.

“What we’ve done thus far hasn’t dealt with that issue,” Stinson said.

This is not simply a problem of allocating resources. Also at stake is Minnesota’s economic health, which depends on a skilled workforce.

Now is the time the state must start upgrading the skills of the next generation, Stinson and others have argued. It needs to close the achievement gap between white students and racial minorities which make up the fastest-growing group of youngsters. It also needs to foster better achievement in science for all students.

The session ended with school districts pushed closer to the financial edge. And funding was slashed once again for the University of Minnesota and the Minnesota State Colleges and Universities system. (For details see the report by MinnPost’s Beth Hawkins.)

Stinson worries in particular that the cuts to MnSCU, the state’s hub of technical training, will price some students out of the chance to learn skills or upgrade them.

“That’s going to lead us, if we are not careful, to a less productive workforce,” Stinson said. “Then the Minnesota economy is not going to reach its full potential.”

Another challenge is to streamline the costs of caring for the aging population — for example, to restructure long-term care.

Nelson at the Center of the American Experiment said Minnesota took meaningful steps in that direction this year, by agreeing to apply for waivers from some federal rules that have blocked innovation in the state.

“So you could argue that there is that initial foundation to create dramatic change,” he said.

Republicans succeeded in blocking Dayton from raising income taxes on the wealthy.

Now comes the suspense: Will local property taxes rise in response to state spending cuts? Kiedrowski, the former finance commissioner, says that is likely to happen.

If so, Minnesota would continue a trend of shifting the burden from the income tax to the property tax. MinnPost reported last year that the income tax is projected to make up 35 percent of all the state and local taxes we pay in 2013, down from 37.4 percent in 2006. Meanwhile, property taxes are making up a good share of the difference: projected to rise to 33.1 percent of our tax burden in 2013, up from 30.1 percent in 2006.

Ten years of the big three taxes in Minnesota

(in 000s of 2009 dollars)

Source: Minnesota House of Representatives, Fiscal Analysis Dept.

Dayton insists that shift is unfair because the property tax falls more heavily on middle- and low-income families.

But Haveman at the Minnesota Taxpayers Association says the property tax is the cornerstone of local government finance for good reason: It is the most direct way of giving taxpayers control over government spending. At the local level, citizens have a better understanding of close-to-home needs and better access to officials making the spending decisions.

Beyond the property-tax question, many Minnesotans were hoping for reform that could have boosted state revenues at the same time it closed loopholes in the tax code.

Groups had called for extending the sales tax to clothing and some other items while lowering the overall sales-tax rate.

Others said it was time to scrutinize tax expenditures, various deductions such as the sales-tax breaks for items like legal fees. MinnPost’s budget calculator showed how the state could save billions of dollars by capping or eliminating some of these tax breaks.    

“These are really just spending within the tax code,” said Laura Kalambokidis, an extension economist at the University of Minnesota.

She served on a panel that reviewed tax expenditure policy for the Minnesota Department of Revenue. The panel’s report [PDF] in February urged state leaders to evaluate tax expenditures and consider phasing out some in a way that could have lowered taxes.

“These expenditures don’t get the scrutiny that direct spending does,” Kalambokidis said. “They need to be evaluated periodically to see if they are achieving the objectives they were supposed to achieve.”

That’s another thing that didn’t happen this session.

Still, this Legislature is far from the first to fall short on tax reform, Haveman said.

“There are always opportunities to look at good tax policy reform… but we have passed on those opportunities for decades,” he said.

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.