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Minnesota Legislature’s budget priority overshadows other big policy issues

“Everything is secondary to the budget,” says Senate Majority Leader-designate Tom Bakk.

The new DFL legislative majorities will have to deal with a projected $1.1 billion budget deficit.
Minnesota House of Representatives Public Information Services

The Minnesota Legislature begins its work Tuesday with a wide-ranging policy agenda, but all of those topics — including transportation, health care changes and bonding — will be overshadowed by the one big issue.

“Everything is secondary to the budget,” says Senate Majority Leader-designate Tom Bakk.

The Democrats, who control both the Legislature and the governor’s office for the first time since 1990, have the votes to pass much of their agenda without GOP support. But the budget deficit and a similar obligation to pay back borrowing from the state school system may limit what lawmakers realistically will be able to achieve this session.

The new DFL legislative majorities will have to deal with a projected $1.1 billion budget deficit — relatively modest, compared with recent cycles — but they also want to solve the ongoing structural problems in state finances.

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The budget “may be more dominant than usual because clearly the economy has been on the upswing enough so we can put together a structurally balanced budget.” said Sen. Dick Cohen, chairman of the powerful Senate Finance Committee.

To accomplish that, Gov. Mark Dayton and DFL legislative leaders also plan to consider a range of possible tax changes, too.

The DFL’s Election Night return to power has led to Republican speculation that the budget-balancing discussions will turn into efforts to raise taxes and dramatically increase state spending.

Bakk and other DFL leaders have worked to temper expectations on both spending and on dealing with divisive social issues, such as gay marriage and gun control.

House Speaker-designate Paul Thissen told MinnPost that state government’s austerity over the past decade has led to pent-up spending demands, and said some people assume more spending simply because DFLers are in power.

But Rep. Ann Lenczewski, chairwoman of the House Taxes Committee, says bluntly: “We’ll be saying no to a lot more things than we’ll be saying yes to, that’s for sure.”

Here’s a look at how key legislators see the budget and four other policy issues shaping up for the session:

Budget balancing

Top Democrats want to balance the state budget in a way that puts an end to financial gimmicks used in recent years.

Over the past decade, lawmakers have used one-time money and short-term accounting fixes to plug chronic budget shortfalls. Dayton and Republican leaders in part solved Minnesota’s previous $5 billion deficit by frontloading tobacco settlement bonds and further shifting money from schools.

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DFLers also want to change the structure of future budget cycles.

“I’m hoping there’s the ability to do that,” Cohen said of solving ongoing structural budget problems. “We’ve had these feast-or-famine budgets for years now. It’s getting not only tiresome but damaging for the state.”

Current projections indicate the state will have roughly $35.8 billion to spend over the next two years, but the forecast shows $36.9 billion in revenue needed to maintain current funding levels.

What remains unclear is how Democrats will tackle the budget issue. Dayton campaigned on income tax increases for the wealthiest Minnesotans, but legislative leaders have not wholeheartedly back his proposal.

Sen. Rod Skoe, chairman of the key Senate Taxes Committee, said that a balanced budget likely would come from both new spending cuts and new tax revenues.

Cohen noted the steep cuts that budget sectors like higher education have faced over the last 12 years and indicated an interest in further investment there and in early childhood education. But the St. Paul lawmaker said it’s too early to start setting budget targets.

Dayton is scheduled to release his budget on Jan. 22 — a starting point for DFL legislators.

Cohen also said state lawmakers crafting the budget have to take into account how the continuing federal fiscal issues affects planning..

“At this point, there’s a certain degree of uncertainty because we’re not sure where things will end up at the federal level,” he said, “and that will make a difference.”

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Tax changes

Dayton has sent his Revenue commissioner, Myron Frans, across the state to hear from Minnesotans about their openness to potential tax changes.

Proposals to change Minnesota’s tax laws include the governor’s campaign pledge to raise income taxes on the wealthiest 2 percent of Minnesotans, a plan to reduce the sales tax rate but broaden it to include more goods and services, and efforts to tax goods purchased on the Internet.

DFL tax proposals, however, also could come in the form of relief. Frans, referring to Minnesota’s tax system as a “three-legged stool” of income, property and sales taxes, believes that the “legs” of the stool are currently out of balance, because the state relies too heavily on property taxes.

Democrats long have sought property tax relief, which could expand to both businesses and consumers. The governor is also concerned with the state corporate income tax rate, one of the highest in the nation.

But the biggest question is whether the “tax reform” that Dayton and the Democrats are after will be revenue neutral — or will represent a tax increase.

“We don’t believe that we need tax increases,” incoming GOP Senate Minority Leader David Hann said after the fall budget forecast. “Do they really mean [tax] reform, or is it code for a tax rate increase?”

Skoe, who will carry Dayton’s tax bill in the Senate, expects new revenue to “make the tax system more fair.” A tax reform subdivision of Skoe’s committee will also consider proposals to make the tax system “more based on ability to pay and less complicated for the taxpayer.”

Lenczewski has been working on tax reform in Minnesota for years. A moderate Democrat from Bloomington, she is more cautious than other DFLers when discussing potential revenue increases.

“We’ve got everybody talking about tax reform … I just am more accepting that that takes a little time, and I’m not feeling extremely rushed to get there,” she said, adding that she still thinks it could get accomplished in 2013.

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Lenczewski stressed that significant tax reform is extremely difficult to pass and said she’s looking for bipartisan solutions so that Democrats’ work isn’t undone after one election cycle. Until she hears from more DFLers and Republicans, she said she wasn’t ready to speculate on what a tax bill might look like.

“Things happen when everyone tries to work together,” she said, but added, “Maybe that’s delusional.”

Health insurance exchange

Perhaps the tightest deadline lawmakers face this session is taking action to outline the policies governing Minnesota’s state-based health insurance exchange, a key mechanism in implementing the federal health care reform law.

Lawmakers must pass the guidelines before the end of March or risk defaulting to a federal exchange, which Dayton and DFL leaders have worked to avoid. Thissen lists designing the exchange as one of the most important tasks for lawmakers this session.

The exchange, expected to serve about 1.2 million Minnesotans, will allow consumers to compare and shop for insurance using a format popularized by such travel websites as Orbitz and Travelocity. The state expects the exchange to expand access to coverage and reduce average insurance costs, and many will be eligible for an insurance subsidy.

Dayton, using federal grants and an executive branch advisory task force, pushed forward with the exchange without substantial input from Republican lawmakers. As a result, the governor put significant planning decisions on hold until after the elections, and the new DFL Legislature will have to scramble to make up for lost time.

DFL Rep. Joe Atkins, incoming chairman of the House Commerce Committee, said he will sponsor exchange legislation in that chamber. Sen. Tony Lourey, who will chair a key Senate health committee, will carry the legislation there.

Atkins, who hopes to introduce the legislation this week, said it would follow the governor’s recommendations. Although details are still scarce, that means the exchange will likely be governed by a public-private partnership and could be funded using a variety of methods, such as a sin tax or by selling the naming rights to the exchange.

So far, Minnesota has secured roughly $70 million in federal funding to plan the exchange. It signed a $41 million development deal to design the IT infrastructure and is waiting for an additional $39 million in planning money. The exchange is expected to cost $48 million in 2014 and up to $62 million in 2016, when projections end.

Atkins said he plans to hear from the governor’s task force members and other lawmakers before committing to specific policy decisions. Other issues wrapped into exchange planning include expanding Minnesota’s Medicaid program and figuring out a replacement for MinnesotaCare program, which isn’t compatible with the 2010 federal law.

“That is very much on our radar, and before we reach conclusions, it’s important that we hear from people affected by it,” Atkins said.

The tight timeline has led some experts to speculate that the Legislature could pass a basic exchange package this session and come back to beef it up in 2014. But Atkins said he hopes that lawmakers can get it right the first time.

“My personal hope is that it will be a little more robust than just a barebones framework,” he said. “But we’ll see what sort of appetite the Legislature and Minnesotans have for that.”

Bonding efforts

Legislation to fund public works projects — including roads, civic centers and Minnesota’s public higher education facilities — likely represents either the session’s best opportunity for compromise or the biggest casualty of partisanship.

DFL lawmakers have expressed strong interest in passing a substantive bonding bill this session – traditionally large bills are reserved for even years — in order to stimulate the state economy and put people back to work. The state has the capacity to responsibly borrow up to $1.3 billion under current regulations, and supporters note that interest rates for state bonds are at historic lows.

Rep. Alice Hausman, chairwoman of the House bonding committee, said her staff is compiling a proposal that should be completed this week. The St. Paul Democrat has extensive experience with bonding and is an outspoken supporter of transit development.

Included in the proposal are requests from the University of Minnesota and the Minnesota State Colleges and Universities system, the three regional civic centers that Dayton has supported and funding for such transit projects as the Southwest corridor light rail line.

“I still believe that the secondary aspect of this is we put people to work, and the construction industry could still use a boost,” she said.

Hausman, who hadn’t reviewed the final totals, said the bill would be larger than $500 million, or “as robust a bill as I can do.”

But the veteran lawmaker could be out of luck, despite DFL control. That’s because bonding legislation requires 60 percent support to pass,which means Democrats would need some Republican votes.

That makes bonding the GOP’s biggest bargaining chip, one they’re not likely to give up easily. It’s unclear what Democrats would have to trade to get Republican support for the measure.

A $531 million, off-year bonding bill was a key part of the deal Dayton struck with Republicans to end the 2011 government shutdown. Lawmakers passed a $496 million bill under more traditional circumstances in 2012.

Rep. Kurt Daudt, incoming House Republican leader, previously told MinnPost that he doesn’t support a bonding bill this year, especially if Democrats also push for tax increases.

Hausman, though, believes the state’s open debt capacity and low interest rates make a 2013 bonding bill a common-sense issue.

“The only reason we wouldn’t be able to do that is if Republicans are going to do what Washington just did,” she said, referring to the fiscal cliff stalemate.

Hausman said she hopes lawmakers could pass a bonding bill during the first two months of session while they wait for the key February economic forecast, which is used to shape the next budget. She also plans to introduce a separate bonding proposal in 2014.

Transportation policy

Dayton is searching for a way to fund the the state’s infrastructure needs in repairing crumbling roads and bridges.

But the governor already has rejected an executive branch proposal to increase gas and sales taxes and license tab fees to raise an additional $50 billion over 20 years for roads and transit. Democrats in particular want to continue funding transit projects, such as the Southwest Corridor light rail line.

It’s clear that’s not going to be publicly acceptable. It’s not going to raise the revenues necessary to do what needs to be done, so we’ve got to look to see what are our other options,” Dayton said of the measure in mid-December.

But transportation-oriented lawmakers say the state needs to come up with a solution to plug the shortfall. “I think we need to raise those dollars,” said Sen. Scott Dibble, chairman of the Senate Transportation and Public Safety Committee.

Dibble said the state needs to reclaim transit dominance, using “the whole package” that goes along with transit options, including light rail, passenger rail and access to housing, to increase the greater metro area’s “attractiveness to a young, creative workforce.”

The Minneapolis Democrat called the executive branch’s transportation report the “roadmap,” but said it was just the starting point of legislators’ discussions related to transportation issues.

Rep. Steve Simon, a Democrat from St. Louis Park, plans to champion the Southwest Corridor project.

“I’m hopeful that we’ll get some expanded state support or at least enough to see it through to the finish line and to convince the federal government to commit its substantial promised resources to the project,” he said.

Tuesday: Hot-button legislative issues