This year in St. Paul, lawmakers must find an answer to a $45 billion question.
That figure is roughly what it costs to run the state of Minnesota these days, from health-care programs and schools to keeping the lights on at government agencies. During odd-numbered years, the governor and the state Legislature plan the state’s budget for the next two years, bringing their ideas to the public on how much should be spent on what.
It’s a complicated debate with a lot of factors to consider, including fluctuating costs for health-care programs and unpredictable tax revenue collections. An updated economic forecast in February showed the state sitting on $1.65 billion more than expected over the next two years, meaning legislators need to figure out how to spend that too.
At heart, it’s a debate about political priorities — what programs deserve more or less funding, and how much of the money the state collects should be given right back to Minnesotans.
Republicans in control of the Minnesota House and Senate released their budget targets over the last week, broad figures that are light on details but signal a big appetite for large tax cuts and budget cuts ahead for some state agencies and health care. They want to spend about $45 billion on government over the next two years, but Gov. Mark Dayton, who released his budget in January, proposed using the surplus to spend about $1 billion more on schools, colleges and state programs.
There’s a lot at stake. If lawmakers don’t figure out how to square their competing visions for the state by summertime, state government programs will automatically shut down.
While the governor and House and Senate Republican leaders have all released budget plans, they tend to be broad outlines that are short on specifics. Below, we’ve tried to put together a fair comparison of the plans, based on numbers that are publicly available now. We’ve also included numbers from the February forecast, which shows what the state would spend if laws remained the same as they are today. In the coming months, legislators and the governor will have to pin down some of these numbers.
With that in mind, here’s what we know about the budget proposals so far — and where lawmakers disagree the most.
Coming into the 2017 session, everyone was prepared for a big debate over tax cuts. First, the 2016 session ended with a tax bill that was ultimately vetoed over a drafting error related to bingo halls that would’ve cost the state more than $100 million over the next three years. That meant there was already a push to address some of those failed tax cuts from last year. Then the state’s budget surplus grew to $1.65 billion, leaving even more room for the newly installed Republican legislative majorities to propose cuts.
Combining taxes, non-tax revenues, money left over from last year and a few other funding sources, the February forecast estimated that the state would have about $48.4 billion in revenue to work with for the coming biennium.
With tax cuts, that number could get lower. House Republicans have come in with the biggest cut, proposing about $1.35 billion in “tax relief” over the next two years. What kinds of cuts? There are few details out yet, but House Republicans have shown interest in phasing out increases to the statewide business property tax and Social Security income taxes for some seniors, as well as cutting taxes on large estates after someone dies. “We will target our tax bill at middle class Minnesotans and seniors and college students and farmers and small businesses,” Speaker Kurt Daudt said. “I would look for those kinds of things, but the Tax Committee will be working through that this week.”
Senate Republicans come in lower than the House at $900 million, but they say their plan will distribute tax cuts to the most individuals. The signature component of their “Pro-Growth” tax proposal is a reduction of the lowest income tax rate, currently at 5.35 percent, which affects the largest number of Minnesotans. If passed, it would be the first permanent income tax reduction in Minnesota in nearly 20 years, and it would get more expensive over time. Details are still light on the proposal, and Democrats have already criticized the idea, saying it’s not properly targeted to middle-class families and will benefit wealthier Minnesotans.
For his part, Dayton wants to temper strong desires for tax relief this year. His tax-reduction package totals about $280 million, about $1 billion less than the House and a third of the size of the Senate’s. And unlike Republicans, Dayton’s proposal also includes a tax increase, closing several corporate tax loopholes and continuing inflationary increases on tobacco taxes to raise about $100 million in new revenues.
He frequently references the decade of budget deficits that followed large tax cuts in 1999 and 2000. “My number one priority for sure this legislative session,” he said, “is that stability is not scarified either next biennium or in the years to follow.”
Note that, since some of these tax cuts come in the form of tax credits, they might also be reflected in some of the department-specific spending proposals detailed below.
Property tax aids and credits
Dayton’s plan in particular is heavy on tax credits, with many proposals in his tax-reduction plan coming in the form of a credit for farmers, families and local governments.
Among his proposed credits, Dayton pumps money into the so-called working family tax credit and the child and dependent care tax credit to help families pay for child-care costs. Dayton also wants to give tax credits to farmers who are burdened by school levies or working to implement new water buffer requirements between farmland passed last year. Dayton also proposed an increase to Local Government Aid of $20 million.
Republicans had less information about possible aids and credits. Senators don’t have a specific breakdown of how much of their tax bill will go to credits, but they’ve expressed interest in credits for college graduates with student loans. House Republicans said they aren’t likely to change the amount of aid given to cities and counties this year.
Education is one budget all sides agree should get more funding this year — though there are battles ahead over how much more should be spent and what it should pay for.
Dayton has the highest new education spending plan, proposing to increase the state’s education funding formula by 2 percent each year for the next two years, or a total of about $371 million this biennium. That’s not all he’s proposing: Dayton also wants to spend $175 million for his long-sought voluntary preschool education program.
The education funding plans on the Republican side have not been released yet, but both the House and Senate are proposing an increase ($257 million and $300 million, respectively). Dayton is likely to push hard for his preschool proposal as he heads into his final year in office, but Republicans have pushed back on the bill in the past, arguing Dayton didn’t make a strong enough pitch to legislators and school districts and labeling it as a potential unfunded mandate. Republicans have shown more interest in targeted early education scholarships.
For the state’s higher education institutions, Dayton proposed $318 million in new spending over the biennium. He wants much of that money to go toward keeping tuition low and helping students of color attend college. That includes $125 million to Minnesota State colleges and universities and $68 million to the University of Minnesota for operating costs, urging both university systems to use the money to “fund activities that address the educational attainment gap.”
House Republicans are proposing spending an additional $150 million on higher education, though the details of their plan have not been released. Senate Republicans want to spend $100 million more on higher education than what’s expected under current law, including $30 million for the University of Minnesota to increase the medical school’s research capacity and improve its National Institutes of Health ranking.
Minnesota’s transportation budget is confusing at first glance, because the state only actually pays a small portion of its transportation budget out of the general fund, and most of that funding goes toward running transportation-related agencies. The Minnesota Constitution does most of the heavy lifting, creating several core transportation funds and dedicating money from the federal government, gas taxes and other revenue directly to things like highways, roads, bridges and transit.
Dayton isn’t proposing to change much in the general-fund appropriation for transportation, but he has a broader plan to pump billions into roads, bridges and transit over the next 10 years. In the next two years, he wants to raise $600 million by increasing the gas tax, about $400 million for transit and other projects by raising the sales tax a half cent in the metro area and another $125 million from higher vehicle registration fees. Those funding increases aren’t reflected in his budget proposal, though, because they would come from dedicated funding sources, rather than the general fund.
House and Senate Republicans rolled out transportation plans this week that don’t raise the gas tax but do increase transportation revenue by moving some state revenue streams going to other departments and spending them on transportation instead. House Republicans want to specifically dedicate about $300 million of that funding to roads and bridges (a number they appear to have included in their transportation general-fund budget).
Senate Republicans’ budget targets keep the general fund expenditure for transportation steady, but they call for an additional $570 million in “new permanent transportation funding.” Like the House, that comes from transferring revenues on things like car rentals, sales and repairs to roads and bridges and include some federal funds already coming into the state for transportation funding.
Neither plan funds light rail this year — or in the future. Both the House and the Senate have asked the federal government not to fund the controversial Southwest Light Rail line, and the House bill requires metro counties to pay for all future operating and capital costs of light rail. For past projects, the state had been asked for 10 percent overall of construction costs and 50 percent of annual operating subsidies.
Democrats have criticized Republicans for blowing a hole in the general fund by shifting revenues around and not actually finding new money for transportation. “The House Republican transportation plan is a short-term and divisive gimmick,” DFL Rep. Frank Hornstein said.
Republicans say that’s a perfectly reasonable position given the state’s budget surplus. “If you look at the surplus we have now plus the surplus going forward, we’re pretty confident that we can do that and still take care of the other budget needs that we have, including tax relief,” Senate Majority Leader Paul Gazelka said.
There is one thing everyone agrees on: The Minnesota Department of Transportation should find savings in its own budget. All three proposals call on the agency to find 15 percent savings within its allocated budget.
Health and human services
Health and human services programs make up the second largest part of the state’s budget after education. It tends to be the area with the most growth from budget year to budget year; this cycle, it’s the area of the budget with the most uncertainty ahead.
The forecast predicted state spending on health care would increase by about $2 billion from the last budget, largely due to the increasing costs of caring for the sick and Minnesotans living with disabilities.
Neither Dayton nor the Republicans spend as much as the forecast budgeted for health and human services, but they come fairly close. Dayton’s health care spending comes in lower than the forecast mostly because of an accounting shift, not an actual cut to services. He recommends using the state’s Health Care Access Fund to pay for about $716 million in Medicaid spending instead of the general fund. That fund was originally set up to administer MinnesotaCare, but over the years an increasing level of Medicaid spending had been added to its duties.
In addition to that accounting shift, the administration says it is proposing about $316 million in new health care spending. That includes giving Minnesotans a “public option,” allowing them to buy into MinnesotaCare, the health care program for low-income residents, through the MNsure health insurance marketplace.
That idea has landed with a thud among Republicans, especially in the House, where it didn’t get a hearing. Republicans haven’t said yet where they plan to cut health care spending, but House Ways and Means Chairman Jim Knoblach said they might look at trimming eligibility for certain programs.
For everyone, there’s a lot of uncertainty about what’s going to happen with the Affordable Care Act at the federal level. Whatever happens, it could have huge implications for Minnesota’s budget down the road.
“When you look at some of the changes that are likely coming out of Washington, we really need to figure out how to trim back the growth of some of these programs given that we may have less money for some of them,” Knoblach said. “We need to be trying to reform some of these programs now so we are ready for that.”
Public safety and judiciary
Neither House nor Senate Republicans are proposing dramatic increases in public safety and courts spending for the next two years, but Dayton wants to see the budget for law enforcement, prisons and judges increase by $256 million. That would include money to cover the rising cost of health care in prisons, staffing, new IT infrastructure and to give pay raise for judges over the next two years, among other proposals.
Dayton also wants money dedicated to developing new, less-restrictive housing options for sex offenders in treatment at the state’s sex offender treatment facility in Moose Lake.
State government and veterans
Republicans in both the House and Senate recommend spending less than forecasted for veterans programs and the operation of state government, but the details of their plans are still unclear. Daudt said House Republicans likely won’t propose a 5 or 10 percent cut across the board to all state agencies, an idea senators had floated.
But senators and House members have both shown an interest in cutting the state auditor’s budget after Auditor Rebecca Otto used office funding to pay for a lawsuit fighting a 2015 law change. (The change allowed counties to seek audits from private accounting firms instead of the state auditor’s office.) Senators are proposing lesser cuts to the Minnesota secretary of state’s office and the Minnesota Campaign Finance and Public Disclosure Board, and they want to eliminate the state’s campaign subsidy program.
Dayton wants to put another $150 million into state government and veterans over what was forecasted, a large amount of that to update antiquated IT systems. The state of Minnesota’s system would get $51 million for upgrades and $74 million to boost cybersecurity under Dayton’s plan.
Then there’s all the rest. Some areas of the budget picture — including the environment, agriculture, economic development, housing, energy and the bonding bill — are still fuzzy, even for Capitol regulars. That’s partially because some of those numbers were lumped together in House and Senate budget targets and the details of those spending areas haven’t been finalized yet.
Some things are clear: In the House and Senate, spending on environment and natural resource programs would go down under their budgets.
Bonding bills — large packages of construction projects paid for by state borrowing — also require money in the budget to pay for the debt service on the bonds. Dayton wants legislators to pass a $1.5 billion bonding bill this session, after a bonding proposal failed in the final moments of the 2016 session. House Republicans have budgeted for a $800 bonding bill each year for the next two years, but the size of the bill must be worked out with all four caucus leaders involved (Democrats have leverage in bonding debates because bonding bills need a supermajority to pass).
As for savings, everyone wants to leave a little money on the bottom line, especially with so much uncertainty about what’s going to happen to the state’s budget under federal cuts. Dayton is proposing to save $200 million on the bottom line, as are House Republicans. Minnesota also has $1.6 billion in its budget reserve fund, which could be used if federal cuts run deep.
“It’s no question that if the kind of reductions the Trump administration is proposing, when they take effect, it’s going to have a devastating effect on Minnesota’s budget,” Dayton said. “We’re not going to be able to make up for everything.”