’98 percent’ constitutional amendment undercuts common-sense budgeting

In our ongoing effort to highlight the pitfalls of budgeting by constitutional amendment, we just released an issue brief, ’98 Percent’ Constitutional Amendment Creates Barriers to Common-Sense Budgeting. The 98 percent amendment is one of several proposed constitutional amendments that would severely limit lawmakers’ ability to create a budget that meets our state’s needs. The 98 percent amendment is short-sighted on many grounds: it would increase budget gridlock, slow the response to a crisis, jeopardize the state’s credit rating, worsen budget deficits and undermine critical state investments.

The amendment would limit general fund spending to 98 percent of forecasted revenues. The other two percent goes into a reserve account. Lawmakers could not spend above the 98 percent limit or use the reserves unless responding to an emergency. Further, any emergency spending would require a supermajority vote (60 percent) in both the bodies of the Legislature. When the reserve account reaches five percent of state revenues, a reduction in the state sales tax would be triggered.

Here is why state lawmakers should reject this amendment:

It would increase gridlock and gimmicks at the Capitol. To understand the problems the amendment would create, one needs only consider recent history. It took a 20-day government shutdown before Governor Dayton and the Legislature reached a deal on the FY 2012-13 budget. The painful solution included more than $2 billion in service cuts and creative financing schemes that no one liked (school aid shifts and the sale of tobacco revenue bonds). Had this amendment been in place, policymakers would have needed to reduce net general fund spending by $1.3 billion. In other words, they would have needed to find an additional $1.3 billion in cuts and shifts.

It would slow our response to a crisis. In the face of an emergency “involving the health, safety, or welfare of the citizens,” the amendment would require supermajority votes in the House and Senate to tap reserves or raise revenues beyond the 98 percent cap. This risks slowing the state’s response to a crisis and empowers a small number of legislators to block action on important priorities while trying to get concessions on unrelated issues.

It would risk weakening the state’s credit rating. The 98 percent amendment would likely hurt the state’s credit rating and increase its borrowing costs, similar to the supermajority amendment. The national credit rating agencies frown on states with constitutional restrictions that undermine their flexibility to address budget problems. Minnesota’s credit rating has already taken recent hits. The 98 percent amendment would raise another red flag.

It would make deficits deeper. This amendment effectively creates a tax cut account, not an effective rainy day fund, and it could make future deficits worse. The amendment requires the state to put two percent of revenues into a reserve every biennium, even in the middle of a recession. It wouldn’t take long for the reserve to reach five percent of revenue, triggering a mandatory tax cut. The state would face the perverse possibility that a tax cut would be triggered that would tip the state into deficit or deepen an existing revenue shortfall.

It would interfere with investments in the state’s future. This amendment would interfere with Minnesota’s ability to recover from a recession and invest in our future. For instance, putting two percent of forecasted revenue off limits would prevent Minnesota from taking full advantage of economic growth coming out of a recession. Other states could be rebuilding while Minnesota might be forced to make additional cuts to education, job training and infrastructure.

Our issue brief goes into more detail about the many drawbacks to this proposal and why it is wrong for Minnesota.

-Scott Russell

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