Bad news and really bad news about Minnesota’s financial situation

July 12, 2010

First, the bad news. Despite some optimism from the Governor at the end of the 2010 Legislative Session that the cash flow situation for FY 2011 was manageable, the latest news from Minnesota Management and Budget (MMB) shows that the state’s cash balance in the statutory general fund will dip to near zero as early as October. The cash balance will remain near or below zero until May. That’s clearly well below the minimum workable cash balance of $400 million.

The administration is proposing some options to help manage the cash flow situation which could be implemented as soon as this August. Recommendations include:

  • Deferring $83 million in K-12 payments until May 2011.
  • Deferring $89 million in payments to the University of Minnesota until June 2011.
  • Delaying $221 million in sales tax and corporate tax refunds over $5,000 by up to six months (all would be paid out by January 2011).
  • Delaying $110 million in payments to health plans and county-based health services in October and November (all would be paid by December 2010).

Unfortunately, these actions wouldn’t be sufficient to completely resolve the cash flow problem that persists through next spring. The state is also pursuing a line of credit option to help manage those shortfalls.

And now for the really bad news. The latest economic update released by Minnesota Management and Budget shows the state’s revenue collections for the current biennium are below expectations. We are closing FY 2010 (which ended on June 30) with a $99 million revenue shortfall. This shortage will be absorbed by the $6 million policymakers left on the bottom line and the $266 million in the cash flow account. As a result, there is no deficit for the current biennium. However, if there is another shortfall of more than $173 million before the end of FY 2011 (that’s what will be left in the cash flow account), then policymakers may need to solve another budget deficit before June 30th. (As a side note, the cash flow projections mentioned above take into account the $99 million shortfall.)

The future doesn’t look any rosier. Remember that the actions of the 2010 Legislative Session left the state with a $5.8 billion deficit for the FY 2012-13 biennium, $6.9 billion if you include inflation. Although the U.S. economy is showing consistent growth, the economic update points out that, “a crisis of confidence is emerging now as Americans begin to recognize how slow this recovery is likely to be.” Although most economists do not fear another recession, real GDP growth is now expected to average 2.9 percent over the next biennium, not the 3.5 percent initially projected. As a result, “it appears that the 2012-13 budget gap is likely to be materially wider than end-of-session estimates.”

State policymakers may soon be regretting that they did not take more action to reduce the FY 2012-13 deficit during the last legislative session. A slim ray of hope could come from the federal government. Congress has been debating for months whether to provide states with additional fiscal relief. This latest financial news clearly shows that the crisis in the states continues and federal assistance is critical to preserving core public services and sustaining economic growth.

-Christina Wessel

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Posted by Christina Wessel

State Supreme Court limits Governor’s unallotment authority

May 5, 2010

The Minnesota State Supreme Court has ruled that Governor Pawlenty’s unallotment of the Minnesota Supplemental Aid-Special Diet (MSA-SD) program last year exceeded the authority granted by the state’s unallotment statute. MSA-SD provides cash supplements to disabled Minnesotans whose health conditions require them to follow strictly prescribed diets.

Although the case before the Supreme Court focused on the unallotment of this specific program, the decision has far-reaching implications. In the court’s words:

We cannot conclude that the Legislature intended to authorize the executive branch to use the unallotment process to balance the budget for an entire biennium when balanced spending and revenue legislation has not been initially agreed upon by the Legislature and the Governor. Instead, we conclude that the Legislature intended the unallotment authority to serve the more narrow purpose of providing a mechanism by which the executive branch could address unanticipated deficits that occur after a balanced budget has previously been enacted. (from page 18 of the decision)

Because the legislative and executive never enacted a balanced budget for the 2010-2011 biennium, the use of the unallotment power to address the unresolved deficit exceeded the authority granted to the executive branch by the statute. (from page 21 of the decision)

What are the practical implications of this ruling on the state’s current budget deficit? The Supreme Court’s decision was focused on the Governor’s unallotment of MSA-SD. This ruling voiding the Governor’s unallotment of this program does not have any current budget implications because a lower court had already issued a temporary restraining order reinstating payments to these disabled individuals.

It is still unclear whether the Governor’s other $2.7 billion in unallotments are immediately impacted. If the other unallotment actions aren’t reversed by this ruling , it at least opens the door for affected parties to bring forward additional lawsuits to overturn other unallotment actions. There is already a lawsuit pending regarding the Governor’s unallotment of the Renters’ Credit. So, we’ll have to wait and see what the budget implications will be.

What are the implications of this ruling for future unallotment actions? The Supreme Court did not rule that the unallotment statute is unconstitutional, so the Governor’s unallotment authority remains in place. However, it did rule that the Governor cannot use the unallotment power until the Legislature and Governor have first arrived at a balanced budget solution. That takes a very powerful tool out of the Governor’s arsenal. Just yesterday, Pawlenty demanded that the Legislature cut an additional $536 million out of the state’s budget: “If they won’t do it, I’ll do it for them,” said the Governor. With the threat of unallotment removed, the Governor will be forced to return to the old practice of negotiating an agreement with the Legislature to solve the state’s remaining budget deficit.

Of course, this is just our first look at the Supreme Court decision. We’ll let you know if the experts (meaning people who actually have a law degree) come up with a different interpretation.

-Christina Wessel

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Posted by Christina Wessel

Senate releases bill to address climate change

October 6, 2009

Last week the U.S. Senate released their version of a bill to address climate change – the Clean Energy Jobs and American Power Act. The bill is an important step toward a cleaner, healthier and more economically vibrant place for all members of our society, addressing the serious problem of climate change and producing needed employment opportunities at the same time. Although much of the bill took the form of “placeholder language” - signaling a need for continued negotiations - the existing content suggests it will include critical provisions to mitigate cost burdens for low- and moderate-income households rising from expected energy price increases. At the same time, the bill includes important measures to target low-income people and people of color for new green job opportunities so that they are able reap the economic benefits of this legislation.

As negotiations continue, we know that Minnesota will play an important role in the debate – particularly given Senator Klobuchar’s leadership in the Environment and Public Works Committee. A diverse range of organizations recently delivered a sign-on letter to our Senators asking them to dedicate 15 percent of total allowance values for full, direct consumer relief for low- income households, as the House bill did, in addition to extending relief to moderate-income households. We also made the case for public investments in training and job creation programs to ensure that disadvantaged populations have access to well-paid employment opportunities.

We will continue to keep you informed as details emerge, but given that legislation has already passed through the House and is currently being crafted in the Senate now is a great time to get involved and weigh in on what will surely be a challenging debate. To learn more about our position or to share your own priorities and concerns, please contact me at 651-757-3063 or leah@mncn.org.

-Leah Gardner

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Posted by leahgardner

State of Minnesota to raise $131 million by ending agreement with Wisconsin

September 30, 2009

Recently, the Minnesota Department of Revenue decided to cancel the state’s reciprocity agreement with Wisconsin. As you may have read in our analysis of the Governor’s unallotment plan to balance the state’s FY 2010-11 budget,

The Governor’s unallotment plan includes an additional $106 million in tax revenues in FY 2010-11 by asking the State of Wisconsin to reimburse the State of Minnesota sooner under an existing reciprocity agreement. Under the current reciprocity agreement, Wisconsin residents who work in Minnesota file their state income taxes in Wisconsin, and Wisconsin remits those taxes to Minnesota after a 17 month delay.

The impact of ending this agreement?

  • For the state, it means $131 million in revenue in FY 2010-11, more than the state was hoping to raise by renegotiating the agreement. This is because there no longer will be a delay in receiving the revenue.
  • About 13,000 Minnesotans and 33,500 Wisconsinites who live in one state but work in the other will need to file income taxes in both states in 2010. The Minnesota Department of Revenue notes that “No Minnesota resident will pay more in Minnesota tax, but some who work in Wisconsin will pay more Wisconsin taxes.”  (More information for these workers and impacted employers is available from the Minnesota Department of Revenue.)

First Brett Favre, now the reciprocity agreement. What help will we ask Wisconsin to send us next?

-Nan Madden

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Posted by Nan Madden

Minnesota sliding backwards in 2000s – income down, poverty up

September 29, 2009

Over the last few weeks, the U.S. Census has released data showing that Minnesota has been sliding backwards during the current decade. Earlier this month, we blogged about how employer-sponsored health care has declined significantly since 2000-01.

Now, new Census data shows that median household income is falling and poverty is on the rise.

Minnesota’s median household income started falling in the wake of the 2001 recession. Back in 2001, Minnesota’s median household income reached $60,606 (adjusted for inflation). That turned out to be the high point of the decade. The Census data released last week reveals that the state’s median household income fell to $57,288 in 2008, a five percent decline from where median income was during the last recession.

Back in 2000, Minnesota’s child poverty rate was 8.6 percent and the overall poverty rate was at 6.9 percent. However, Census data released today reveals that Minnesota’s child poverty rate rose to 10.9 percent in 2008, and overall poverty increased to 9.6 percent, both statistically significant increases. Nationally, the poverty rate has also increased, from 12.2 percent in 2000 to 13.2 percent in 2008. Although Minnesota’s poverty rate remains below the national average, poverty has grown more quickly in Minnesota.

And remember, these figures are from 2008 and do not reflect the full impact of the current recession – which really bottomed out in 2009. It’s very possible that we will experience a further decline in median household income and an increase in poverty when the 2009 figures are released next year.

-Christina Wessel

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Posted by Christina Wessel

More details on unallotment…and the Minnesota Senate announces its own cuts

July 29, 2009

Minnesota Management and Budget has released more detail on the spending cuts and payment deferrals that are part of the Governor’s unallotment plan:

  • A letter released on July 16 provides additional details on how the broader unallotment orders will be implemented – such as more specifics about how the University of Minnesota will implement its $50 million in reductions or how the delay in payments to school districts will financially impact specific programs.
  • Another letter released on July 28 provides additional details on more than $11 million in reductions to state agencies – such as cuts to the rehabilitation loan program at the Housing Finance Agency or education and outreach programs at the Historical Society.

Separately, KARE 11 just posted an Associated Press news item that the Minnesota Senate has announced plans to cut 5 percent of its budget, a $2.2 million reduction over two years. Four-fifths of the Senate budget goes towards paying for staff. The reductions include job cuts, hiring freezes, cut backs on investments in computers and technology, and the elimination of Senate Briefly, the weekly nonpartisan publication on legislative activity.

-Katherine Blauvelt

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Posted by Katherine Blauvelt

New resource on federal housing programs and policies

July 28, 2009

Affordable and safe housing is a foundation for strong families and a healthy economy. The federal government has long recognized the importance of housing, and funds a number of programs that help provide an adequate supply of affordable and safe housing. With the recent housing market meltdown, there have been a number of new housing policy initiatives from the federal government.

Fortunately, the Minnesota Housing Partnership has created a new resource that tracks the major federal housing policy initiatives and programs.  It’s well-organized, highlighting issues up for debate in Congress, as well as links to additional information.  It should be helpful to any individual or organization that wants to understand more about a particular federal housing program or policy proposal.

-Katherine Blauvelt

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Posted by Katherine Blauvelt

More detail on unallotments to state agencies

July 24, 2009

In an update to the Governor’s ealier unallotment plan, Minnesota Management and Budget recently released specific numbers on unallotments for state agencies. In total, the cuts to agencies amount to $19.5 million in the FY 2010-11 biennium. Most state agencies will see their operating budget reduced by 2.25% for the biennium. Those agencies that are exempted from the cut include Public Safety, Corrections, Military and Veterans Affairs, State Operated Services, and the Minnesota Sex Offender Program within the Department of Human Services.

To find the specific dollar amount cut for a particular agency, read this recent letter to the Legislative Advisory Commission from Commissioner Hanson.

-Katherine Blauvelt

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Posted by Katherine Blauvelt

How the state used the federal stimulus dollars

July 9, 2009

During session we blogged about the important role one-time federal stimulus dollars (courtesy of the American Recovery and Reinvestment Act) played in solving the state’s budget deficit. Now that the session is over, we can start to account for how the state used the federal money.

There were essentially two large pots of money available:

1. Fiscal stabilization funds. Most of the $816 million in fiscal stabilization funds was used to backfill cuts in state funding in K-12 and higher education. House Fiscal wrote up a nice summary of the federal guidelines for using these funds and the final decisions made by the Governor and legislature. Here’s the allocation:

  • $31 million was allocated to the University of Minnesota and the Minnesota State Colleges and Universities to replace the FY 2009 funding unalloted by the Governor in December 2008.
  • $138 million was allocated to higher education in FY 2010 to partially backfill cuts in state funding (the result was a $60 million net reduction in funding for higher education).
  • $500 million was allocated to E-12 education in FY 2010 to backfill cuts in state funding (the result was no net change in funding for E-12 education).
  • $110 million was allocated to health and human services to pay for state operated services, which are services for people with mental illness, developmental disabilities, chemical dependency, and traumatic brain injury.
  • $38 million was allocated to public safety to backfill cuts in state funding for the Department of Corrections.

2. Federal Medicaid matching funds increase. The state is eligible for approximately $1.8 billion (to be disbursed over three years on a quarterly basis) from the federal government in the form of an increase in the federal contribution for Medicaid costs. Normally Minnesota pays 50% of Medicaid costs and the federal government matches at 50%. Under the federal stimulus plan, the federal matching rate temporarily rises to about 60%, allowing Minnesota’s share to fall to about 40%. However, the exact amount of federal dollars Minnesota will receive is not clear because the state recently cut some Medicaid spending, thereby forfeiting some of the federal matching funds.

Other funding streams: There are a lot of small pots of one-time federal economic recovery money that the state can request – for everything from senior nutrition programs to highway repair. Minnesota Management and Budget has posted at least a partial three page list of federal funds requested by state agencies.

Warning: Remember, these federal resources are temporary and will do nothing to sop up the red ink of future projected deficits. Currently, estimates for the budget deficit awaiting us in the FY 2012-13 biennium range from $3.1 billion to $7.3 billion (read our blog entry on why there’s some dispute over the number). We’ll get a more definitive number in early December.

-Katherine Blauvelt and Christina Wessel

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Posted by Katherine Blauvelt

Estimated 3,300 to 4,700 jobs lost due to Governor’s unallotments

June 30, 2009

Today at a Legislative Advisory Commission hearing on the Governor’s $2.7 billion unallotment plan for FY 2010-11, state economist Tom Stinson estimated that 3,300 to 4,700 jobs would be lost through June 2011 directly due to the Governor’s unallotments, including:

  • Local government (not including school districts): 1,630 – 1,970 jobs lost
  • State government (including higher education: 870 – 1,630 jobs lost
  • School districts: 300 – 600 jobs lost
  • Private (health care, etc): 500 jobs lost

These job numbers are estimates, made with conservative assumptions, and should be viewed as such. But they do represent real pain.

Under the Governor’s unallotment plan, public universities, tax credits to low-income renters, mental health services and aids to local governments are cut, to name just a few examples. Localities are already feeling the impact – the Star Tribune recently reported on tough times ahead in Washington County. The county has already eliminated the equivalent of 21 full-time jobs and now it faces a loss of $2.2 million in local government aid in 2010 under the Governor’s unallotments. They are planning for more layoffs and cuts in services.

And remember, the 2009 Legislative Session yielded about $1 billion in cuts in for health care, social services, higher education and other areas, which will likely yield job losses as well.

There’s a new spreadsheet from Senate Fiscal staff, with the unallotments and the impact on the FY 2012-13 biennium. The Governor’s unallotment actions will close the budget deficit for the FY 2010-11 biennium. According to Minnesota Management and Budget, that leaves a $4.4 billion deficit in FY 2012-13. However, that number is in dispute, as it assumes the $1.2 billion school aid payment deferral is paid off in FY 2012-13 and the $600 million property tax shift from school districts is not paid off.

Budget figures are based on current law, and this is an area where there is some dispute about what the current law is. Senate Fiscal staff estimate a FY 2012-13 deficit of $5.9 billion, assuming that funding for General Assistance Medical Care would return to previous funding levels in that biennium (after losing its FY 2011 funding to the Governor’s line-item veto and a portion of its FY 2010 funding under unallotment) and the property tax recognition shift is paid off. You may also have seen estimates of a $7.2 billion deficit in FY 2012-13 – that figure includes the impact of inflation.

After an often passionate discussion with the Commissioner of Minnesota Management and Budget Tom Hanson, the Legislative Advisory Commission passed a resolution stating “it would be unwise and not in the interest of the State’s long-term fiscal stability for Governor Tim Pawlenty to approve the allotment reductions and administrative actions.” But the Commission only acts in an advisory capacity. With the start of the budget biennium tomorrow, the Governor’s unallotments will start to take effect.

I encourage our blog readers to post their own observations on the unallotments, especially the impact on the people of Minnesota.

-Katherine Blauvelt

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