The way out of Minnesota's budget problem: a balanced approach

Last week, the Minnesota Supreme Court did what seemed impossible. Its "unallotment" decision turned the legislative clock back a year. Now Minnesota must decide what wasn't legally decided last year ... how to balance the budget deficit, which is now $5.5 billion.

Last year at this time, Gov. Tim Pawlenty and the Legislature had a couple of weeks to finalize a two-year revenue and expenditure budget for 2009-11 to solve a budget deficit of $6.4 billion. To achieve balance, Gov. Pawlenty had proposed using:

$1.8 billion in federal stimulus money;

$1.9 billion of budget cuts;

$1.8 billion from an accounting gimmick shifting school payments to the next biennial budget; and

$.9 billion borrowed from future tobacco settlement funds.

The Legislature essentially agreed with the governor but changed some of his cuts, rejected the governor's $.9 billion borrowing proposal, and included a $1 billion tax increase. The Legislature sent its bills to the governor.

Pawlenty vetoed the $1 billion tax increase (and inadvertently the $1.8 billion accounting shift in the same bill), and accepted most of the Legislature's cuts, but line-item vetoed some of the proposed spending -- for the General Assistance Medical Care program serving the poor; a small Special Diet Program, and other items. As a result, the budget remained out of balance by $2.7 billion. The governor then told the Legislature to go home; he would "unallot" $2.7 billion to balance the budget.

Legislators and capitol watchers were shocked. Never before had a governor used the unallotment power to terminate the legislative process. The contentious process of adopting a budget became even more contentious as the governor, in essence, refused to bargain with the Legislature to resolve differences.

There it stood, until three recipients in the small Special Diet Program filed suit, arguing that the governor had acted illegally. The District Court and the Minnesota Supreme Court agreed that "the unallotment of the Special Diet Program funds was unlawful and void."

The court's decision now requires the governor and Legislature to balance the budget legally for 2009-11. Gov. Pawlenty, not surprisingly, has instructed the Legislature to simply affirm his unallotments, cut $500 million more, and "don't even think about a tax increase."

The resolution to the 2009-11 budget deficit is simple but highly charged. All along, Minnesota should have been considering a balanced approach of expenditure reductions and revenue increases. Why?

In 1998, when the economy was the strongest, the governor and Legislature took just such a balanced approach to using the large budget surplus. They lowered the income tax by over $1 billion and increased spending dramatically. This unfortunately created a long-term imbalance of state revenues and expenditures.

In the fall of 2007, Gov. Pawlenty, House Speaker Margaret Anderson Kelliher and Senate Majority Leader Larry Pogemiller appointed a 15-member Minnesota Budget Trends Study Commission. The commission, comprising Democrats, Independents and Republicans, recommended in its 2009 report that the governor and Legislature should "Achieve [a] long-term balance of state revenues and expenditures."

Last fall, former Minnesota governors, speakers of the House and majority leaders of the Senate assembled to discuss the state's persistent budget deficits. Former Govs. Wendell Anderson, Arne Carlson and Al Quie -- two Republicans and a Democrat -- led the others in issuing a statement declaring that Minnesota needed a "strategic balance of both tax increases and spending decreases that will support ongoing public investment priorities."

Given that the governor and Legislature have already cut $2.4 billion from the 2009-11 budget (and will likely agree on the school aid shift of an additional $1.8 billion), a balanced solution requires only a tax increase of a billion dollars.

Logically, if the income tax cut of 1998 was a root cause of the current problem, the taxes should be reinstated. That would generate $840 million in 2010-11 if implemented this summer. An increase of alcohol taxes would generate another $121 million, bringing the total close to $1 billion.

The Minnesota Supreme Court has turned 2010 into 2009, giving the governor and the Legislature a do-over to get the budget right. The Legislature needs this week to pass 1) more cuts, 2) the shift, and 3) a tax increase.

Pawlenty will accept the first two easily, but he needs also to accept the tax increase, which covers only 18 percent of the problem, for the Legislature to adjourn on time. As a former governor said, it is time for the governor to put the state's interests ahead of his own personal interests, and seek a balanced solution to the state's budget problem.

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Jay Kiedrowski is a senior fellow at the Public and Nonprofit Leadership Center at the University of Minnesota's Humphrey Institute of Public Affairs. He co-chaired the Minnesota Budget Trends Study Commission and served as commissioner of finance for Gov. Rudy Perpich.

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