Potential shutdown could cost millions while causing long-term damage

When a business temporarily halts operations and lays off workers, you'd expect to see savings. But state government doesn't work that way.

In fact, a state government shutdown would likely cost millions of dollars in lost productivity, delays and financial penalties. The costs are beginning to add up even before the shutdown, which will happen Friday if Gov. Mark Dayton and the Republican-controlled Legislature don't agree on how to close a $5 billion budget gap.

Read a list of the potential costs of a shutdown.

A shutdown could result in some initial real savings from laying off state workers. Under an agreement being voted on by the state worker unions, employees could apply for unemployment but wouldn't immediately be paid vacation or severance, which would save the state money. But state workers could seek back pay once the shutdown is over.

"There's savings because 10,000 or 5,000 or whatever number of people are not going to be paid for this number of days. That's sort of lost on the fact that you end up paying people who aren't working," said Peggy Ingison, a former state finance commissioner under former Gov. Tim Pawlenty who now oversees finances for the Minneapolis Public Schools.

Ingison, who was finance commissioner during the state's only shutdown in 2005, said a combination of paying people who aren't working and focusing so much effort on planning and preparing for a shutdown can make government look inefficient.

"It feels so unproductive when we're already feeling the strain on government services," she said.

"While no one is hoping for a shutdown, it is a serious enough threat that we do think it's something people need to be planning for."

It'd help if any of the state cash accumulating once a shutdown starts could be invested and earn interest, but interest rates are low and there's too much uncertainty about how long a shutdown would last, Ingison said. The delayed payments could also come with penalties or could threaten the state's standing with credit agencies, adding costs, she said.

In addition, state workers have spent hundreds of hours planning for a shutdown or preparing for a court fight over which services should continue in the event of a shutdown. That doesn't include the time spent by leaders of school districts, nonprofit organizations and local governments to understand and plan for a shutdown.

"People are spending time on this that otherwise they would be spending on other things," said Nan Madden, director of the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits. "While no one is hoping for a shutdown, it is a serious enough threat that we do think it's something people need to be planning for."

Madden said nonprofits likely won't recoup their planning costs. If there is a shutdown, some of the costs incurred because of late payments from the state could be repaid, but many groups are uncertain about what their funding levels will be once the governor and Legislature actually agree on a new two-year budget.

Other costs likely already adding up include lost revenue from camping cancellations at state parks and extra expenses associated with delaying road construction projects.

For example, contractors were supposed to demolish the Bren Road bridge over Highway 169 in Minnetonka last weekend as part of a construction project to prepare the area for new development. The demolition was put off because MnDOT has said it will halt all construction projects if there's a shutdown.

Because road construction projects are on tight schedules and involve layers of subcontractors, more projects could start shutting down this week.

'DOMINO EFFECT'

Because of those issues and others, a shutdown could have a domino effect, said John Gunyou, the city manager of Minnetonka who served as state finance commissioner under former Gov. Arne Carlson.

"It's not just the shutting down and starting up again," he said. "Especially when you talk about the human services area, it's this mosaic of public and nonprofit agencies. ... There are these relationships of funding for which you're dealing with multiple, multiple agencies."

Gunyou said the fact that the Bren Road/Highway 169 road project being managed and inspected by the city is a good example of something that would be affected by a shutdown for no good reason. Delays could cost the $15 million project up to $3 million more, he said.

On many projects, including the Bren Road/Highway 169 project, local and state officials are working together and splitting the costs, Gunyou said. But political maneuvering that ends in delays can hurt the state's reputation with businesses, he said.

"Do I want to get into another partnership with these guys who are willing to shut this down when they didn't have to?" he asked. "Now expand that to the rest of all the services the state's performing."

In addition to the productivity lost in planning and carrying out a shutdown, the budget stalemate is also preventing lawmakers from making meaningful changes that might save the state money in the long run, one expert said.

For example, government consultant Eric Schnurer said Dayton and other political leaders in Minnesota have shown an interest in implementing changes to things like long-term care for the elderly and disabled. They're not making much headway, he said.

"We're diverting our attention from really solving the problem and jockeying over tomorrow instead of 10 years from now," said Schnurer, president of Public Works, which works to help state and local governments run more efficiently.

Even if Dayton and the Legislature are able to resolve their differences before Friday, it likely won't be the last time the state will see such gridlock over a budget.

Many observers remain concerned about the state's long-term budget stability, saying leaders will continue to face deficits. Todd Haggerty, a research analyst for the National Conference of State Legislatures, said such hard decisions have required more time for leaders to reach agreements in many states. That's led to five state shutdowns since 2002, he said.

"When states are facing difficult budget situations, there is an increased likelihood of a late budget," Haggerty said.

LAST SHUTDOWN GIVES FEW CLUES

Experience can often provide clues about the possible impacts. But that isn't the case with Friday's potential shutdown.

Minnesota's government came close to shutting down in 2001, but 2005 was the only actual shutdown.

In 2001, government officials did extensive shutdown planning that didn't end up being necessary. State officials calculated that planning for a shutdown cost $2.7 million, but there was no estimate of how much a shutdown would have cost in 2001.

You might expect the 2005 shutdown would be a good source of comparison, but there were many differences, including the fact that Gov. Tim Pawlenty and the Legislature had approved several appropriations bills before the partial shutdown.

At the time, state Department of Employee Relations Commissioner Cal Ludeman estimated the shutdown cost the state at least $12 million, including $10 million in lost productivity. Ludeman, who coordinated that shutdown, told reporters then that it would take weeks to know the true cost of the shutdown, but it appears no formal analysis was done.

Ludeman, who is now secretary of the Senate, declined an interview request. Through his assistant, he referred all questions to Minnesota Management and Budget, which began handling employee relations issues when the two departments were merged.

Judy Plante, a Minnesota Management and Budget assistant commissioner, told lawmakers in January that there was no summary of costs done during or after the 2005 shutdown.