Capitol Update for January 30, 2009

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This week’s update from lobbyist John Tuma:

“This place is now feeling the pressure of hard times… they have not found bottom yet, by considerable…they have recently voted to loan the credit of the State for $5.000.000 & have thus hung a Millstone around their Neck, which they will doubtless have to bear for [m]any years to come…”

-John P. Bardwell
Agent of the American Missionary Association
From St. Paul on May 7, 1858*

John P. Bardwell was a Congregationalist minister who worked for the American Missionary Society which was strongly committed to abolition and ministering to Native Americans.  In their service, he taught slaves in the South while secretly working for their freedom.  His home in Ohio was part of the Underground Railroad.  While working to free blacks, he was captured and beaten in Mississippi by a mob.  He was later sent to the Minnesota territory to serve as a missionary to the Ojibwe Indians near Leech Lake.

Bardwell’s report back to his missionary society regarding the economy in the capitol of the new state of Minnesota painted a very bleak picture.  The infant state was still reeling from the panic of 1857.  Leading up to the panic, Minnesota was burning with the pioneer fever of land speculators.  Land speculators ran up debts like drunken sailors with dreams of great riches on the western frontier.  On August 24, 1857, at the height of this land speculation frenzy, the Ohio Life Insurance and Trust Company failed in the East, which sent a shockwave through the nation’s financial institutions.  Minnesota was hit extremely hard, with nearly all of her banks collapsing and within a year, Minnesota’s population of settlers dropped by almost half.  In order to stem the slide, the Legislature came up with a scheme of floating a $5 million loan on the state’s credit to enhance the development of railroads.  Unfortunately, the scheme was a bust and the words of the frugal missionary Bardwell were prophetic.  The infamous “Five million loan,” as it would later be known, did become a Millstone around the neck of the state for over five decades.

Now 150 years later, the mature state of Minnesota faces another daunting financial crisis.  It would be fair to say that the panic of 2008 resulted from the burst in the speculative markets created in real estate.  You would think we would learn our lessons.  Now our state and federal legislators are faced with the intimidating task of finding solutions that do not end up as “a Millstone around the Neck,” but actually stimulate our economy.

The first step in addressing the 2008 crisis through the Legislature occurred this week with the presentation of the Governor’s budget.  The response to the Governor’s budget was a tempered dissatisfaction from the DFL-controlled Legislature.  It appears that they will take two weeks to have their finance committees go through his recommendations.  You can expect some very pointed questions.

Adding to their dissatisfaction was a brand new revenue scheme invented by the administration within this budget.  Basically, the Governor proposes that the state sell $1 billion in bonds to be paid off by future revenues from the state tobacco lawsuit settlement — essentially borrowing money on future revenues to solve our present crisis.  It sounds very similar to a $5 million “solution” from 150 years ago.  The DFL leadership feels that the Governor gave them no real hints of a bipartisan path out of the budget shortfall, but just another gimmick.  Every expectation is that the shortfall could well exceed $6 billion after the February forecast is released.  That would be nearly 20% of the budget.

Further adding to legislators’ worries about finding a path to a budget solution was the early signals from Washington, D.C., regarding the stimulus package.  It appears that the package will not have a significant direct impact on solving our state budget problem.  There will be significant stimulus money coming to Minnesota, but that funding will be focused on specific projects and little will be available to prop up the state’s budget.

We will outline more details in the environment and conservation budget recommendations as they play out in the committees during the next couple of weeks. Nonetheless, one of the biggest concerns is how the Governor treated the new constitutionally dedicated funding.  As far as the new revenues, he seems to have addressed the expenditure of those funds in a conservative fashion.  He chose to spend only a portion of the new money from the dedicated accounts for water quality protection and parks and trails.  The unspent money still stays available for future projects and parks and water investments.  He just did not want to over promise, given the volatility of the sales tax revenue during a recession.  That is a fair and prudent position to take at this stage.

What was troubling was how the Governor treated the existing funding for the areas addressed in the constitutional amendment.  As you may recall, the constitutional amendment adopted by the voters in Minnesota specifically states in part: “The dedicated money under this section must supplement traditional sources of funding for these purposes and may not be used as a substitute.”  This is commonly known as the supplanting clause.  Exactly what this prohibits is still a question that must be defined.  Unfortunately, the Governor has apparently taken a position that there are no established traditional sources of funding.  Therefore, he has made cuts in areas of the traditional sources of funding for the environment, conservation, parks and trails, and arts.  The hardest hit was a 50% reduction in arts funding.  This sets up a difficult political situation for the Legislature.  If they are to honor the clear intent of the constitutional amendment, they will have to move money from other areas of the budget.  The Governor has put them in a challenging political position.  Fortunately, we have the constitution to back us up and we will be working hard to preserve the traditional sources of funding for conservation, water protection, and parks and trails.

This week was a sobering reminder that there are many challenges yet to overcome for the Legislature in their attempt to balance our state budget.  They are hoping for answers from the Governor and the federal government that would actually help close this historic budget gap.  Unfortunately, the answers they received are leading them towards some very difficult choices.  My guess is that if old John P. Bardwell was still around, he would be telling them to earnestly pray, waste no time getting to work, and above all, avoid hanging Millstones around their necks.

*M391, Roll 1, American Missionary Association, Minnesota Files, 1847-1882, Minnesota Historical Society Library.

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