Capitol Update for March 2, 2007

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This week from John Tuma: The Budget Race Is On.

Everett M. Dirksen, the powerhouse U.S. Senator from Illinois during the 1950s and 60s, was purported to have said in a debate over the national budget, “A billion here, a billion there, and soon you’re talking about real money.”  The legislative establishment of the government’s budget is big business and is the most time-consuming and intense function of a legislative body.  The Minnesota Legislature has set before it the task of balancing its $34 billion budget before adjournment in May — something that has been a real struggle over the last four years.  The real kick off of that budget battle to decide how billions of dollars of real money is spent started this week with the release of what is known as the February forecast.

Minnesota’s constitution requires the Legislature to balance the state’s budget.  In order to effectively do so, the Legislature has instituted revenue and expenditure forecasts to guide their financial decisions.  The budget forecast is the basis by which the Legislature determines how much money it has to spend during the next two fiscal years which, for the state budget, starts on July 1, 2007 and runs through June 30, 2009.  A preliminary forecast comes out at the end of November and the final forecast, which guides the legislative session, is always issued at the end of February.  This February forecast came out Wednesday and set off the intense budget debate between the legislators.  It reverberates in the Legislature like a starter’s gun setting off a footrace.

This year’s February forecast received only minor attention in the news because it was rather boring from a news viewpoint.  There was no major crisis or huge pot of new money to report; no major change from the preliminary November forecast is not exciting news.  Therefore, the starter’s gun to the budget process received little attention outside the granite walls of the Capitol.  Nonetheless, it rang loud and clear within the Capitol dome and you could literally see the legislative leaders lurching out of the blocks like a runner determined to win.

The first step in the process begins with each legislative body setting “targets” for the overall budget and each spending category such as education, transportation, environment, etc.  Over the next week the Senate Finance Committee and the House Ways and Means Committee will be working behind the scenes in hopes of reaching consensus with each of their respective finance chairs.  When consensus is reached, each of those committees gives the targets to their finance divisions to develop the individual omnibus bills.

Therefore, the next couple weeks will be critical for the two MEP proposals that are very dependent on the budget – the Clean Water Legacy and the Dedicated Funding Proposals.  The decision on how big the targets are for the environment committee will determine whether the Legislature can provide the $100 million per year necessary to clean up our state’s water.  The Governor’s budget only recommended $20 million a year which is significantly short of the need.  The Governor proposed very little money for actual cleanup efforts and directed most of the limited money to the development of cleanup plans.

The nature of the budget surplus may dictate how Clean Water Legacy is funded this budget cycle and may also determine whether the constitutional amendment dedicating sales tax to conservation and the Clean Water Legacy makes it on the ballot for the next election. 

The surplus is reported as $2.163 billion, but you have to break this down into two parts.  The two parts are known as “one-time money” and “ongoing money”.  The “one-time money” is the additional tax revenue the state has collected over the present biennial budget which ends June 30, 2007.  It’s like extra money you have saved up in your bank account over the last year.  The “one-time money” cannot be pledged to ongoing future obligations.  You can only spend it on one-time purchases.  The “ongoing money” is like a raise in your salary.  Because the “ongoing money” is an increase in your salary, you can budget for new ongoing future programs.
The forecast indicates that the state has about $1 billion in “one-time money” in the bank.  That one-time pot of money is slightly down from the November forecast due to poor receipts after Christmas and into January, but only by a small amount relative to the overall budget (about a $25 million decline).  This is still a good supply of one-time money in the bank.  It can be spent on things like tax rebates, replenishing budget reserves, building roads, and acquisition of property.  Because a lot of the environment and conservation programs involved the acquiring of property rights to protect a particular area, we are potentially in the race for this pot of “one-time” money.  Unfortunately, a lot of the Clean Water Legacy involves ongoing programs also.  Therefore, it cannot be fully funded out of the one-time money pot unless there’s a new fund that comes on line in the next budget cycle after the one-time money is spent.  More on that later.

As to the “ongoing money”, the state budget forecast has also indicated growth in the ongoing revenues available for the next budget cycle and beyond.  This is like a pay raise for the state’s budget.  The February forecast said that the next two years will see revenues exceed expenditures by $1.15 billion over the budget cycle.  This is up nearly $18 million from the November forecast.  That means there’s a little bit more “ongoing money” that could be put toward new or expanded government programs.  This could also include some permanent tax relief.  That may seem like a significant amount of new money to spend, but there’s a catch.  In order to help balance the budget in the past budget crisis, the Legislature has not recognized inflation in the budget forecast.  If you take into account a reasonable level of inflation for salaries and supplies necessary to maintain the present programs, there is only about $130 million in discretionary “ongoing money” to spend.

Given the competition from education, healthcare, and transportation, that $130 million in “ongoing money” is extremely small.  The Legislature could raise revenues, but every indication is the new DFL leadership is very reluctant to go after a big general tax increase.  The Governor has also been very adamant about no new taxes.  There may be a few proposals to go after corporate tax loopholes and to increase the top tiers on some wealthy income taxpayers.  Don’t expect these to be major increases, because the word at the Capitol is that the DFL, particularly the House DFLers who face elections sooner, do not want to be accused of huge tax increases this session.

Therefore, $100 million of new spending on the Clean Water Legacy from the small pool of “ongoing money” will be difficult.  A possible attractive solution for the Legislature is to use some of the ample “one-time money” to increase funding for the Clean Water Legacy over the next two years and put the constitutional amendment that would dedicate a portion of the sales tax to invest $100 million annually in Clean Water Legacy and $100 million annually in conservation on the ballot of the next election.  If that amendment passed, the money would then start flowing in the following budget cycle starting on July 1, 2009 and provide a stable ongoing funding source for these programs when the one-time money runs out.  That way the one-time money acts as if it is ongoing money because it is backed up by a constitutional amendment.  This is somewhat risky, but a possibly attractive budget scenario when the “ongoing money” is scarce.  Further, Legislators can avoid being accused of raising taxes because they simply gave an option to the voters to raise their own taxes. 

This possible scenario has been suggested by some in the Senate.  There has been no clear signal from the House as to how they would fund the Clean Water Legacy and whether they would be supportive of a constitutional amendment dedicating sales tax revenues to the Great Outdoors.  Given the tight amount of “ongoing money” and an ample supply of “one-time money”, the above option may start to look very attractive to House leadership as they try to make the dollars balance over the next couple weeks.  Therefore, stay tuned as the budget race picks up within this legislative session.  There may be the right mix this year to finally invest the necessary long-term money for the Clean Water Legacy and actually get the dedicated funding proposal to the voters.  And if it happens, we will finally, to quote Dirksen, be talking about “real money” for the protection of our Great Outdoors over the next few decades.

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