Addressing the shortfall

Spending cuts, using surplus balance funds, tapping into state budget reserves and lowering the state sales tax are the cornerstones of Gov. Tim Pawlenty’s $938 million deficit-reduction plan.

But the proposal isn’t going over well with everyone.

“This plan balances our budget without adding to the burden facing Minnesotans,” Pawlenty said at a March 7 news conference. “We’ll tackle this deficit by holding government accountable, tightening our belts and using available resources, not by raising taxes.”

His plan includes reducing state spending by $341 million, using $250 million of the state’s $653 million budget reserve and taking $250 million from the surplus in the Health Care Access Fund.

Pawlenty said the reductions would decrease the biennial budget increase from 10.6 percent to 9.2 percent, still more than double the rate of inflation.

The plan includes funding for a few new initiatives, such as $12 million for Strategic Entrepreneurial Economic Development, which is designed to help stimulate the economy in rural Minnesota; $6 million for military and veteran’s packages; and $5 million in K-12 reforms, including summer academies for teachers, particularly for math and science, and online curricula access to better incorporate technology into the education system.

Highlights of the governor’s plan to curb the shortfall include: no reduction in K-12 education or local government aid; a 4 percent reduction for most state agencies; and a 1/8th percent sales tax decrease.

Finance Commissioner Tom Hanson, left, and State Budget Director Jim Schowalter confer as a member of the House Finance Committee makes a comment during the March 10 presentation of the governor State Budget Director Jim Schowalter noted that about 40 percent of the state budget is directed to K-12, and 9 percent is in local aids and credits. “That means that either you’re going to take much more significant reductions in other areas or take some other kind of action, such as onetime reserves.”

Since the governor’s release, the plan has been met with resistance and skepticism from many DFLers.

“My concern is how much of this solution is sound bites and how much is substance,” Rep. Gene Pelowski Jr. (DFL-Winona) said during the House Finance Committee’s March 10 gathering. “It appears we’re getting a great deal of sound bite and the substance we’re going to put off into the next biennium.”

The plan reduces the projected 2010-11 biennial deficit from almost $1.09 billion to $693 million, which Pawlenty said can be covered by unused reserves and rainy-day funds. When the state had a $4.5 billion deficit in 2003, the original out-year deficit was $1.7 billion.

Finance Commissioner Tom Hanson noted that it is a constitutional requirement to solve the current biennial deficit. To fix the projected 2010-11 deficit, he said taxes would have to be raised or spending would need to be significantly reduced. “Either solution you pick at this point might very well hurt the (economic) recovery that we want over the next year.”

Hanson said a series of bills would be drafted to address the deficit. Fiscal targets are expected to be given to House finance divisions early next week.

Agriculture

Although the governor proposes a comparatively small cut ($102,000) to the Agriculture Department, the chairman of the House Agriculture, Rural Economies and Veterans Affairs Finance Division cautioned department staff not to get too comfortable.

The proposed biennial cut would reduce the department’s funding for administrative services and information technology.

With a budget of $24 million from the General Fund and more than $31 million in other funds, Rep. Al Juhnke (DFL-Willmar), chairman of the division, questioned why the proposed cut is far less than the 3 percent to 4 percent being advocated for agencies by House and Senate leadership.

“What you see is what the governor chose to go forward with,” Quinn Cheney, the department’s director of policy development, told the division March 11.

Juhnke countered that, once each division has its budget targets, more cuts could be proposed for the department.

Environment

The largest proposed reductions in the area of environment and natural resources spending could fall on the Department of Natural Resources, which has been asked to reduce its current biennial funding by 4 percent, or $2.94 million.

The reductions are spread over a wide range of DNR programs, with the Fish and Wildlife, Ecological Services and Parks and Recreation divisions taking the biggest hits. Some of the impacts on individual services and programs include:

• smaller-than-expected funding increases for aquatic invasive species control and enforcement;

• reduced biological monitoring to support total maximum daily load Clean Water Legacy programs;

• reduced supply and expense budgets for state parks;

• reduced maintenance and restoration of state trails; and

• elimination of grants for the “Let’s Go Fishing” program for senior citizens.

Meanwhile, the Pollution Control Agency faces a more modest reduction of $473,000 per fiscal year of General Fund spending. PCA Operational Support Division Director Myrna Halbach said the reductions could be achieved through largely administrative measures, such as modifying replacement schedules for computer equipment and cutting publications costs by using more Web-based publishing.

State agencies

The plan calls for a 4 percent reduction for most state agencies.

Pawlenty does not believe the cuts will result in layoffs, in part because of the large number of people eligible to retire in the near future, so attrition may make up the shortfall. “Leaving those positions unfilled, or in some cases migrating the services to technology is going to be a big part of that,” Pawlenty said. “Moving to e-government will allow us to shrink state government. That’s what we’re planning to do anyhow.”

Included in the governor’s recommendations are cuts of $6.86 million for the Legislature, $1.78 million for constitutional offices and $1.17 million for the Department of Administration.

State Auditor Rebecca Otto told members of the State Government Finance Division March 12 that cuts to her office could result in a loss of five staff positions, and could significantly hamper the ability of the office to conduct investigations.

Health and human services

Taking $250 million from the Health Care Access Fund, which Pawlenty says has a “substantial surplus,” still leaves a balance for the current and next biennium.

Even with the money removed, there is enough to maintain eligibility and nobody will have their benefits reduced, Pawlenty said. “Those are very expensive programs, and their costs are rising dramatically, but rather than cut those programs now — it may come to that point in the future if the economy continues to deteriorate — we think it’s important to maintain those programs.”

Savings are also generated by canceling planned expansions to MinnesotaCare to single people without children and by slowing the growth of provider payments by making certain rate reductions.

“Health plan programs had about a 17 percent biennial growth,” Hanson said. “Now it’s down to about 15 percent.”

Nonetheless, Rep. Nora Slawik (DFL-Maplewood) took direct aim at the governor’s plan.

“You are taking 54 percent of the cuts of the deficit just through HHS cuts and transfers,” she said. “That’s just outrageous that you are again going to balance it on the backs of those who can least afford it.”

Health and human services is nearly 30 percent of the state budget, so any reduction is going to be big, especially with K-12 education off the table, Schowalter said. “In talking about proportionality, if everything was reduced 4 percent this would be less than that 4 percent.”

Slawik, who chairs the House Early Childhood Learning Finance Division, said the governor’s recommendation to refinance TANF funds (Temporary Assistance for Needy Families) threatens the state’s Child Care Assistance Program.

“I hope people understand what this does. It is money that could be helping needy families and kids with child care and it’s displacing it, in essence,” she said.

Higher education

A $27.2 million reduction to the University of Minnesota and $26 million to the Minnesota State Colleges and Universities system is proposed. The amounts are about 0.9 percent of the university’s $3 billion operating budget, and 1.3 percent of the MnSCU all-funds operating budget.

The university received a nearly 17 percent funding increase last year; MnSCU nearly 13 percent.

The governor’s plan does include $2.1 million for the university to study the high incidence of mesothelioma among Iron Range taconite workers.

“Raising tuition will be the last place we will look for a solution to solve whatever comes our way,” University President Robert Bruininks told the House Higher Education and Work Force Development Policy and Finance Division March 12. “I can tell you, quite honestly, if the cut’s this deep, I frankly think it would be a dereliction of responsibility on my part if tuition wasn’t a part of the solution.”

Others, including MnSCU officials and university student leaders, said the cut would go against some of the positives made the last several years.

“There’s no way for us to remove this much money from the budget without a serious impact on students, on faculty and on our strategic initiatives, that include providing the educated workforce that Minnesota needs,” said Laura King, MnSCU vice-chancellor for finance.

K-12 education

Rep. Mindy Greiling (DFL-Roseville) criticized the governor’s plan, in part, because $105 million of the $185 million cut to address the 2003 deficit has yet to be restored.

“I have always thought that education of our students is one of the most critical things that’s called for in our constitution,” said Greiling, chairwoman of the House K-12 Finance Division. “This year we have a 1 percent increase for schools when inflation is 3 percent. … This is letting cuts remain and there will be a lot more cuts made at the local level with a 1 percent increase.”

House Minority Leader Marty Seifert (R-Marshall) reminded Greiling that she sponsored last year’s omnibus K-12 education law. She countered that the bill needed 90 House votes for a potential veto override, so it was the governor’s bill.

“The governor has more money for K-12 in here,” Seifert said. “If you don’t like how it’s spent, put it to something else.”

Public safety

Proposed cuts for public safety agencies have some officials worried that they may be asked to stretch too far.

The governor has proposed $16.52 million in reductions, including a $3.1 million cut at the Department of Corrections, $2.78 million from the Public Defense Board, $1.39 million at the Department of Public Safety, and $9.1 million from the Judicial Branch.

Jeff Shorba, deputy state court administrator, told the House Public Safety Finance Division March 12 that because of current budget restraints, 207 court staff positions have been abolished or left vacant. With additional cuts, another 222 positions could be lost which will lead to a further reduction in services the court provides.

Edward Lynch, First District assistant chief judge, said his district has done everything it can to cut costs, but there are “no more rabbits in the hat.” The court system is about real people with real problems, Lynch said. “It is no longer a question of the quality of service we can provide; it is a question of whether we can meet our constitutional duty to provide meaningful access to justice for the people of our state.”

Rep. Steve Smith (R-Mound) said this “should be the last area” to look for cuts because a primary government role is to provide public safety.

Taxes

In addition to providing modest economic growth, Pawlenty said the sales tax reduction would offset the tax increases — transportation, and the arts and outdoors constitutional amendment — approved so far this session by the DFL-controlled Legislature. The reduction would save an estimated 2 cents on a $20 purchase. The decrease is expected to provide $77 million in tax relief this biennium and $178 million in 2010-11.

“I think it’s strategically important to lower tax burdens in Minnesota, and we want to begin that process in this budget,” Pawlenty said.

House Majority Leader Tony Sertich (DFL-Chisholm) indicated the idea could be much like many others from the state’s top official.

“A lot of his proposals don’t make it past the press release, and he doesn’t invest a lot of capital in making that happen,” he said. “I’m open to looking at the entire budget and see what impact it has.”

Sertich did commend the governor for his plan to close corporate tax loopholes.

“This is the same language that was in the vetoed bill last year that essentially adopts the IRS definition for what a foreign operating corporation is, which, in short, is, you have to be foreign and you actually have to have some operations in order to qualify for this 85 percent exemption from taxation,” Pawlenty said.

The plan also shifts a June sales tax payment for some business; repeals a mutual fund cap; and the state has a new ability to match bank records for people who are tax delinquent or have compliance issues. Pawlenty said that better collections should provide an additional $10 million.

Veterans

The governor’s plan proposes increases for two departments with programs that have a direct effect on the military and veterans.

The Department of Military Affairs would see a $1 million increase, and a lifting of the current spending cap so that all funds generated by the Support Our Troops license plates can be spent on veterans programs.

Michael Pugliese, Department of Veterans Affairs deputy commissioner, advocated to the House Agriculture, Rural Economies and Veterans Affairs Finance Division March 12 for the more than $6 million increase proposed by the governor. He said “new needs are surfacing” as more veterans return from overseas deployments. The governor’s plan includes $2 million for the State Soldiers Assistance Program, which allocates emergency financial assistance to veterans, dependents and survivors; and $1.5 million to expand County Veterans Service Office and the Higher Education Veteran Assistance Offices programs.

— Session Weekly’s Courtney Blanchard, Nick Busse, Craig Green, Tom Hammell, Brian Hogenson, Patty Ostberg and Lee Ann Schutz contributed to this story.