FY 2002-03 Budget-Balancing Proposals: Comparison and Analysis

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February 2003

Minnesota’s policymakers started the 2003 Legislative Session facing a general fund deficit of $356 million for the FY 2002-2003 biennium. Minnesota’s constitution requires a balanced budget, so decision-makers needed to act quickly to bring the budget back into balance before the biennium ends on June 30, 2003.

Four different approaches for resolving the deficit arose: Governor Pawlenty’s FY 2003 supplemental budget proposal, the plans passed by the House and Senate, and the Governor’s unallotment order. This document describes the components of these four budget-balancing plans and measures them against a set of principles for fiscal decision-making. Table 1 provides an overview of the fiscal impact of each plan.

General Fund Changes, FY 2003 and FY 2004-05

Overview of Budget-Balancing Plans

The four budget-balancing proposals differ in several ways: their total size, the degree to which they include permanent changes, and the size and nature of spending changes. The Governor’s FY 2003 supplemental budget recommendations were released on January 14, and set the tone for the debate. This proposal made $468 million in changes for FY 2003 and $306 million for FY 2004-2005. Use of reserves and transfers make up the largest portion of the total proposal, with spending changes making up a significant, albeit smaller, portion. Revenue changes are the smallest part of the plan, and in fact, the $50 million savings from delaying sales tax refunds might be better termed a timing shift, rather than an increase in revenues. The total impact of the supplemental budget proposal is larger than the $356 million deficit. This recognizes that, given the risk that actual conditions may be worse than projected in the 2002 November forecast, it is prudent to leave a positive balance as a cushion for any additional shortfalls that may arise before the end of the 2003 fiscal year. The Governor’s supplemental budget proposal leaves a $137 million balance, including the $24 million budget reserve.

The Senate was next to pass a FY 2002-03 budget solution. The Senate plan is smaller than the Governor’s, making $384 million in FY 2003 changes. The Senate focuses on FY 2003; permanent changes are limited to $9 million in cuts to the legislature and constitutional officers. As in the Governor’s plan, reserves and transfers make up the largest part of the overall package, with spending changes being the second largest component. The Senate plan is more likely than the others to make changes through timing shifts and uses of special revenues. It also includes the delay in sales tax refunds proposed by the Governor. The Senate plan, being smaller than the Governor’s, leaves a smaller positive balance of $53 million, including the budget reserve.

The House proposal is similar to the Governor’s proposal for FY 2003, but goes beyond it for FY 2004-05. For FY 2003, the House plan is slightly larger than the Governor’s, making $477 million in changes. Of all plans, the House’s puts the most emphasis on making a dent in the FY 2004-05 deficit. The House makes $512 million in permanent changes, significantly more than the Governor or Senate. In several areas, the House proposal makes the same FY 2003 spending cuts as the Governor, but the House makes the cuts permanent while the Governor cuts on a one-time basis. In terms of use of the three budget-balancing tools, the House plan follows the pattern shown by the Governor and Senate in which reserves and fund transfers are the largest piece, spending changes second, and revenue changes making up the smallest part. The FY 2003 ending balance of $145 million is slightly larger than the Governor’s.

Since the two bodies of the Legislature were unable to come to a compromise before the February 7 deadline he had set, Governor Pawlenty chose to use his unallotment authority to balance the budget. The unallotment order is modeled on the Governor’s supplemental budget, but is different in three main ways, as the rules of unallotment provides a more limited set of choices.

  • The unallotment order is dominated by spending changes, instead of reserves and transfers. The Governor can only unallot from funds with a deficit — in this case, the general fund. This prevented him from implementing many of the fund transfers and the refinancing of transportation projects that were part of his original proposal.
  • The unallotment order could only balance the 2002-03 budget. The Governor could not leave a positive balance to guard against additional shortfalls.
  • The unallotment order only has an impact in FY 2003. There are no permanent changes.

In terms of individual spending reductions, the unallotment order largely follows the Governor’s original budget-balancing proposal, although he has added a number of additional cuts, particularly in education and economic development. It is of concern that new cuts are largely to services for low-income and other vulnerable populations. A revised unallotment order was released on February 24 in which some adjustments were made, largely to reflect contractual obligations.

The plans also vary in the degree to which they meet our budget-balancing principles, which call for deficit solutions that are balanced, that do not put undue burden on low-income families and other vulnerable populations, and that follow a thoughtful process that takes the state’s needs into account. The Governor’s original proposal and the Senate plan are closer to these principles than the House proposal and the Governor’s unallotment order. The House and unallotment order target programs for struggling Minnesotans for cuts, and include policy changes and service cuts without adequate public debate.

The sections that follow provide more detail about how each of the plans uses the three available budget-balancing tools: use of reserves and fund transfers, spending changes, and revenue changes.

Reserves and Transfers from Other Funds

In the 2002 Legislative Session, the deficit was largely addressed through the use of reserves, fund transfers, and other one-time strategies. Again this tool makes up the largest portion of the three original plans for balancing the 2002-03 budget. The plans agree on many options for tapping into special funds and revenue sources, including:

  • $130 million in construction projects to be funded through bonding, rather than cash.
  • $15 million from the Workers Compensation Special Fund. This fund was created in 1999 to settle long-term claims. $250 million was transferred out of the fund in the 2002 Legislative Session to help balance the general fund budget.
  • $11 million from the Solid Waste Fund, which is used for programs such as landfill cleanup and is funded by solid waste fees and bond sales.
  • $30 million from the Higher Education Services Office (SELF) Loan Fund. The SELF Loan Fund is a revolving loan fund for undergraduate and graduate student loans.
  • $15 million from the State Airports Fund, which is funded by the tax on aviation fuels.

In addition, the Governor and House tap into the 21st Century Minerals Fund for $39 million and $49 million respectively. This fund was created in 1999 to finance economic development on the Iron Range. The Senate plan does not use resources from this fund, but does transfer $11 million from the Employee Insurance Trust Fund (the Governor would allow these funds to be expended on certain general fund purposes). This fund pays medical insurance claims for state employees, and is funded by premiums paid by employees and employers. The transfer would reverse general fund appropriations to the Employee Insurance Trust Fund made in 1998 and 1999.

Because unallotment offers a more limited set of choices, the unallotment order included only three transfers: $24 million from the Budget Reserve (or “rainy day fund”), $49 million from the 21st Century Mineral Fund and $11 million from the Employee Insurance Trust Fund.

Spending Changes

Specific spending reductions fall into three major categories. Many of them are cuts in agency operating budgets. Others are cancellations of amounts that have not yet been distributed, whether because they are likely to be unneeded in FY 2003 or because they were scheduled to be allocated during the second half of the fiscal year. A smaller but significant number of spending cuts can be categorized as policy changes, such as the Governor’s proposal to cut ethanol subsidies, the Senate’s initiative to house short-term offenders in local jails rather than state prisons, and the House’s eligibility and service changes to child care, health care, and other assistance programs.

Table 2 measures the spending changes in each area as a percentage of that area’s general fund budget under current law. To put the spending cuts in perspective, the FY 2002-03 deficit of $356 million is 2.5 percent of FY 2003 general fund spending, although the cuts will be implemented in the during the last five months of the fiscal year. The FY 2004-05 deficit represents about 14 percent of general fund spending for the biennium.

FY 2003 Spending Changes as a Percentage of General Fund Budget

In each issue area, the spending changes total includes a small amount of transfers of special funds or new revenues. For example, the House plan proposes a $3 million reduction in the general fund budget for transportation. Of this, $3 million comes from a cut in the Met Council budget, and $750,000 comes from selling the state airplane and transferring the proceeds to the general fund. In some cases, transferring special revenues simply draws down an account balance that would not otherwise be used. In others, it means that fewer funds are available for the specified purpose of the account.

A short comparison of the plans in each funding area is below. Appendix 1 provides a more comprehensive list of the impact of cuts to programs serving low- and moderate-income persons and other vulnerable populations. Spending items are arranged by the House committee that has jurisdiction over that program. All the spending items for a particular state agency may not appear in the same committee. For example, although most of the cuts in the Department of Children, Families and Learning fall into the Education category, some are categorized under Health and Human Services and some in Economic Development.

Education

Education General Fund Changes FY 2003-05

Education is the largest part of the state’s general fund budget, but takes the smallest reductions in percentage terms — even under unallotment, less than one percent of the education general fund budget is cut. The Senate and Governor’s plans are nearly identical with $5 million in reductions for FY 2003, with the House slightly larger at $8  million. Only the House makes permanent cuts. All plans recapture reserves that are defined as “excess” from the Early Childhood Family Education (ECFE), Community Education, and School Readiness programs.

The House proposal cuts Adult Basic Education (ABE) services by replacing the eight percent growth factor allowed under current law to two percent in FY 2003 and future years. This growth factor was intended to accommodate increased demand for the program, which offers participants academic instruction to earn a high school diploma or equivalent, English as a Second Language (ESL), citizenship, and workplace skills enhancement.

The Governor’s unallotment order makes much larger reductions in Education than any of the other three plans. The unallotment order includes all the cuts the Governor previously proposed. It also includes the House proposal to cut ABE.

The unallotment order includes a surprising 20 additional line items that were not part of any previous budget-balancing proposal. It is alarming that the additional cuts are concentrated on the very small part of the budget of the Department of Children, Families, and Learning that is targeted to low-income and other disadvantaged populations. For example, 69 percent of the FY 2003 allocation for After School Enrichment Grants is cut. This will affect funding for programs that build on community resources to provide out-of-school programs for youth who are struggling with academic success and/or have been involved with the criminal justice system.

Higher Education

Higher Education General Fund Changes FY 2003-05

Higher education receives one of the biggest cuts measured in dollar amounts. The largest cuts are divided equally between the University of Minnesota and Minnesota State Colleges and Universities (MnSCU) system ($25 million each under the Governor’s and House plans, $20 million each under the Senate). Each plan also makes reductions in the Higher Education Services Office (HESO), which administers financial aid.

The Senate makes cuts only in FY 2003, while the House and Governor make permanent reductions. The Senate also makes a one-time appropriation of $10 million to the State Grant Program to cover needs for spring and summer grants. On January 10, 2003, the HESO grant fund was frozen due to insufficient funds. In addition, HESO child care and work study funding are no longer available due to the state grant program deficit.

These changes are in addition to the $30.0 million transfer that all three original plans make from the HESO SELF Loan fund.

The unallotment order differs from the Governor’s original budget proposal in two ways: it makes an additional cut to the Minnesota Library Information Network, and it does not include the SELF Loan transfer.

Health and Human Services

Health and Human Services General Fund Changes FY 2003-05

Health and human services takes one of the biggest cuts in terms of dollars, although not in terms of percentage of budget. This is also one of the areas of largest disagreement. The Governor proposed $39 million in reductions in FY 2003 and $169 million in FY 2004-05, covering 33 individual budget items. The House proposal contains most of the items proposed by the Governor, plus several additional cuts for a total of $46 million for FY 2003 and $297 million in FY 2004-05.

The Senate makes the largest amount of spending changes in FY 2003 at $53 million, but many of these changes are from timing shifts, rather than spending cuts. The Senate delays from June to July subsidy payments to community health boards and fee-for-service reimbursements for inpatient and outpatient hospital services. This has the effect of moving these payments into the next fiscal year, leading to savings in FY 2003.

The House proposal includes a number of policy changes to programs serving low- and moderate-income Minnesotans, such as:

  • Reducing eligibility and increasing copayments for low- and moderate-income families receiving Basic Sliding Fee child care assistance. The eligibility ceiling would be lowered from 75 percent of the state median income (approximately 290 percent of the federal poverty guideline) to 250 percent of the federal poverty guideline. Copayments would be increased by about 10 percent for most families, although families paying the minimum amount would see their copayments double from $5 to $10 per month.
  • Repealing the Cover All Kids legislation passed in 2001 that would provide Medical Assistance (MA) coverage to more low-income children and families. The savings would be partially offset by the cost of covering some of these children under MinnesotaCare, which is funded by the Health Care Access Fund.
  • Making access to Emergency Assistance more infrequent. Currently families may access Emergency Assistance once in a 12-month period; this proposal would limit access to once in an 18-month period.
  • Eliminating access to a second year of post-secondary education or training for Minnesota Family Investment Program (MFIP) participants.
  • Ending MA and MFIP eligibility for legal immigrants who are not refugees or asylees. Undocumented pregnant women would lose prenatal and postpartum care.

Another difference among the plans is to what degree they focus on the General Fund, or whether they make changes to dedicated funding sources that fund ongoing program commitments. For example, only the House plan makes a net $13 million reduction in FY 2004-05 in the Health Care Access Fund, which funds the MinnesotaCare program. These changes have no impact on the general fund deficit. The House and Governor also make reductions in programs for low-income families funded by federal TANF dollars, and direct the savings to the general fund.

The total impact on health and human services was less under the unallotment order than the original proposals. Under unallotment, the Governor could not include his proposed savings from drawing down special accounts in State Operated Services and cutting the unallocated portion of Supportive Work Grants funded by federal TANF dollars. He also did not implement his proposal to increase surcharge revenues from nursing facilities and intergovernmental transfers from counties with county-owned nursing facilities and thereby increase federal Medicaid funding.

While it does not include the serious cuts in assistance for struggling families that were proposed by the House, the unallotment order does cut services for vulnerable families. The unallotment order includes reductions in nutrition counseling under the Women, Infants, and Children (WIC) program and a delay in implementing Medical Assistance coverage for certain services for children with autism.

As with education, health and human services receives cuts under the unallotment order not previously discussed as part of any budget-balancing plan, including:

  • A 36 percent cut to Minnesota Economic Opportunity Grants, which provide core funding for Minnesota’s 40 community action agencies. This will result in cuts in the most basic services to needy families, such as transportation, housing and shelter, senior programs, Head Start, food shelves, and emergency services.
  • Cuts to Child Care Service Development Grants and Child Care Facility Grants, which are used to improve the quality of child care, recruit and train child care staff, and develop child care services for special needs children.

Environment

Environment General Fund Changes FY 2003-05

In environmental spending, the House and Governor’s plans have a similar impact in FY 2003, although only the House makes permanent changes. The Senate makes a smaller amount of FY 2003 reductions. The reductions come from programs in the Pollution Control Agency, Office of Environmental Assistance, Minnesota Zoo, Department of Natural Resources, and Board of Water and Soil Resources.

The House and Governor also transfer $1 million in FY 2003 to the general fund from Motor Vehicle Transfer Fee revenues that would otherwise go to the Environmental Fund and $2 million from the sales and use tax on cigarettes that would otherwise go to the Future Resource Fund. The Governor makes these transfers on a one-time basis; the House plan continues the transfers until July 1, 2007. These changes are in addition to the $11 million transfer that all three original plans make from the Solid Waste Fund.

Under unallotment, the Governor made most of the cuts he previously proposed as well as some additional reductions. The transfers from the Solid Waste Fund, Future Resource Fund, and Environmental Fund are not enacted.

Agriculture

Agriculture General Fund Changes FY 2003-05

The three original plans vary in their impact in agriculture, with the Senate making $3 million in reductions in FY 2003, the House $8 million, and the Governor $29 million. No plan makes reductions in FY 2004-05.

The primary area of disagreement is in payments to ethanol producers. The Governor proposed to cut $27 million from this program. The House would make a $5 million reduction shared across all producers, while the Senate would only eliminate $2 million in payments to a facility in St. Paul.

The unallotment order cuts $20 million from ethanol subsidies, less than the Governor originally proposed. It also includes some new items not previously slated for cuts, including Value Added Livestock Grants and Beaver Damage Control.

Transportation

Transportation General Fund Changes FY 2003-05

Much of the state’s funding for transportation comes from outside the general fund. Therefore, cuts in this area are relatively small in terms of dollars. Only the House makes permanent cuts. All three original plans raise $750,000 by selling the state airplane. The House and Governor also cut the Met Council Transit budget.

These reductions are in addition to refinancing $130 million of transportation projects and a $15 million transfer from the State Airports Fund found in all three original plans.

Under unallotment, the Governor eliminates $20 million in general fund dollars for transportation projects (which is not expected to delay any projects in the near-term). He also includes proceeds from the sale of the state airplane and cuts to both Met Council and Non-Metro transit.

Judiciary

Judiciary General Fund Changes

Judiciary spending follows the pattern of the House and Governor making similar-sized cuts with the Governor cutting only in FY 2003 and the House having an impact in FY 2004-05 as well, with a smaller one-time reduction from the Senate. The House and Governor would make a range of cuts to the Supreme Court, Civil Legal Services (Legal Aid), Court of Appeals, District Courts, Uniform Laws Commission, Board on Public Defense, Department of Public Safety, Private Detective and Protective Agent Services Board, Department of Human Rights, Department of Corrections, Ombudsman for Corrections and Sentencing Guidelines Commission.

The Senate plan does not cut the courts, but instead focuses on the Department of Corrections. The Senate makes policy changes in this area, proposing that offenders with sentences of less than one year be housed in local facilities, rather than state prisons. The proposal includes local grants to help offset the costs of this policy.

Under unallotment, the Governor implemented most of the cuts he originally proposed. Additional cuts are made in the Department of Public Safety related to anti-terrorism equipment and training. One service cut of particular concern in this area is Legal Aid, which provides low-income people, the elderly, the disabled and children with critical civil legal services they could not otherwise obtain.

Economic Development

Economic Development General Fund Changes FY 2003-05

The House and Governor make similar proposals in economic development, while the Senate would cut a much smaller amount in FY 2003 only. A number of agencies are affected under all three original plans, including the Department of Trade and Economic Development, Minnesota Housing Finance Agency, Department of Economic Security, Minnesota Historical Society, Department of Labor and Industry, Department of Commerce, Bureau of Mediation Services, Minnesota Arts Board, Humanities Commission, Accountancy Board and Architecture Board.

The House and Governor would also make reductions to Minnesota Technology, Indian Affairs Council, Chicano Latino Affairs Council, Council on Black Minnesotans and Council on Asian-Pacific Minnesotans. The Senate and House proposals include $124,000 in new funding to the Department of Economic Security to restore some of the cuts made last year to State Services to the Blind.

These are in addition to a $15 million transfer from the Workers Compensation Fund found in all three original plans, and $39 million and $49 million in transfers from the 21st Century Minerals Fund by the Governor and House respectively.

The unallotment order largely follows the Governor’s original budget proposal, except it does not include the Workers Compensation Fund transfer. Under unallotment, the Governor also implements a number of additional cuts of concern to low-income workers and at-risk youth, such as:

  • A $2 million cut in the Minnesota Job Skills Partnership and Minnesota Pathways Program, which provide grants to educational institutions working in partnership with businesses to develop training programs targeted to business needs. The Pathways Program focuses on workers who are at or below 200 percent of federal poverty guidelines or are making the transition from welfare to work. These programs are part of the Department of Trade and Economic Development. (The House proposed a $1 million cut in these programs.)
  • $127,000 in cuts in the Emergency Services Program, which funds 26 emergency homeless shelters and agencies serving the homeless. This cut eliminates about a quarter of the FY 2003 funding, and is expected to lead to an increase in the number of families turned away from shelters due to insufficient space. This program is part of the Department of Children, Families and Learning.
  • Funding for the Youthbuild program in the Department of Economic Security is cut by $306,000. Youthbuild assists at-risk youth in making a successful transition to the workforce, and includes construction skills training, work experience, job readiness, leadership development, and basic academic skills. It serves youth ages 16 to 24 who are high school dropouts or potential dropouts, at risk of involvement with the juvenile justice system, chemically dependent, disabled, homeless, teen parents or recipients of public assistance.

State Government

State Government General Fund Changes FY 2003-05

State government is the only spending area that sees permanent reductions under all three original plans, with the Senate making the largest one-time cuts of nearly $15 million in FY 2003, followed by $13 million by the House and $10 million by the Governor. The Senate plan limits its permanent cuts to the Legislature and constitutional officers, compared to larger permanent cuts by the Governor and the House.

This area includes cuts in the Legislative bodies and commissions, constitutional officers and state agencies including Minnesota Planning (Office of Strategic and Long-Range Planning), the Department of Administration, Department of Finance, Minnesota Revenue, Department of Military Affairs, Department of Veterans Affairs, Gambling Control Board and Minnesota Racing Commission.

The unallotment order is similar to the original proposal from the Governor. It is interesting to note that at a time when the state is facing crucial decisions that will have an impact on every part of the state and for years to come, the Governor cuts funding for Legislative Television, which allows the public to better follow the decision-making process. Neither the House nor Senate agreed with this cut.

Capital Projects

Capital Projects General Fund Changes FY 2003-05

The state often funds capital improvements, such as buildings and roads, through borrowing — the state issues bonds and uses the proceeds to fund a capital project, then pays off the bonds with interest over time. The plans differ in which capital projects they would cancel and the total impact.

Under unallotment, the Governor makes $12 in capital project cancellations. Project cancellations fall into two categories:

  • Projects originally approved in 1999 or earlier. Minnesota law requires the Commissioner of Finance to report each year on capital projects that have been authorized for more than four years. Balances on such projects are normally frozen on February 1 and cancelled on July 1, unless the Legislature acts to reauthorize the project. Under both the House proposal and unallotment, the point at which these projects are cancelled is speeded up. In essence, this shifts forward the savings from these programs into FY 2003. $9 million of cancellations are made in this category under unallotment.
  • Projects originally approved in 2000, 2001 and 2002. These projects are not subject to cancellation in 2003 as described above. In his unallotment order, the Governor cancels $3 million of projects approved in 2000, $21,000 in projects from 2001, and $592,000 in projects from 2002.

Revenue Changes

All three plans would make $50.0 million in savings by delaying payments on certain sales tax refunds until 90 days after an application is filed. These are mainly claims for refunds on sales tax on capital equipment purchases, but includes all other types of sales tax exemptions that require the sales tax to be paid at the time of purchase but then are refunded after an application is filed. This provision does not raise new revenue so much as shift payments into the future and by reduce the amount of interest paid.

The $50 million savings from sales tax refund delays is included in the unallotment order, as is a $2 million cut in TIF grants (this is the remaining balance from a expiring program set up to address rate compression in 1997).

How Do These Plans Measure Up?

The Minnesota Budget Project uses a set of principles to evaluate budget-balancing decisions. These principles call for deficit solutions that are balanced, that do not put undue burden on low-income families and other vulnerable populations, and that follow a thoughtful process that takes the state’s needs into account.

The Governor’s original proposal and the Senate plan are closer to these principles than the House proposal and the Governor’s unallotment order. The House and unallotment order target programs for struggling Minnesotans for cuts, and include policy changes and service cuts without adequate public debate.

The state’s budget-balancing decisions should not make the impact of the recession worse for those Minnesotans least able to weather the downturn, including low-income families, laid-off workers and other vulnerable populations.

The Senate largely avoids targeting services for struggling Minnesotans for cuts, as does the Governor in his original proposal. These populations did less well under the unallotment order, which cut services more severely. Particularly in education, the bulk of the unallotment cuts are in programs targeted to low-income families and at-risk youth. Another area of concern is Higher Education, where reductions are made on top of significant cuts in 2002. It remains to be seen whether higher tuition and less funding for financial aid will diminish access to education and training by low-income students and workers.

The House plan for FY 2003 is nearly the same size as the Governor’s original proposal, but makes significantly smaller cuts in ethanol subsidies while making larger cuts in programs serving low-income families, and legal immigrants in particular. For FY 2004-05, over half of the total cuts in the House plan are in Health & Human Services. These cuts would have put an unacceptable burden on vulnerable populations.

The state should use a combination of the three primary budget-balancing tools available: raising revenue, using reserves and cutting spending.

The three original plans used all three budget tools, although the revenue proposal might be more properly classified as a timing shift. However, given the short time span in which any tax increase would need to be implemented, it is reasonable that revenue increases are not a large component of the short-term budget fix. It also should be noted that policymakers did propose smaller revenue-raising items, such as sale of the state airplane and adjustments to special fees. More broad-based revenue solutions should, however, be on the table when policymakers begin to debate the FY 2004-05 budget.

Unfortunately, the fact that the budget was balanced through unallotment meant that the Governor had fewer options in terms of fund transfers, and could not raise revenues even if he had the desire to do so. Unallotment forces an unbalanced plan that is mainly made up of spending changes.

Budget balancing should be informed by current need and past budget decisions, including how surpluses were divided between tax cuts and new spending, who benefited from tax cuts, and how certain programs were underfunded even in times of surplus.

The size of the state’s budget deficit means that changes in state programs are inevitable, and may involve considerable change and reform. These changes should be made by a process that allows for debate and public involvement. Unfortunately, the short timeline faced in bringing the FY 2002-03 budget into balance made it impossible to have the kind of thoughtful dialogue involving policymakers, frontline workers, and the persons involved that is needed to bring about real reform. This problem was made worse by the lack of public meetings by the Conference Committee.

Given the timing constraints, permanent policy changes should not be part of the FY 2002-03 deficit solution. The place for debate on permanent changes, such as those proposed by the House in child care, health care and other assistance programs, is as part of the discussion involved in passing the FY 2004-05 budget.

Again, unallotment is a blunt tool, and is a less desirable process for balancing the budget. Several service cuts were made that were not part of any previous budget-balancing plan, and therefore were made without opportunity for input from service providers, program participants or the public.

Another aspect of meeting the state’s needs is providing a sufficient budget reserve to guard against future shortfalls. While no one can accurately predict how much reserve is needed, the $53 million provided by the Senate plan seems a little small given the level of risk in the November forecast. Since the short-term deficit was addressed through unallotment, the state is in an even worse condition. The state’s budget will have a balance of $0 for FY 2002-03 after implementing the unallotment order. The budget reserve will also be depleted. Decision-makers will need to revisit the FY 2002-03 budget if the February forecast or quarterly economic updates show an additional shortfall.

Next Steps

Policymakers must quickly turn to the larger task of passing the 2004-05 budget. The Governor released his proposed FY 2004-05 budget on February 18, which addresses the $4.2 billion FY 2004-05 deficit. Policymakers will also be provided with updated deficit figures when the February forecast is released. The Legislature will then work throughout the spring to pass the appropriations bills that will enact the FY 2004-05 budget.

Decision-makers should return to the principles outlined above. The state faces a severe challenge that can only be met through full participation of policymakers, persons and organizations involved in the delivery of services, program participants, and the public. Trying to solve this deficit through spending cuts alone would mean reducing the budget by 14 percent. This would create an unacceptable situation that would have lasting, damaging impacts on the state’s infrastructure, economy, and communities. So far, only of two of the three budget-balancing tools have been used. It’s time to return to the toolbox and acknowledge that revenues must be part of the deficit solution.

This document compares the Governor’s FY 2003 supplemental budget recommendations as introduced, House File 74, Senate File 79, and the Governor’s unallotment order as revised February 24. Except whether otherwise noted, the source documents for this analysis include spreadsheets, bill summaries, and other materials from the Department of Finance and legislative fiscal and research staff.

 

[1] Minnesota Department of Finance, November 2002 Economic Forecast. See also Minnesota Budget Project, November 2002 Forecast Summary.
[2] Constitutional officers are the Governor, Lieutenant Governor, Attorney General, State Auditor, and Secretary of State.
[3] In this analysis, transfers that are larger than $10 million are listed in the reserves and transfers category, and smaller transfers and increases in special revenues are included in the spending changes total.
[4] For a full list of all line items, see the
House Fiscal Analysis spreadsheet, HF 74 – SF 79 Budget Adjustments Comparison.
[5] In the case of ECFE and School Readiness, these funds would otherwise have been redistributed within the program.
[6] Undocumented persons are already ineligible for MA and MFIP. They would remain eligible for emergency medical care including labor and delivery.
[7] It appears that the Governor’s unallotment authority does not allow him to make cuts to the state court system. However, the Courts have agreed to voluntarily make nearly all of the cuts called for in the unallotment order.
[8] It appears that the Governor’s unallotment authority does not allow him to cut the Legislature’s budget, but the Legislature has agreed to make the cuts voluntarily.
[9] A list of projects is available on the
House website.
[10] Minnesota Budget Project, Principles for State Fiscal Decisions.
 

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