Comparison of Budget-Balancing Proposals in the 2002 Legislative Session

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Updated February 2002

According to the 2001 November Economic Forecast, Minnesota faces a deficit of $1.953 billion for the 2002-03 biennium and a structural deficit of $2.532 billion in 2004-05. The state of Minnesota is constitutionally required to have a balanced budget in the current biennium, and policy-makers must make adjustments to bring the FY 2002-03 budget back into balance. This document provides a brief comparison of how the general fund deficit for FY 2002-03 is addressed in the various budget-balancing plans released to date.

2002-03 Budget Proposals

Policymakers have three budget-balancing tools available — using reserves, reducing spending, and raising revenues. In all plans, the largest component of the solution is use of reserves and other one-time revenues. One-time revenues makes up $1.5 billion of the House-Senate agreement, compared to $1 billion of the Governor’s plan, $1.3 billion of the House proposal, and $1.9 billion of the Senate’s solution.

The Senate’s greater reliance on one-time resources means that their plan has the smallest amount of permanent spending cuts at $225 million, compared to $559 million of cuts in the House plan, and $634 million in Governor Ventura’s plan. The House-Senate agreement comes in about the middle of the House and Senate spending targets, at $374 million in permanent spending reductions. Only Governor Ventura proposes permanent tax increases, which make up $397 million of his plan.

Reserves and Transfers from Other Funds

The largest component of all three budget-balancing plans is use of reserves and transfers from other funds. The state has several reserve accounts:

  • The $653 million Budget Reserve, or “rainy day account,” has been set aside to deal with budgetary shortfalls.
  • The Cash Flow Account of $350 million can be thought of as a “minimum balance” in the state’s checking account. It is used to address short-term cash flow problems during the year.
  • The Tax Relief Account contains $158 million left from the FY 2000-01 biennium.
  • The 2001 omnibus tax bill set aside $14 million in the LGA (Local Government Aid) Reform Account for use in future reform to the LGA formula.

The Senate’s plan uses all four of these accounts to address the FY 2002-03 deficit, as does the House-Senate agreement. The House and Governor would only use the Budget Reserve and LGA Reform Account in FY 2002-03. Governor Ventura’s plan would use the Tax Relief Account in FY 2004-05 to help rebuild the budget reserve. The House and Senate have not yet specified how they would rebuild the reserves.

In addition to these official reserves, a number of other one-time revenue sources are tapped, such as the Assigned Risk Plan and Workers’ Compensation Special Fund. The Assigned Risk Plan provides workers’ compensation coverage to employers who are unable to purchase coverage in the private insurance market.[4] At the end of 1999, there was a $553 million surplus in this fund, primarily due to returns on investments. In the 2000 Legislative Session, $450 million was transferred out of the Assigned Risk Plan and into the following funds: $325 million to the Workers Compensation Special Fund to settle long-term claims, $110 million to the state’s general fund, and $15 million to the Minnesota Compensation Health Association (MCHA). All four budget-balancing plans would use $95 million from the Assigned Risk Plan to address the FY 2002-03 general fund deficit. In addition, the Senate would access $282 million from the Workers Compensation Special Fund in FY 2002-03, the House-Senate agreement would use $230 of these funds to address the FY 2002-03 deficit, while Governor Ventura would use $200 million from this account in the next biennium to help rebuild the budget reserve.

Approximately $1.3 billion in funds the state received from its tobacco settlement is put aside in several Tobacco Endowments. The interest earned on these endowments is used to fund various purposes, including medical education and tobacco use prevention. The Senate plan would borrow funds from the tobacco endowments to deal with cash flow problems during the year. The House plan would use the $554 million endowment dedicated to tobacco prevention to cover general fund costs in FY 2002-03.

Another transfer used by Governor Ventura and the Senate is to refinance $245 million in transportation projects appropriated in 2000. The $245 million in general funds for these projects would be replaced by issuing bonds.

The House-Senate agreement and the Senate plan repeals a portion of the 2001 tax bill that has not yet been implemented, called the June Accelerated Sales Tax Payment, which is scheduled to be repealed on June 2003. Currently, merchants must remit a portion of their estimated sales tax collections for June in advance, which moves some of the sales tax revenues into the prior fiscal year. Repealing this provision would keep $119 million in the FY 2002-03 biennium instead of shifting it into FY 2004-05. This does not raise new money, but rather changes the timing of when it is collected by the state.

Expenditure Cuts

The plans vary in the degree to which budget-balancing is achieved through permanent spending cuts, ranging from $225 million in the Senate, $374 million in the House-Senate agreement, $559 million in the House, and $634 million in the Governor’s plan. The House-Senate agreement comes in about the middle of the House and Senate spending targets, at $374 million in permanent spending reductions. The House-Senate agreement also often comes down in the middle in individual spending areas where the House and Senate targets differ.

The House plan also included $100 million in savings from a hiring freeze and reduction in the number of state employees. The House-Senate agreement similarly outlines $40 million in savings from a salary cap. The agreement also would save $35 million in the area of professional and technical contracts.

All plans make changes to state aids to local governments, and agree to do so by eliminating $91 million in one-time funding and $38 million in ongoing funds for TIF grants (this proposal is also in the Governor’s plan). The TIF grant program was created as part of last year’s tax bill to help local governments who may encounter problems with their Tax Increment Financing (TIF) districts as a result of tax reform.

In addition, Governor Ventura’s plan would permanently cut aids to local governments by $147 million in FY 2003. The immediate impact of this decrease is softened by changing the way in which local government aids are paid. These funds are currently distributed to local governments in July and December. The Governor’s plan would distribute the funds three times a year, and would move approximately half of the July payment into March. Under this plan, $173 million in aids that would have been distributed in the 2004-05 biennium are moved up into the FY 2002-03 biennium. This does not provide additional aid, but is simply a timing shift. No other plans include the timing change or a reduction in local government aids.

Revenue Increases

The only plan that includes significant ongoing revenue changes is Governor Ventura’s plan, which proposes $397 million in additional revenues for FY 2002-03. The primary components of his revenue-raising plan are to increase the gas tax by five cents per gallon starting March 1, 2002, and index for inflation starting in 2003, and increase the cigarette tax by 29¢ per pack for a total of 77 cents a pack (and similar increase to tobacco products tax) starting March 1, 2002.

Source documents: Information from the Ventura administration’s Supplemental Budget Recommendations; House Fiscal Analysis’ Governor Jesse Ventura’s FY 2002-03 Supplemental Budget: An Overview; and spreadsheets from the Department of Finance and legislative fiscal staff were used in the preparation of this document.

 

[1] Includes transfer to Dislocated Worker Fund.
[2] Includes Department of Revenue.
[3] These revenues are from the State Government/Economic Development/Judiciary Committee.
[4] The source for this paragraph is from the House Fiscal Analysis,
Assigned Risk Plan Surplus Grows by $73 million, October 2000.
 

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