Governor Pawlenty's Unallotment Order: FY 2003 Budget Brought into Balance

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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 2002-03 biennium. Minnesota’s constitution requires a balanced budget, so decision-makers needed to act quickly to balance the budget before the biennium ends on June 30, 2003. On January 14, Governor Pawlenty released his FY 2003 supplemental budget proposal, which outlined his plan to address the deficit. Both bodies of the Legislature passed their own budget-balancing plans shortly thereafter. However, the legislature was unable to come to agreement by the February 7th deadline set by the Governor, and therefore Governor Pawlenty used his unallotment authority to balance the FY 2002-03 budget.

The components of the unallotment order are outlined in Table 1, and described in more detail and measured against our principles for fiscal decision-making below.[1] These principles call for deficit solutions that are balanced, do not put undue burden on low-income families and other vulnerable populations, and follow a thoughtful process that takes the state’s needs into account. While the Governor’s original proposal did not single out services for low-income and other vulnerable populations for cuts, many of the new items in the unallotment order target such services. In addition, the rules of unallotment forced an unbalanced plan that more heavily relies on spending cuts.

FY 2003 General Fund Changes in Governor's Unallotment Order

Plan Summary

The Governor’s unallotment order makes $356 million in changes to the 2002-03 budget. Of the total, $220 million comes from spending changes, $84 million from the use of reserves and fund transfers, and $52 million from revenue changes (although the bulk of this may more appropriately be termed a timing shift, rather than an increase in revenues).

The rules of unallotment provide the Governor with a more limited set of choices than are available through the legislative process,[2] and therefore the unallotment order differs in three key ways from the Governor’s FY 2003 supplemental budget proposal:

  • The unallotment order is dominated by spending changes, whereas reserves and transfers make up the largest part of the Governor’s supplemental budget proposal. 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 Governor’s supplemental budget proposal recognized the risk that actual conditions may be worse than projected in the November 2002 forecast,[3] and left a $134 million positive balance as a cushion for any additional shortfalls that may arise before the end of the 2003 fiscal year.[4] Under unallotment, the Governor can only act to balance the budget.
  • The Governor’s supplemental budget placed some emphasis on making a dent in the FY 2004-05 deficit, cutting $306 million in FY 2004-05. Under the rules of unallotment, the Governor was only able to have an impact in FY 2003.

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

Reserves and Transfers from Other Funds

Under the Governor’s FY 2003 supplemental budget proposal, reserves and transfers total $240 million, and make up the largest piece of the plan for balancing the FY 2002-03 budget. Under unallotment, only $84 million of transfers and reserves were used, which include:

  • $24 million from the Budget Reserve, which is also known as the “rainy day fund.”
  • $49 million from the 21st Century Minerals Fund, which was created in 1999 to finance economic development on the Iron Range.
  • $11 million from the Employee Insurance Trust Fund. This fund pays medical insurance claims for state employees, and is funded by premiums paid by employees and employers. The transfer reverses General Fund appropriations to the Employee Insurance Trust Fund made in 1998 and 1999.

Spending Changes

Specific spending reductions in the Governor’s supplemental budget fall into a few 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. Very few of the spending cuts could be considered major changes in policy. Under unallotment rules, the Governor can cut previously authorized spending, but he cannot implement policy initiatives, such as the eligibility and service changes to child care, health care and other assistance programs that were part of the House budget-balancing plan. Such changes require legislative action.

Table 2 measures the changes in each spending area in dollar amounts and as a percentage of that area’s general Ffnd 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 need to be implemented during the last five months of the fiscal year.

FY 2003 General Fund Spending Changes in Governor's Unallotment Order

In each issue area, the spending changes total includes a small amount of transfers of special funds or new revenues. For example, the unallotment order reduces the transportation general fund budget by $24 million; $23 million comes from cuts in transportation spending 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.[5]

In terms of spending changes, the unallotment order released on February 7 largely follows the Governor’s supplemental budget proposal, although he added a number of additional cuts, particularly in education and economic development. A revised unallotment order was released on February 24 in which some adjustments were made, largely to reflect contractual obligations.

A short overview of the spending changes in each funding area follows. Appendix 1 provides a more comprehensive list of the impact of cuts to programs serving low- and moderate-income persons and other vulnerable populations.

Education ($23 Million Reduction)

Education is the largest part of the state’s general fund budget, but takes the smallest reduction in percentage terms. The unallotment order makes a significantly larger cut than the supplemental budget proposal, which would have cut $5 million. Of greater concern is that the cuts to the Department of Children, Families and Learning are focused on a very small portion of that agency’s budget, services targeted to low-income and disadvantaged populations.

The unallotment order includes all the education cuts included in the supplemental budget proposal, including recapturing reserves that are defined as “excess” from the Early Childhood Family Education (ECFE), Community Education and School Readiness programs (in the case of ECFE and School Readiness, these funds would otherwise have been redistributed among school districts to fund the programs). It also includes the House proposal to cut Adult Basic Education (ABE) services by replacing the eight percent growth factor allowed under current law to two percent in FY 2003. 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 unallotment order includes a surprising 20 additional line items that were not part of any previous budget-balancing proposal, including cuts in a wide range of services within the Department of Children, Families, and Learning serving low-income and other vulnerable populations.[6] 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 ($50 Million Reduction)

Higher education receives the largest cut measured in dollar amounts. The University of Minnesota and Minnesota State Colleges and Universities (MnSCU) system are each cut by $25 million, and reductions are made in the Higher Education Services Office (HESO), which administers financial aid.

It remains to be seen whether the cuts in higher education, coming after significant cuts in 2002, will diminish access to education and training by low-income students and workers. HESO currently has insufficient funds, and as a result, HESO child care and work study funding is no longer available, grants will not be available for summer term, and grant applications for spring term were cut off on January 10, 2003.

The unallotment order differs in two ways from the Governor’s supplemental budget proposal:

  • It cuts the Minnesota Library Information Network.
  • It does not include a proposed $30.0 million transfer from the HESO SELF revolving student loan fund.

Health and Human Services ($25 Million Reduction)

Health and human services takes the second largest cut in terms of dollars, although not in terms of percentage of budget. It is, however, a smaller reduction than under the Governor’s supplemental budget proposal, which included $39 million in reductions in FY 2003 and $169 million in FY 2004-05, covering 33 individual budget items. 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 cutbacks in child care, health care and other 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, 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 ($16 Million Reduction)

Environmental spending receives one of the larger cuts in percentage terms — its FY 2003 budget is cut by nine percent. The unallotment order makes most of the cuts the Governor originally proposed, which cover a range of programs in the Pollution Control Agency, Office of Environmental Assistance, Minnesota Zoo, Department of Natural Resources, and Board of Water and Soil Resources.

Under unallotment, the Governor was unable to enact three transfers contained in his original proposal: $1 million in Motor Vehicle Transfer Fee revenues that would otherwise go to the Environmental Fund, $2 million from the sales and use tax on cigarettes that would otherwise go to the Future Resource Fund, and $11 million from the Solid Waste Fund.

Agriculture ($23 Million Reduction)

The largest cut in percentage terms — 34 percent — is to the area of agriculture. One of the more controversial items in the Governor’s supplemental budget proposal falls in this area. The Governor proposed cutting $27 million in payments to ethanol producers, arguing that the industry had grown to a level that state support was no longer needed. This initiative was not endorsed by the legislature. Instead, the House’s budget-balancing plan made a $5 million reduction shared by all ethanol producers and the Senate eliminated $2 million in payments to a facility in St. Paul.

The unallotment package brings the ethanol cuts down to $20 million. It also includes some new items not previously slated for cuts, including Value Added Livestock Grants and Beaver Damage Control.

Transportation ($24 Million Reduction)

Much of the state’s funding for transportation comes from outside the general fund. Under unallotment, 10 percent of transportation’s general fund budget for FY 2003 is cut. This is an area where there are significant differences from the supplemental budget proposal. Under the original proposal, $130 million is made available by financing transportation projects through bonding, rather than cash. 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 ($18 Million Reduction)

Under unallotment, the Governor implemented most of the cuts outlined in his original proposal. The order includes a range of cuts to the 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. In addition, cuts are made in the Department of Public Safety related to anti-terrorism equipment and training.

In the original unallotment order, the Governor made cuts to the Supreme Court, Civil Legal Services (Legal Aid), Court of Appeals and District Courts. One service cut of 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. 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 total cuts just slightly less than called for in the unallotment order.

Economic Development ($19 Million Reduction)

In the supplemental budget proposal, Governor Pawlenty recommended $10 million in cuts. The unallotment order is significantly larger, and makes an nine percent cut in FY 2003 spending. A wide range of agencies are affected, 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, Architecture Board, Minnesota Technology, Indian Affairs Council, Chicano Latino Affairs Council, Council on Black Minnesotans, Council on Asian-Pacific Minnesotans, and Department of Children, Families, and Learning.

The unallotment order largely follows the Governor’s original budget proposal, with the exception of a proposed $15 million transfer from the Workers Compensation Fund. He also implements a number of additional cuts of concern to low-income workers and at-risk youth:

  • 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.
  • $306,000 in cuts to the Youthbuild program in the Department of Economic Security. 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.
  • $1 million for the Minnesota Youth Program in the Department of Economic Security is cut. This program provides economically disadvantaged and at-risk youth ages 14 to 21 with employment and training services.

State Government ($10 Million Reduction)

The unallotment order is similar to the original proposal from the Governor. This area includes cuts in the Legislative bodies and commissions,[7] 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.

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 ($12 Million Reduction)

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 unallotment order cancels $12 million in previously authorized capital projects. This is an increase from the Governor’s original proposal, in which $8 million of capital projects were cancelled. Cancelled projects fall into two main 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 unallotment, the Governor speeds up the point at which these projects are cancelled.[8] In essence, this shifts forward the savings from these programs into FY 2003. Nearly $9 million of cancellations are made in this category.
  • 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, $20,800 in projects from 2001, and $591,600 in projects from 2002.

Revenue Changes

The unallotment order makes $50 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 sales tax exemptions that require the sales tax to be paid upfront but then is refunded after an application is filed. This provision does not raise new revenue so much as shift payments into the future and reduce the amount of interest paid.

An additional $2 million in savings is made in Tax Increment Financing (TIF) grants. This is the remaining balance from an expiring program set up to address property tax rate compression enacted 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 budget 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.

While the Governor’s original proposal did not single out services for low-income and other vulnerable populations for cuts, many of the new reduction items in the unallotment order fall into this category. No public discussions were ever held on the wisdom of making these cuts. In addition, unallotment limits the budget-balancing choices available, and results in a solution heavily reliant on spending cuts.

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 Governor’s supplemental budget proposal did not appear to single out services for low-income families and other vulnerable populations for a disproportionate share of cuts, and did better on this measure than did the proposal passed by the House.

However, services for struggling Minnesotans were cut more severely under unallotment than under the Governor’s original proposal. Particularly in education, the bulk of the cuts come in programs serving vulnerable populations, even though these programs only make up a very small part of the overall education budget.

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

The unallotment order uses all three of the tools, although the major revenue change might be more properly classified as a timing shift. Given the short time span in which any tax increases would need to be implemented, it is reasonable to expect that revenue raising would not be a large component of the short-term budget fix. The unallotment order does include some small revenue-raising items, such as sale of the state airplane. More broad-based revenue solutions should, however, be on the table when policymakers debate the FY 2004-05 budget.

The fact that the budget was balanced through unallotment meant that the Governor had fewer options in terms of reserves and 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 needs 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 through a process that allows for debate and public involvement. The short timeline faced in bringing the FY 2002-03 budget into balance made it difficult 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.

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, the persons affected or the public.

Another way that the rules for unallotment prevented addressing the state’s needs is that there was no ability to build up some level of reserves. Therefore, policymakers need to revisit the FY 2002-03 budget to address the additional shortfalls identified by the February forecast, and if quarterly Economic Updates show further declines in revenues.

Next Steps

The full impact of the Governor’s unallotment decisions is not yet fully known. The state showed a balance of $0 for FY 2002-03 after implementing the unallotment order, and the state’s budget reserve was depleted. Just after the unallotment order was released, the February forecast showed an additional shortfall, so policymakers will need to work to again balance the FY 2002-03 budget.

Policymakers must quickly turn to the larger task of passing the FY 2004-05 budget. The Governor will release his proposed FY 2004-05 budget on February 18, which will address the $4 billion FY 2004-05 deficit. The Legislature must now 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 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.

View Appendix 1: Impact of All Proposals to Resolve the FY 2003 Deficit.

This document compares the Governor’s FY 2003 Supplemental Budget Recommendations as introduced and the Governor’s unallotment order as revised on February 24.

Except whether otherwise noted, source documents for this analysis include spreadsheets, bill summaries, and other materials from the Department of Finance, legislative fiscal and research staff, and state agencies.

For a comparison of the Governor’s Supplemental Budget proposal, unallotment order and the budget-balancing proposals put forward by the House and Senate, see Minnesota Budget Project, FY 2002-03 Budget-Balancing Proposals: Comparison and Analysis.

 

[1] Minnesota Budget Project, Principles for State Fiscal Decisions.
[2]
Minnesota House of Representatives Research Department, Unallotment.
[3] Minnesota Department of Finance,
November 2002 Economic Forecast. See also Minnesota Budget Project, November 2002 Economic Forecast Summary.
[4] This positive balance includes $24 million in the Budget Reserve.
[5] In this analysis, transfers larger than $10 million are listed in the reserves and transfers category, and smaller transfers and increases in special revenues are included in spending changes.
[6] In this analysis, 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. Although most of the cuts in the Department of Children, Families, and Learning (CFL) fall into the education category, additional CFL cuts are made in health and human services and economic development.
[7] 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.
[8] A list of projects is available
online.
 

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