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First Reading: A budget in balance

Published (4/4/2008)
By Mike Cook
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Some members believe the budget reduction bill passed by the House April 3 could be ruled unconstitutional because it embraces more than one subject. Others say it is constitutional because it’s all based on reducing the deficit. (Illustration by Paul Battaglia)

The War of 1812 was fought between the United States and the British Empire after a long period of troubled relations between the two countries.

The battle over HF1812 is the DFL willingness to solve the state’s projected $938 million biennial deficit one way, compared to that proffered by the state’s top Republican, Gov. Tim Pawlenty.

Unlike the battle of nearly 200 years ago, this one is not likely to end in a stalemate, although other skirmishes may be forthcoming. After more than nine hours of debate, and more than three-dozen amendments, the House was still debating the bill April 3 when this magazine went to press. A companion bill, SF3813, sponsored by Sen. Richard Cohen (DFL-St. Paul), was approved by the Senate on a voice vote earlier in the day.

A conference committee is expected to work out the differences before a final product is sent to the desk of Pawlenty, where his veto pen rests.

“Although, after this is over, I don’t think there’s any plan to burn down the White House or anything like that,” said Rep. Lyndon Carlson (DFL-Crystal), a former history teacher.

Carlson, the bill’s sponsor, said the balancing act includes budget reductions, use of reserve funds and increased revenues by closing some corporate tax loopholes. “There are no general tax increases in the proposal and we keep our commitments to schools, health care and college students.”

It makes nearly $135 million in cuts, drains $350 million from the cash-flow account and $250 million from the budget reserve. The reserve would be left with $403 million;similar to the governor’s proposal.

After House leaders met with Pawlenty, House Speaker Margaret Anderson Kelliher (DFL-Mpls) said the House plan’s budget reserve number was adjusted to match the governor’s, and leaders made sure the House plan could accommodate the governor’s concerns on issues such as increased funding to erradicate bovine TB. “I hope that the governor comes to the table and negotiates in good faith.”

Rep. Paul Kohls (R-Victoria) expressed concern about draining the cash flow account to zero. “It would at least provide the potential for some more flexibility, if the budget situation doesn’t improve.”

Carlson said the Finance Department has the authority to use various accounts for cash flow purposes. “If finance needs additional funds for cash flow purposes, the two big ones that would remain would be the reserve fund and the Health Care Access Fund could be used temporarily, as well, as (Republicans) did in the past. … It’s just one of those decisions you make in terms of which account you’re going to use to resolve some of the budget problems that we wanted to take care of.”

The governor’s proposal 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. It also includes no reduction in K-12 education or local government aid, a 4 percent reduction for most state agencies and a one-eighth percent sales tax decrease.

The governor’s plan leaves an anticipated $694.54 million deficit in the 2010-11 biennium; about $110 million more that the House plan. Neither number accounts for any inflationary increase.



Constitutional challenge forthcoming?

According to the state constitution, “No law shall embrace more than one subject, which shall be expressed in its title.”

Rep. Mark Olson (IR-Big Lake) and a handful of Republicans said this bill violates that rule.

“Depending on how you want to define single subject, there’s possibly as many as 28 different distinct subjects in the bill, but for sure 16 very distinct subjects that generally go through this process here in the House and the Senate as separate omnibus bills,” he said.

Olson cited the 2003 “concealed carry” bill as an example of what could happen. In that case, a Ramsey Court District judge ruled in July 2004 that by amending the firearm carry language to a Department of Natural Resources bill, was unconstitutional. The Minnesota Court of Appeals upheld the lower court’s decision in April 2005.

Two years ago we didn’t have all these policy provisions in a finance bill, said Rep. Morrie Lanning (R-Moorhead). “This bill has way too much in it to meet the constitutional test.”

House Taxes Committee Chairwoman Rep. Ann Lenczewski (DFL-Bloomington) said everything in the bill works together to balance the budget and that the current minority caucus tried the same approach in 2002 and 2005.

“We’re putting everything under a single subject: solving the deficit,” she said.



Bill provisions

“We incorporate several of the governor’s recommendations, but differ with him in key areas,” Carlson said. “We minimize his cuts to higher education, which should allow our universities to keep tuition stable. The plan does not incorporate the governor’s proposed cuts to nursing homes and the disabled. In fact, the House proposal includes a 2 percent cost of living increase for nursing home workers. At a time when we are investing in a comprehensive health care system, and are advancing needed reform proposals, it is critical we strongly support our nursing home workers who are responsible for the daily care of our elderly.”

The House Ways and Means Committee provided targets for each finance division, and it was up to them to craft legislation to meet those goals. Some divisions received extra money, and some took hits. Some also included policy provisions in the bill, leading Lanning to call it an “omnibus-omnibus bill.”

“No one ever said it was going to be easy to resolve these issues,” Carlson said. “The final product is the result of each and every one of the divisions that are attached to the Finance Committee, and reflects their recommendations on how to resolve the issue.”

Among the measures in the bill are:

• a 3 percent budget reduction for most state agencies, including the legislative budget;

• the delay of hospital rebasing of inpatient fee-for-service rates, which is expected to reduce spending by $9.7 million in Fiscal Year 2009;

• a $4.53 million combined cut in Fiscal Year 2009 to the Supreme Court, Court of Appeals and district courts, about half of the governor’s proposal;

• a $4 million transfer from the Telephone Assistance Plan Fund, also proposed by Pawlenty;

• the cancellation of $2.6 million in grants for the development of renewable hydrogen initiatives that were approved last year, also recommended by the governor;

• a $253,000 reduction to the waters division of the DNR for water resource management; a $230,000 reduction to the DNR’s ecological services division for managing impaired waters; and a $225,000 cut to the DNR’s land and minerals division;

• the governor is required to reduce by 25 percent the number of deputy commissioners, assistant commissioners and governor’s office personnel supported by interagency agreements;

• a $6.85 million appropriation from trunk highway funds to recognize federal funds awarded to the state for bridge construction, as was requested in the governor’s supplemental budget bill; and

• a one-time 1 percent increase in the school funding formula for K-12 education, or about $51 per student statewide, with the majority of money coming from a freeze in Q-Comp revenue to districts participating in the program.

The reduction to both the Minnesota State Colleges and Universities system and the University of Minnesota is proposed at $6.1 million, compared to $26.6 million and $27.2 million respectively proposed by Pawlenty. “We put an end to the double-digit increase in tuition and fees last year, and we just cannot go back to the days when the state budget was balanced at the expense of students and their families,” Carlson said.

A one-time $14 million transfer from the Worker’s Compensation Special Fund to the General Fund is proposed. Carlson said the Republicans took $265 million from the special fund when they needed to balance the budget five years ago. Also, a one-time $8 million transfer from the Workforce Development Fund to the General Fund is proposed by the House and Pawlenty.



Tax provisions

On March 31, the House Taxes Committee added several provisions to the bill that would raise money for the budget.

The provisions would:

• repeal the definition of foreign operating corporations and, therefore, tax breaks that apply to them;

• repeal the foreign royalty subtraction;

• eliminate “tax havens” so that companies doing a certain amount of business in the United States and in countries identified as a tax haven by the IRS and the Organization of Economic Opportunity and Cooperation would be subject to Minnesota’s corporate franchise tax; and

• increase fees on mutual funds, meaning regulated investment companies would have to pay higher annual securities fees to the Department of Commerce.

Altogether, they are expected to rake in more than $201 million in Fiscal Year 2009 and more than $382 for the 2010-2011 biennium, according to nonpartisan House fiscal staff.

Though it may appear to some that the bill is being used as a dumping ground for the tax committee, Lenczewski said everything in the bill balances out to solve the deficit. She said an omnibus tax bill is still forthcoming.

“This goes far beyond what any other state has,” said Jill Larson, fiscal policy director for the Minnesota Business Partnership. “We’re concerned that a company with foreign operations would have its foreign income taxed simply because they were doing business in one of these so-called tax haven countries.”

Tom Hesse, vice-president of governmental affairs for the Minnesota Chamber of Commerce, asked the committee to avoid repealing the entire FOC statute and instead work on tightening it up.

“The purpose back in 1988 was to place U.S. companies operating overseas at an equal footing with their foreign competitors,” he said.

Rep. Mary Liz Holberg (R-Lakeville) warned the corporate money to pay increased taxes will come from outside their walls. “Where they get the money to pay the taxes is from the average consumer you and I.”

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