It took some late-night twisting and turning, but lawmakers concluded a tough legislative session May 16 and a short special session May 17 by successfully balancing the state’s budget.
After a week of tense negotiations, legislative leaders announced shortly before midnight May 16 they had reached a deal with Gov. Tim Pawlenty. Under the agreement, they would erase the state’s projected $3 billion shortfall mostly through spending cuts, but would soften the blow for schools and seniors and revamp certain health care spending.
In legislative terms, it’s a classic compromise — nobody is very happy with it.
“We found where we needed to compromise and we got the job done,” said House Majority Leader Tony Sertich (DFL-Chisholm). “We didn’t agree with every solution in here, but that is the true definition of compromise.”
House Minority Leader Kurt Zellers (R-Maple Grove) offered a similar assessment.
“It’s not a perfect product, it’s not a pretty product, but it is what it is,” Zellers said.
The process was challenging enough to force lawmakers into overtime. The budget deal was announced literally minutes before the Legislature’s deadline to pass bills. To let legislators finish their work, Pawlenty called a special session at 12:01 a.m. May 17.
Eleven hours later, the House and Senate passed SS HF1*/SS SF1. Sponsored by Rep. Lyndon Carlson Sr. (DFL-Crystal) and Sen. Richard Cohen (DFL-St. Paul), the budget-balancing bill was signed by Pawlenty May 21.
In the brief floor debate on the bill, sleep-weary House members touted the benefits and lamented the faults of the legislation. Supporters said the legislation balanced the state’s budget while minimizing the harm done to vulnerable Minnesotans.
“In House File 1, we do have a balanced budget, and we are standing up for Minnesota families, the middle class, the sick and the elderly,” Carlson said.
Many House members criticized the budget agreement for doing little to resolve the state’s long-term structural imbalance. Rep. Paul Kohls (R-Victoria) noted the budget agreement left a gaping hole in the 2012-13 biennial budget. He said permanent spending reductions are needed to provide true fiscal stability.
“For those of you who will be here, you’re going to have an even bigger challenge to deal with in the next biennium,” Kohls said.
A shift, cuts and ratification
The plan essentially ratifies the governor’s controversial 2009 unallotments for the current biennium, including a $1.8 billion delay in state payments to K-12 school districts. It does not make the unallotments permanent, however, as the governor wanted. Also, the school payment shift will begin to be repaid in the next biennium — something that was not required under Pawlenty’s unilateral cuts.
The agreement also includes a provision that will allow Pawlenty or the next governor to choose whether to have Minnesota opt in to an early expansion of Medicaid. DFL majority leaders in the House and Senate hope to take advantage of the program, which would cost the state $188 million but would bring in an additional $1.4 billion in federal funding. Pawlenty and legislative Republicans oppose it.
The budget compromise also cuts a variety of health and human services programs, and authorizes delayed sales and corporate tax refunds as a way to help manage the state’s cash flow. It’s not all bad news for health care programs, however: General Assistance Medical Care will also receive a $10 million boost to help rural hospitals care for low-income adults.
At a May 17 press conference, Pawlenty said he considers the compromise a success overall because it balances the budget without raising taxes.
“All in all, even though the process was challenging, the outcome from my perspective is a very good one,” he said.
House members on both sides of the aisle repeated what became a familiar refrain in the 2010 session: that the state’s leaders were “kicking the can down the road,” leaving a huge fiscal problem for the next governor and the next Legislature to deal with.
“I, too, share a disappointment that I’ve heard bipartisanly that the can gets kicked down the road,” Sertich said.
One week earlier, the House and Senate passed a DFL-backed budget bill that would have raised $443 million in new tax revenues in addition to making $2.5 billion in cuts. Democrats argued their proposed new income tax tier on the wealthiest Minnesotans would help reduce the deficit in the next biennium. Republicans opposed it, saying it would harm small business owners. Pawlenty vetoed the bill.
Health and human services
Like other areas of the budget, some decisions on health and human services spending were left to future leaders.
The most prominent is an option to enroll more Minnesotans in the state’s Medicaid program, which receives federal funding. Under the budget-balancing law, Pawlenty and his successor may choose to broaden Medicaid coverage to include certain adults making less than $8,000 annually. Many of these people are already enrolled in state health care programs like GAMC and MinnesotaCare.
Rep. Thomas Huntley (DFL-Duluth), chairman of the House Health Care and Human Services Finance Division, called the proposal “a good deal for Minnesota taxpayers.”
“This will allow us to capture certainly a bigger chunk of what we send to Washington,” he said.
Minnesota would receive an estimated $1.4 billion in federal funding over the next three years to help pay for the larger Medicaid program. Lawmakers would pay for a required state match with $188 million from the General Fund, as well as money that otherwise would have gone to GAMC and MinnesotaCare.
Democrats like the idea because it would move people from programs that are solely state-funded to one that receives federal dollars. The federal contribution will grow in 2014 as a result of the health care reform law.
Republicans peg the early Medicaid option as too expensive and too reliant on the federal government. Rep. Laura Brod (R-New Prague) compared it to taking out a zero-interest loan on an unaffordable home.
During negotiations, lawmakers removed controversial surcharges on hospitals and HMOs that would have been used to capture federal funding.
Nevertheless, Pawlenty has said he will not authorize Minnesota’s participation in the early option. In the final days of the session, he indicated Republicans could support the use of federal money for existing state programs, a path some states are pursuing instead of early Medicaid enrollment.
The budget-balancing law also includes several provisions from the omnibus health and human services budget bill vetoed by the governor May 13. The law appropriates funding for some of the State Operated Services facilities that were slated for closure, including five dental clinics serving people with developmental disabilities. It also creates a task force that’s charged with making recommendations on how to improve State Operated Services programs in the future.
Another notable piece of the law: a $10 million funding increase for hospitals serving GAMC patients. The money is available to hospitals that have chosen not to participate in a new GAMC care model, many of which are in Greater Minnesota. The additional funding will go into an “uncompensated care pool” that will reimburse hospitals for GAMC services through February 2011.
The law finds some savings by cutting or delaying state payments to health care providers. Nursing homes are largely spared, while payments to hospitals will be reduced beginning next summer. Certain non-primary care physicians will have their payment rates reduced starting in July and managed care plans will have a higher percentage of their payments withheld.
House members from both parties were generally supportive of the compromise during the May 17 special session. Others said it will do little to reduce health care spending in the long-term.
“I don’t think it’s the golden lining that you might think it is,” said Rep. Jim Abeler (R-Anoka). “It’s great politics. But it also would work to undo the nice reform we’ve had in the General Assistance Medical Care program.”
Abeler and others would prefer to work out the kinks in GAMC, as opposed to ending the program once enrollees were moved to Medicaid.
Legislative leaders and the governor chose not to make use of $408 million the state is expecting to receive from the federal government for enhanced Medicaid match funding. Both the Legislature and the governor had included the money in their original budget plans; however, the legislation authorizing the funds is currently stuck in Congress. Should the money eventually be appropriated, it will simply fall to the state’s bottom line and cushion its cash flow account, under the agreement.
The $1.8 billion in school shifts includes delays of regularly scheduled state aid payments to districts and early recognition of June property tax receipts from counties in lieu of receiving some late spring state aid payments, with an IOU to repay starting July 1, 2011.
The plan ratifies current year delayed state aid payments of 27 percent, raises the proportion to 30 percent in 2011, returning to a typical 90/10 percent schedule in 2012.
The state regularly issues a K-12 IOU. The practice usually works without much harm because the state uses cash flow accounting, while school districts use the accrual method, which allows them to record all allocated revenue even if the cash isn’t received yet. But districts still need adequate cash flow to pay salaries, utilities and other bills, so the larger-than-usual shifts mean many districts will have to borrow money to make ends meet.
How shifts work: The state withholds a percentage of regularly scheduled payments to school districts for a given fiscal year, with repayment promised the following fiscal year. Typically, 90 percent of the total aid entitlement is paid out over the year in metered payments about twice a month. A “cleanup payment” of 10 percent is made the following fiscal year. The total is based on enrollment projections; the actual payment is adjusted depending on whether more or fewer students actually enrolled. Exceptions are made for certain districts in statutory operating debt.
The property tax early recognition mechanism was enacted in 1982, and has been in and out of statute since. Again, to help the state’s cash flow, school districts are required to “borrow,” or recognize early, a portion of June property tax receipts from the county instead of receiving the state aid payment, which is eventually repaid.
This year, the state borrowed even more heavily from districts with a certain level of cash reserves, because of a statute requiring them to do so if the state would otherwise have to borrow or issue short-term bonds to meet cash flow needs. The statute now allows but does not require the state to tap schools first.
The problem with the IOU lies with the projected deficit in the next biennium, which could be between $4 billion and $6 billion.
“Contrary to what’s put in statute,” said Rep. Pat Garofalo (R-Farmington), “regardless of who wins the (gubernatorial) election, they’re not going to be able to pay them back until the economy gets better.”
Shifts of 83/17 in 2003, 80/20 in 2004 and 84.3/15.7 in 2005 were repaid by the end of 2007, according to Tim Strom from the nonpartisan House Fiscal Analysis department. However, shifts made in the early 1980s were not fully repaid until 1998.
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