Implications of a pending budget agreement

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dayton koch zellersOn Thursday morning Governor Mark Dayton announced that he would accept the Republicans’ June 30 offer with three conditions:

1. The removal of all of the policy issues on the Republican legislative leaders’ list from the remaining budget negotiations and from legislative action this year.

 2. A drop in the Republicans’ push for a 15% across-the-board reduction to the number of employees in all agencies, regardless of their funding source.

 3. The Republicans’ assurance that after all the budget issues have been resolved in a special session, they will support and pass a bonding bill of not less than $500 million.

Late Thursday afternoon the Republican leadership accepted Governor Dayton’s budget proposal.  But what are the implications of Dayton’s conditions and his acceptance of the June 30 Republican offer?

Several policy changes were introduced by Republicans at various points during their budget negotiations with Governor Dayton.  Some of the issues that had been discussed include: private school vouchers, a ban on cloning, a requirement that voters show photo identification at the polls, and an end to taxpayer funded abortions. While the Republicans have agreed to not bring up these issues again during the special session, they may wish to reintroduce them next year in a new legislative session.


In January, Representative Keith Downey (R-Edina) proposed legislation that would have required Governor Mark Dayton to reduce both the ranks of state workers and payroll costs 15 percent by 2015 through layoffs, early retirements, furloughs, wage and hiring freezes, and pension restructuring.  Downey, a management consultant, upon proposing his legislation argued that the Minnesota state work force is unsustainable and needs to shrink quickly.  He said that his proposal could save tens of millions of dollars in the FY 2012-2013 budget and predicted that once the cuts were fully implemented the state could save $150 million to $200 million a year.


Earlier this year, Governor Dayton proposed a $1 billion bonding bill with the intention of 'putting Minnesotans back to work.'  The rational for the new $500 million bonding bill follows a similar logic. Although Dayton has not yet specified what he would like to be covered in the bonding bill, his proposed bonding bill expenditures from earlier this year may be reintroduced.  These suggestions included $51 million for a Physics and Nanotechnology center at the University of Minnesota, $28 million for a Mayo Civic Center Complex, $20 million for a new Saints' Stadium, and $14 million for renovations of the Livingston Lord Library and Information Center.


One point of concern in regards to a bonding bill is Fitch's recent downgrade of Minnesota bonds from AAA to AA+. Often times such downgrades lead to an increase in interest rates.   However, thus far concerns about higher interest rates have not been confirmed.  According to Kelly Nolan of the Wall Street Journal the shutdown and downgrade have had little effect on Minnesota's reputation in the municipal-bond market: "Minnesota's bond prices are generally stable because there are relatively few of them.  The state has about $5.7 billion of general-obligation debt in the market... that is a fraction of roughly $90 billion in California and $60 billion in New York."


In addition to Governor Dayton's stipulations, the Republican's proposal for closing the $1.4 billion funding gap was critical to making a deal possible; however, they too have implications for the future of the state.


The proposal- which comes in two parts- is to effectively borrow the $1.4 billion from other state programs.  First, the state will borrow $700 million against future tobacco payments.  These are payments which were derived from a 1998 settlement with tobacco companies and are obligated to be made annually to the state of Minnesota.  The state can then sell bonds to investors based upon these payments.


Second, the state will delay 40 percent of aid payments to schools, making up the remaining $700 million difference, leaving schools with 60 percent of the funding they would normally receive.  In the past this accounting shift has been relatively common, and usually schools make up the difference by taking out short-term loans. The proposal this year is slightly different in terms of the amount delayed, which is normally only 10-15 percent. The effect is that more schools will have to take out short-term loans, and for greater amounts.


A special session to discuss the budget agreement and end the state government shutdown has not yet been scheduled.


(MPR Photo/Jeffrey Thompson)


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The Freedom Foundation of Minnesota is an independent, non-profit educational and research organization that actively advocates the principles of individual freedom, personal responsibility, economic freedom, and limited government. 

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