Surprise! Minnesota Budget Forecast Delivers Bad News
Just a few days before the beginning of the 2016 legislative session, legislative leaders received some unexpected bad news: A previously healthy $1.2 billion budget surplus projection had dropped by $300 million to $900 million. The 25 percent drop in surplus dollars basically wipes out many spending and tax cut opportunities that leaders had hoped to enact during the short legislative session set to convene on March 8, 2016.
Legislative leaders were quick to draw lines in the sand. Senate DFL Majority Leader Tom Bakk said his caucus would forego consideration of any major tax cuts and House Republican Speaker Kurt Daudt tamped down expectations for any new transit funding. Even Gov.Mark Dayton conceded that the new budget projection probably puts his two main priorities – transportation funding and early childhood learning – in deep jeopardy. In other words, resolution to the already complex legislative puzzle of bonding, tax cuts, spending and a major transportation funding package just got that much harder to solve. The Star Tribune editorial board opined that legislators should simply meet in order to pass a comprehensive capital spending package and leave the budget surplus on the bottom line until they come back next year for the 2017 legislative session.
Short Legislative Session—Huge November General Election
With an election year looming and all 201 seats of the Minnesota legislature up for re-election, the legislature will start unusually late this year and meet for a total of 10 weeks through late May. The late start is part luxury and part design: The previously-reported $1.2 billion surplus was supposed to make the work of the legislature a lot easier. Legislative leadership had hoped to narrow the number of issues the legislature takes up this year in order to avoid controversy heading into the 2016 general election.
Legislators have many ideas of how best to spend the budget reserve, including paying cash for transportation and traditional bonding projects, a whole host of tax relief proposals, and a laundry list of rural Minnesota spending initiatives focused on rural issues in key districts that may well determine the outcome of the 2016 general elections and control of the legislature . Republicans currently control the Minnesota House by a 72-62 seat margin. The Minnesota Senate is under the control of the DFL Senate caucus by a 39-28 seat margin. Therefore, a turnover of six seats would determine the next majority in either body.
With the national political scene so volatile, legislators are very aware of the perils of not getting their work done, or worse yet, being called back into a special session by Gov. Dayton because they were unable to come to some agreement. The bad, late-breaking news on the lower budget surplus adds to the drama of an election year battle and only makes it more difficult for legislators to come to agreement.
Retirements Keep Adding Up
Announcements by legislators that they are choosing not to run for re-election continue to pile up. To date, 17 legislators have announced they will not be running for reelection. This trend is somewhat unusual because traditionally most legislative retirements come toward the end of the session, oftentimes on the last evening of the legislative session when the legislature closes up shop, adjourns and goes home to campaign for the general election. However, with Minnesota electing to have party primaries earlier in the year, legislators now need to consider that their local party unit endorsement conventions take place in the middle of the winter, months earlier than in the past.
Those legislators that chose to not run for re-election did so for various reasons ranging from moving on to new careers, family considerations or simply wishing to retire and wrap up their careers in public service. View the complete list of retiring Minnesota legislators.
The results of these retirements – and there are surely more to come – will be a legislature with many new faces. Coupled with legislators who lose in the general election, as many as 20 percent of the entire Minnesota legislature could turn over. The changes in the Minnesota legislature are sure to be transformational given the institutional memory and experience of the legislators leaving.
Traditionally a target for spending reductions, health care legislators seem to be expecting a somewhat quieter session in 2016. Traction for big, new initiatives are lower than usual, but the familiar topics of MNSure, MinnesotaCare, mental health and pharmaceuticals will no doubt be taken up for discussion.
House Democrats did announce a package of "next generation " proposals aimed at areas such as public program fraud and how out-of-network medical procedures are billed, but given the political environment any significant action seems unlikely. That being said, these issues could make for interesting campaign fodder come this summer and fall.
Water has become an increasingly important topic, with some reports classifying half of the state's waters as impaired. To that end, Gov. Dayton convened a Water Quality Summit last weekend to hear from companies and citizens about which water-related issues are important to them, and what solutions exist for the challenges the state faces. More than 800 people participated in panels and breakout discussions on a wide variety of topics, with many holding the agricultural and mining industries at least partially responsible for water quality issues. Read more on the summit ; the cooperating state agencies will be releasing a summation of the feedback they received in the near future.
Additionally, the state Senate announced this week that a new committee will be formed to oversee the financial dealings of the Pollution Control Agency, Environmental Quality Board, Board of Soil and Water Resources, Public Utilities Commission, and three sectors within the Department of Commerce related to energy and petroleum issues. The new committee will be chaired by Sen. John Marty (DFL – Roseville), and will be called the Environment and Energy Budget Division.
Two weeks ago, the Minnesota Chamber of Commerce coauthored letters to the editors of the major metro newspapers with labor groups. The message in the letters was clear: support a general fund transfer for highways and fund transit. That overtone is helping advance a transportation discussion at the Capitol.
This year’s Minnesota legislature stands a better chance than any legislature since 2008 of passing a transportation finance package. In 2008, in response to the I-35W bridge collapse tragedy that occurred August 2007, voters were open to a new fuel tax for the first time in two decades. That public sentiment helped to provide the momentum the bill needed to get over the finish line. Legislatures before and after 2008 attempted to pass infrastructure investment bills, but none have coalesced well enough to succeed.
What might the bill look like? There is no crystal ball in politics, but we can make some educated guesses:
- The Departments of Transportation and Public Safety will have technical language related to daily operations and federal conformity to the Federal FAST Act.
- There will be industry-specific language making adjustments affecting unique stakeholders.
- There will be a substantial road and bridge funding package that relies heavily on existing tax collections for auto parts sales.
- There may be new metro area sales taxes to fund transit expansion, including the South West Light Rail line.
A package like that should not have major political opposition because it offers something to all Minnesotans without increasing the fuel tax, which is very unpopular with voters. Legislators are all facing elections this year and do not want to defend a fuel tax increase, but also want to point to results as they shake hands and attend events this summer. A bill like the one above accomplishes both.
The tone in St. Paul coming from legislative leadership and stakeholders is creating a fertile environment for a substantial transportation package to pass – Transportation Committee chairs Tim Kelly and Scott Dibble are both very committed to passing a bill, a broad group of stakeholders are coming together, and the available budget surplus, all lend to moving Minnesota’s transportation system forward.
On January 25, Gov. Dayton released his bonding recommendations for the upcoming legislative session. The 2016 Minnesota Jobs Proposal leverages $1.4 billion in total state investment for $600 million in additional funding to create nearly 40,000 jobs. Much of the proposal would address critical infrastructure needs statewide including investments in water quality infrastructure, rail and pipeline safety, and higher education.
With a modest bonding blockage being passed at the conclusion of special session in 2015, it is expected that the Republican controlled House will have a more pared down bonding proposal. In discussions with key members, the House is likely to release a capital investment bill that is closer to $850 million. The Democratic controlled Senate is expected to release a bill somewhere between these two extremes, around $1 billion.
The February forecast came in below that of the November forecast. Legislators are carefully crafting strategies to complete session by the constitutional deadline of May 23. A tax bill and transportation package were left in conference committee at the conclusion of 2015, which must be addressed before legislators head home to campaign in their districts. It is not likely that budget targets will be set for other areas of the budget.
The Government Solutions team at Stinson Leonard Street provides a complete range of services to clients who need to interact with government at all levels, including businesses, trade associations, nonprofits and citizens' groups. If you have questions specific to the budget forecast, please don't hesitate to contact one of our team members listed below.