On August 14, 2007, there was $4.486 billion in state general obligation bonds outstanding; on Feb 1 this year the level stood at $4.339 billion. The government has to service these bonds (i.e., pay interest and principal) and this was currently forecasted for 2008 to be at the level of $409.4 million, up from $353.7 million in 2006, a rate of increase of 7.5% per year. The growth in the next biennium adds another $50 million in debt service costs. The maximum that was set for this year was $885 million, and with today's actions on line-item vetoes by Gov. Pawlenty we spent $777 (the $717 million today and the $60 million in the transit bill.)

Also worth noting: That bill obligates the state to issue bonds going forward of an additional $1.8 billion. While it has gas money dedicated to its expenditure, the state also has a guideline on debt service as a share of state personal income, which is unlikely to rise as the result of tax increases. It's not yet the binding constraint of the state's debt management policy, but any slowdown resulting from higher spending on fuel could cause the state to graze that 3% limit. Limiting the bonding bill to the lower figure chosen by Gov. Pawlenty today will give the state at least a little breathing room.

Labels: legislature, Minnesota, Pawlenty

A commenter on MDE says the governor is just announcing the bonding bill will be vetoed in toto. I should have taken the bet with Michael on the air Saturday, dang it!

Now the question is: Will the DFL try to override (which I'm told will fail in the House, but I've heard that before)? If they fail to override, will they offer a second bill? Will Keith Langseth pay a price for his $925-or-bust strategy?

Should make for more good show material!

UPDATE: I had heard the rumor he might cut down more than the $825 million limit, but my God!

Gov. Tim Pawlenty has signed a borrow-to-build plan after cutting out projects to reduce the price tag. Pawlenty decided Monday to use his line-item veto authority rather than taking down an entire $925 million bonding bill. The trimmed bill contains $717 million of general state debt.

Among the 52 rejected projects are the Central Corridor light-rail line linking Minneapolis and St. Paul, a Como Zoo gorilla exhibit and the proposed new Bell Museum of Natural History.

"Somebody has to be fiscally responsible. That job falls to me," Pawlenty said.

On the block was $81 million in easy pickings from the Central Corridor rail project and the now infamous gorilla pad at the Como Zoo. All told, more than $102 million came out of the Met Council requests (full list courtesy MPR.) The letter sent by Gov. Pawlenty to Speaker Margaret Kelliher-Anderson was quite emphatic.

I am very disappointed that the legislature ignored an understanding between my office and legislative leadership and my repeated warnings to abide by the state's longstanding debt limit. It is irresponsible to exceed the "credit card limit" that has been maintained by governors and legislators from both parties for the past 30 years. Doing so could jeopardize our state's strong credit rating and low interest rates. The overall limit is $885 million, including $60 million already allocated in the transportation bill. The legislature spent well beyond this figure.

In addition, this bill reflects misplaced priorities. As just one example, I find it inconceivable that legislators would fund a brass band music lending library and yet provide no funding for a much needed new nursing facility at the Minneapolis Veterans Home.

...The legislature should keep in mind that upholding the state's three percent debt service limit guideline is important to our overall fiscal well-being. Debt service is one of the fastest growing items in the general fund. Based on previously enacted bonding bills, the state's debt is projected to increase $239 million from the 2006-07 budget to the 2010-11 budget.

The St. Cloud Times reports that all the local projects survived. Larry Schumacher also speculates at the end of the article that the cuts below $825 million provide a little room for a second bonding bill and that the Governor's veto might indicate a willingness to logroll the legislature for the Veterans Home and Lake Vermillion projects. I doubt that will happen, though. Gary's description of treadmarks on Sen Langseth's back are probably enough reward for Pawlenty's work.

Labels: legislature, Minnesota, Pawlenty

Others are focusing on the Survey USA result that the State Legislature has a 28% approval rating. There's also the result that half of voters said they would be less likely to vote for those legislators who voted for the transit tax.

But, 58% approve the Governor's plan for closing the budget deficit. The crosstabs indicate a 55-28 lead with independents, and the plan is only opposed by self-identified DFLers by a 40-48 spread. The DFL plan has yet to be found.

Attempts to dent the Governor's popularity so far have not succeeded.

Labels: legislature, Minnesota, Pawlenty

In one of the sillier articles I've read, MPR is busy figuring out whether Gov. Pawlenty is qualified for Gold Elite on NWA. They even have pretty graphics. Does anyone check to see what the Legislature did for the month and a half before the Legislature even opened for session?

MPR is measuring inputs. What I care about is output. Has he delivered the production we expect from the governor? And how do I measure that? It's NOT based on how many times he talks with the DFL leadership.

"I've seen more of the former governors than I have of the current governor during the start of session," said DFL House Speaker Margaret Anderson Kelliher.

Kelliher said she's worried that Pawlenty has not been meeting with her or other DFL legislative leaders. She said the last time she met with the governor was on Feb. 13, one day after the legislative session started.

DFL House Majority Leader Tony Sertich said he hopes to see the governor come to the table as budget negotiations intensify.

"I think it's shocking. It would be shocking to Minnesotans to know that their governor and their elected legislative leaders have not been in the same room since the start of the legislative session," Sertich said. "I've seen him more on the Sunday morning TV talk shows ... than I've been in the room with him."

Now, go to the last paragraph for the punchline,

House Speaker Margaret Kelliher acknowledged she hasn't invited the governor to any meetings. She said she'd be happy to hold one in her office if the governor would attend.

So first, he was traveling, they didn't want to invite him to a meeting, but they are criticizing his travel. Doesn't that put a pretty big hole in this story? Second, she is willing invite him to HER office. Would she go to his? He is, after all, the governor.

And he's home tomorrow. How do we know? Governor Pawlenty will be with Michael and me on the Northern Alliance Radio Network on AM 1280 the Patriot. The show begins at 3pm CT, and Governor Pawlenty will join us at 3:30.

Speaker Kelliher? Call us at 651-289-4488 and extend that invitation. Who knows? He might give you his cell, and you could reach out and touch him any time you want.

Labels: Minnesota, Pawlenty

When I had a chance to interview Sen. Tarryl Clark yesterday on KNSI, I asked about the budget deficit and the decision to balance. Calling on this post, I asked whether these revisions would lead the Legislature to perhaps choose a mix of spending cuts and monies from the reserve that leaned more towards the latter. I intentionally did not say taxes, to not put words in her mouth to suggest she wanted to raise them. I cannot imagine the DFL wants to have two tax increases on its record this year. (They could prove me wrong, of course. But the size of the increase would not be large relative to the bad publicity, so I cannot see how it makes sense for them to go there.)

Governor Pawlenty is choosing a 40-60 mix.

The Governor’s budget solution reduces the growth in state spending by $341 million, uses $250 million of the $653 million budget reserve, and uses $250 million from the surplus in the Health Care Access Fund to maintain health care programs and eligibility for the disadvantaged.

There are some tax changes planned. Best news is a 1/8% cut in the state sales tax rate. That costs $77 million in the current biennium.

So you're thinking "wait! He got $841m in the paragraph above, but then spends $77m, and he needs $935m. Where's the rest of it?" There is some language in the last paragraph that indicates a couple of changes that, while maintaining the "no new taxes" pledge might be seen as a tax increase for at least one group:

The budget plan also includes a measure that will align Minnesota’s definition of a “foreign operating corporation” with the one used by the Internal Revenue Service and a program to collect money from individuals who owe back taxes to the state by matching data with financial institutions.

I'm waiting to read the full details before deciding he's moved first on the "close the foreign corporation loophole", but if not I'm not sure what that means. But the press release says "approximately 40% of the budget plan comes from spending cuts and additional revenues, 35% from balances or surpluses in non-general fund accounts and 25% from the state budget reserve." So there has to be somebody paying more.

Ah, here we are. The StarTribune details:

Pawlenty's proposal is at odds with DFL moves to increase aid to cities by $90 million and with bipartisan efforts to overhaul health care to increase coverage for under-insured Minnesotans.

The governor recommended paring $187 million from the state health and human services budget to make up for 20 percent of the shortfall in 2008-2009. Another $54 million would be cut from higher education.

Among the other steps, he proposed getting $102 million by doing away with a tax break that some corporations use to shield income from overseas operations.

Ugh. $54 million from higher ed. I guess I better start figuring out where to save some money in my office.

Altogether, though, a pretty good plan in my view, with a majority of money from temporary shifts and with a relatively light take on taxes, though I'm sure he's going to be dinged for closing the FOC tax break. We'll have that topic and more tomorrow on The Final Word.

UPDATE: Forgot to add the title.

Labels: Minnesota, Pawlenty

...it appears that we are going to be headed for a showdown between the governor and legislature again, because this deficit is too big to fix with reserve funds and other legeredemain. You either have to cut spending or raise taxes, and the battle will be for probably $500 million or so between the two.

From the summary document, a couple of interesting points relating to the discussion just below on the possibility of recession in the state:

Projected individual income tax receipts fell by $313 million from November’s estimates. The decline in the personal income tax is due to slower growth in wages and declines in non-wage income. The forecast includes a small decrease in capital gains realizations in 2008. Declines in portfolio income, which includes interest and dividends as well as capital gains, explain about 75 percent of the decline in projected individual income tax receipts since the November forecast.

So most of this is because of stock market concerns. The forecasting firm Global Insights not only is calling therefore for a lower stock market, but it is also imputing a larger decline in Minnesota for key driver variables -- the forecasts that are used to generate the revenue figures -- than is expected for the country. They forecast employment to shrink -0.5% in 2008, which is a slump, not a pause. The detailed report has a projection of a 23,400 job loss 2007:III to 2008:III (see p. 23). Wage and salary income rise 2.5% for MN in 2008 versus 3.6% in the nation; any reasonable guess for inflation would lead you to conclude that real wage income in Minnesota is expected to decline. I think the forecast is a driven very much by the housing situation,

Housing is critical to the Minnesota outlook. Construction is expected to lose approximately 13,500 jobs in 2008. This forecast assumes housing permits bottom out in the second and third quarter of 2008. In 2007 it appears that job losses in construction lagged the decline in building permits up to 3 months, thus a “catch up” period is anticipated in the forecast. If the housing slump continues to deepen, however, it is unlikely that Minnesota’s economy will perform as expected. (p. 28)

...and I wonder if this is perhaps a bit too pessimistic. Total MN employment in construction was 112,432 in December 2007, down almost 6,400 from that time in 2006. You are telling me that you expect the rate of decline in the housing sector to more than double?? I sincerely doubt that, as it would drive down the level of employment in construction to 1997 levels. Tom Stinson said last week at the St. Cloud Economic Outlook that he thought prices in housing had to come down another 20% to reach equilibrium. Again, I'm not seeing why this figure is enough to lead to a double digit decline in construction, which has already shrunk.

Regardless of whether this figure is a little too high, it's unlikely we get to mid May without some adjustment of taxes (who knows, maybe they will tax clothes now.) Governor Pawlenty says he will use spending cuts but not in K-12 education. Expect the Legislature to talk more about tax loopholes (that's a technical term for "income the government doesn't currently tax but wants to".)

Labels: economics, legislature, Minnesota, Pawlenty

The battle over the budget deficit -- with a revenue forecast still ten days away -- is heating up and before we even get to that the Minnesota Legislature is trying to salt away some money for transportation. I talked a little below about a corner of that debate, but let's get some additional information together.

The big news today is that the Legislative Auditor produced a report on transportation that said several things. I'm reading the report in bits, so don't consider this a thorough review, but what I have gleaned is this:

1. "After 2003, inflation-adjusted revenues from Minnesota motor vehicle and fuel taxes declined, and the state made substantial use of debt financing to support the state trunk highway system." According to the last Tax Handbook, Minnesota collected $650 million on the gas tax in 2005 and $646 million in 2006. Which will of course lead people to think we aren't taxing enough, but consider the reasons offered: people are driving no more miles than before, in no small part because of more efficient vehicles and rising gas prices causing a reduction in the amount of gas used. Now I doubt we've raised the price of gas to the point where it's elastic in demand -- which would mean the gas tax revenues would fall for an increase in gas tax rates -- but it's almost certainly true that it's more elastic than previously estimated, so that a proposed 42.5% increase in the gas tax rate will not increase the amount of gas tax revenue raised by anything close to 42.5%. Yet it appears from reading the research summaries on the transportation bills that the DFL intends to spend more than $300 million per year on transportation, immediately freeing up that amount from the bridges to make pork.
2. "Since 2002, the ride quality of state trunk highways has generally declined. The structural condition of bridges has generally improved." Call me paranoid if you must, but I think that second sentence isn't going to appear in news reports. MnDOT uses some qualitative measure of ride quality and for principal highways aims for 70% of them in good or very good condition. It looks like we're at 66-67% rather than 70%: Not very good, but we seem to be exerting a lot of effort for 3% improvement. Expected remaining years of useful life of the roads has indeed declined, but this was not enough of an emergency for the Legislature to pass anything more than a lights-on transportation bill. If the highways are in such dire condition, why is the Legislature this year threatening to not fund transportation unless their one bill is passed?
3. We've spent more on highway expansion than on highway preservation. OK, that one looks real, though in a state where population is moving so dramatically away from the west to the east, do we really want to spend money preserving roads in places the people have left? 21.5 per 100 in-migration to Sherburne County, with large gains also in Isanti and Morrison counties. Name a western county, and you will see population decline. I find the LA's analysis, though correct, a little too macro-oriented. But because the Legislative Auditor isn't thinking that way, the office is arguing for much greater spending on highways.

So with that in mind, look at where we are. The DFL leadership came out with a press release today decrying the lack of money and that we need the tax increase. Not that it will do a thing for the deficit if it comes forward -- indeed, my argument is that the DFL is hurrying this bill along because they fear the revenue forecast will suck all the air out of this plan, forcing them either to pass more tax increases for that or cut spending, in which case nobody will be able to support both a tax increase for a budget deficit AND THEN a tax increase for transportation. But if they can pass the transportation tax increase first, they can pretend that didn't happen while fixing the budget.

Meanwhile, Governor Pawlenty continues to say he's going to veto the transportation bill.

Brian McClung released a statement in response to the DFL news conference. In his statement, McClung said:

"We appreciate the legislative auditor's report. It contains many helpful suggestions that we expect MnDOT to implement. Regarding the DFL press conference this afternoon - it appears DFL legislators are determined to pass a massive and overreaching $8 billion tax increase that the Governor has said he would veto. Just recently, DFLers increased the overall amount of their gas tax hike to 8.5 cents, in addition to license tab tax and sales tax increases. They are essentially disregarding the Governor's concerns and appear to believe they have the votes to override a veto. We'll soon find out the answer to that."

The governor's red veto pen is going to be challenged early, and while I am not sure this is more than a wild goose chase, the DFL is undoubtedly trying to buy some votes somewhere. (At least AAA's girlfriend got a good meal.) It's easy to have it both ways as Drew Emmer suggests -- you could have six GOPers vote for the bill but then vote to uphold the veto (they'd've voted for it before they voted against it.)

The Governor is taking an ax to the state payroll, implementing a hiring freeze. Now, there are some folks who are trying to make an argument that savings by budget cuts are just as harmful as tax increases. The logic is pure Keynesianism: if you cut spending by a dollar there's a dollar less of aggregate demand, but if you increases taxes by a dollar some taxes are paid out of savings, so aggregate demand only falls by the part that is funded by reduced consumption. It's part of those bad principles of macro courses where the instructor teaches the students government spending and tax multipliers. But, the story is always told using lump-sum taxes. For it to be right, the taxes must be taken from the public in some way that doesn't change the return on labor, capital, land or entrepreneurship, or alter the relative prices of goods purchased. (A head tax would be one example.) If the tax change DOES change the return on any productive resource, then the tax increase will decrease the supply of output and has an effect that could be more harmful than a spending cut. Increasing income taxes would be one example of a tax that changes the return on productive resources. It's an empirical question, as I often say, and the devil is in the details. Don't be fooled by simplistic explanations.

Still working on some other items so this post tonight might have to substitute for more over the next couple of days. We'll see. 80 days down for the Legislature (including the one in Special Session), 40 to go.

Labels: gas, legislature, Minnesota, Pawlenty, taxes

I had mentioned briefly in my review last night two comments at the top of Larry Schumacher's live-blog of the State of the State address here in St. Cloud. To repeat:

State media folks are saying this sounds like a speech from a guy who hopes he's not going to be governor for much longer.

Locals who were expecting some kind of announcement regarding St. Cloud are walking out scratching their heads and asking why he came here.

Dave Aeikens of the Times said on my guest stint on the KNSI Morning Show this AM that the first comment was something that didn't make the newspaper, and that to do so it would have needed attributable quotes. Obviously that wasn't the plan; Larry was making a note about something he was hearing in the press row. I will let readers decide what the meaning of that note was; I think it's fair to say the press is currently reflecting back some of the combative nature of political discourse in St. Paul right now. (And I agree with Aeikens that an adversarial press is an important part of democracy, but I don't know that Larry's first sentence is evidence of that. Again, you decide.)

But he did write an article about the second sentence, titled "Speech attendees expected big news". The point seems to be that while the speech lavished praise on the city, we did not get goodies.

Yet many local residents lucky enough to get an invite from Pawlenty's office to the speech at St. Cloud's Civic Center walked out of the room scratching their heads afterward.

"We're of course pleased that the governor recognized the hospital, especially for its efforts at transparency and quality, where we think we're a little ahead of the curve," said David Borgert, government relations director for CentraCare Health System. Borgert was at the Civic Center to hear Pawlenty's speech in person.

"I'm still a little mystified why he came to St. Cloud, though," he said. "I think maybe we were hoping for something after Rochester."

Of course, that's 2005 when Rochester was the site of a state of the state address in which Pawlenty unveiled a plan for a University of Minnesota campus in the city. As Mayor Dave Kleis mentioned later this morning on my show, we already have the best university in Minnesota. (Full disclosure: Dave's a graduate of our university, and took a class from me while he was here. This fact makes me feel very old.) Mayor Kleis said some people were inquiring in the weeks after Pawlenty requested to give the address here whether it meant there would be a big announcement, but no representations were made that the Governor wanted to use St. Cloud as an illustration of Minnesota values.

The rest of the article does not really refer to anything relating to expectations regarding St. Cloud -- it contains the usual plaints for economic stimulus (stabilization policy being something most economists would doubt a state could enact notwithstanding) and scorn on Pawlenty's veto pen from lobbyists for more money for roads. And, of course, this little bit of scaremongering from our state senator.

Just a couple of blocks down from the Civic Center, the Minnesota Highway 23 DeSoto Bridge crosses the same Mississippi River that Pawlenty praised in his speech, said Sen. Tarryl Clark, DFL-St. Cloud.

But Pawlenty's transportation bonding plan wouldn't make any new money available for replacing the state bridge and others that share the same design as the Interstate Highway 35W bridge that collapsed last year, while the DFL plan does, she said.

"Even our bill doesn't have the money to do all that needs to be done," she said. "But at least it would let the Department of Transportation start figuring out which of these fracture-critical state bridges to address first."

Of course the governor's bill does have money for bridges (discussed here earlier) and the MnDOT has already made some decisions about which ones to address first. But Sen. Clark must not like those choices, and so refers to the DeSoto Bridge as "fracture-critical" to help drum up support for an unpopular gas tax hike.

But in general I thought Senator Clark's response to the Governor's address, while filled with DFL initiatives about which we'll disagree, at least managed to thank Governor Pawlenty for coming here. She called the show this morning as well and while she did say she thought the governor might offer something more for St. Cloud she didn't seem to make a very big deal about Governor Pawlenty not playing Santa Claus. Good for you, Senator. Gary has Rep. Haws response as well, which also takes a polite and grateful tone.

I'm frankly embarrassed by the Times article, however. A governor comes to St. Cloud, highlights St. Cloud and central Minnesota values, praises a local hero and lifelong public servant, and the local paper runs an article that sounds like a skit from an old Saturday Night Live where a comedienne keeps whining "Where's My Stuff?" I cannot imagine Pawlenty reading that with his morning breakfast without thinking "what's a guy gotta do?"

So to Governor Pawlenty, on behalf of at least those I've spoken to this morning but I think for many more, thank you for coming to St. Cloud. We've never had a governor bring the entire government of the state to our city to say "Much of this area is built on solid rock. This area's values reflect the strength of our state and the goodness of our people." And when we hear it, we know how to be grateful.

Labels: Minnesota, Pawlenty, St. Cloud

Well that was fun! Governor Tim Pawlenty came to St. Cloud to give the State of the State address, which Larry Schumacher found to be rather combative in tone.

State media folks are saying this sounds like a speech from a guy who hopes he's not going to be governor for much longer.

Locals who were expecting some kind of announcement regarding St. Cloud are walking out scratching their heads and asking why he came here.

Republicans looking for a good, partisan fight against the DFL are maybe the happiest people in the room today.

I'm a bit surprised by the editorial comments expressed by "state media folks". Don't they just report the news any more?

Also, within the speech, Larry notes many compliments made about St. Cloud businesses and organizations. He also paid tribute and a standing ovation was given to former mayor Al Loehr, which was certainly worthwhile. I find it interesting that the only reason someone would think the Governor would deliver a speech outside of the capital was to deliver goodies. I heard nobody as I left the speech expressing what Larry suggests.

Governor Pawlenty did at one point take out his taxpayer protection pen, by which he meant his veto pen. From the speech:

As we tackle the deficit, we must remember that Minnesota's hardworking familes are already squeezed enough. They're paying more for gas, food, and health care. The last thing they need is government rummaging around in their pockets looking for more. Government must learn to live within their means. We should not add to the burden of Minnesota families by raising their taxes.

Moreover, the well-being of the people we serve depends on their ability to have good-paying jobs. That, in turn, depends upon the willingness of companies to invest, stay, and grow in Minnesota. However, Minnesota's tax policies, job climate, and large government discourage economic growth.

We need to reduce taxes and regulations that discourage job growth, income generation, investment, entrepreneurial activity, research and exports. We'll need to do that in a manner that also leaves us with a stable state budget.

Our current tax system reflrects the economy and demographics of the 1960s. It's outdated and needs to be fixed.

I would have hoped for more ideas than a tax reform commission that Pawlenty called for, but
it shows a commitment to reducing the cost of doing business in Minnesota. He also called for a cap on property taxes, about which I have mixed feelings but would like to hear more about, as it pertains to Minnesota.

I was sitting next to someone heavily involved in regional transportation issues, and he had said Pawlenty would say nothing about transportation. I was sure that, after the DFL's announcement of plans last night (covered by Gary Gross) that there would be something. I should have bet my friend.

Just a few weeks ago, I announced my bonding proposal that includes four times more funding for local roads and bridges than ever before.

I would caution legislators not to delete this important funding from the bill to insert less important projects.

My friend had suggested before the speech that the governor had made the transportation lobby a new ally in the U of M and MnSCU systems, who want the DFL to pull transportation out of the bonding bill to make room for more of their projects. (I had suggested just that last month.) No such offer appears forthcoming from Governor Pawlenty.

I think the DFL got the message:

The governor's address drew a tepid reaction from DFL leaders. House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said she was disappointed that deficits and a way to jump-start the state's economy were not featured.

Assistant Senate Majority Leader Tarryl Clark, DFL-St. Cloud, said she thought that there was "a lack of vision" in the speech and that "the veto threats were not very productive."

Depends on what you're trying to produce there, Senator. Could it be ... pork? Could it be ... favors for your block of voters and contributors? Not sure why you'd think the governor would have a vision for that.

The governor thinks lower taxes is a winner. The DFL thinks taxes for roads and bridges is a winner. This should be a fun session.

Labels: Minnesota, Pawlenty

Governor Pawlenty's bond proposal came out this morning, and the St. Cloud Times headlines what is not in the bond:

It does not include requested state dollars to expand the St. Cloud Civic Center or to remodel and expand the National Hockey Center at St. Cloud State...

...two major projects local leaders have had on their minds for quite some time. How long until we hear Sen. "No-no-no", who has in the past pumped for more for the hockey center, has another fit about Governor Pawlenty's thrifty ways?

SCSU is proposed for money for Brown Hall, an old classroom building that has laboratories as old as me. (Rep. Steve Gottwalt told me about touring the facility and the faces of the legislators as they walked through; I think they keep one lab particularly antiquated and nasty-looking for the tour.) In the note from the faculty union reporting this to us, the lobbyist noted,

Concern over neglected transportation infrastructure is causing transportation funding to squeeze other segments of the capital investment bill. This means we have a stake in the outcome of the gas tax debate—if roads and bridges are funded out of a gas tax increase it would mean more bonding authority would be left over for projects such as higher education projects.

I wanted to emphasize this point: The gas tax for funding transportation is not used instead of bonds (or in the slang used by DFL legislators, "the credit card") but in addition to bonds. We will pay just as much interest either way -- we'll just have less private investment increasing productivity with which we pay off those bonds with our future taxes. The gas tax makes government bigger; the discussion of the means of funding is just smoke. And it is highly unlikely the Legislature adjourns and the House goes to the voters without a bunch of money spent on bridges; the demand is still there.

There's plenty not to like about the governor's bond request -- I might start with $70 million more down the Central Corridor rat-hole -- but funding of bridges through bonding is certainly something to like. The "benefit principle" of public finance says that the people receiving the most benefit from a public good should be the ones that pay. That's one reason why we ask people to pay fees to enter state parks, for example. The alternative principle is "ability to pay." But in either case bonding can be the preferred option. Bridges last 30-40 years or more, and there is no reason why we should expect the current taxpayers to fund the driving of individuals using the bridge a generation from now; bonding assures that those driving the bridges are paying for them. And if investments in infrastructure like bridges are to increase state productivity, then the income of future generations will be higher than those in the present. If it is enough higher, the tax burden will be lighter on future than current generations, again arguing that some of the cost be shifted forward. Under any reasonable assumptions about the value of future Minnesotans' utility or satisfaction versus the value of present Minnesotans' utility, it is good public policy to use bonding. (Of course this may be controversial, as we've been arguing for some time over the rate of discount of future generations in the global warming debate. You'd have to work the math a bit to convince me it matters here.)

Now part of the problem, in my view, stems from what appears to be a formula that translates the size of the state budget to the size of the bonding proposal (which would put the amount planned here at about 3% of the biennial budget.) I had Rep. Larry Haws while I guest-hosted on the KNSI Morning Show a couple of weeks ago in which he made some reference to this; about the only sense I could make of this -- assuming there is some formula they use -- is that it keeps the rating agencies happy so that the interest cost of debt stays predictable. But one could easily imagine that cost-benefit analysis could be applied to the bridges to argue for an amount of bonding above this formula, as long as the return on investment was sufficient to cover the opportunity costs. Much like Nixon-to-China, it may be up to the DFL to come up with a way to use cost-benefit judiciously to make the case for a larger bond.

UPDATE: Lileks wonders about light rail. See moreover this from the LA Times (h/t: Peter Gordon):

Paradoxically, the MTA's rail projects, which required fare increases and reduced bus services, have cost the transit system riders. Using MTA data, our analysis indicates that they produced a drop in train and bus ridership of more than 3 billion boardings from 1986 to 2007.

Although we've now gotten back to 1985 levels in terms of public-transit use, the county population has grown by more than 2 million since then. That means, on a trip-per-capita basis, the transit system is still not performing -- by 20% -- as well as it did 22 years ago.

Labels: cost-benefit analysis, economics, legislature, Minnesota, Pawlenty

See if you can spot the flaw in Senator Tarryl Clark's latest press release?

Our state is like a car stalled on a cold winter morning. We have the jumper cables out, but the governor is choosing to just drive by and wave.

How is it that there are two cars? What car is the governor driving?

Any government spending must be paid for by taxes. Any additional employment created by the government is offset by the loss of income to those workers who used to receive the money now collected by the government in taxes.

There's only one car, and Clark, Pawlenty, and you and I are all in it. To use her metaphor you would have to connect your cable from your own to battery to your own battery. I'm dumb enough to have tried that once. The car did not start.

h/t: Larry Schumacher

UPDATE: My further thoughts on the DFL plan to "create" jobs at the Minnesota Free Market Institute. Craig Westover notes as well,

“Clark’s government job creation proposal is interesting in that just two paragraphs earlier, she writes – ‘Small business and a strong middle class are the real engines that drive and sustain job creation and retention. It’s the aspiration (emphasis hers) to acquire wealth to pay for college, vacations or retirement by building a business or working hard at a job that spins the economic engine.’

“Well, okay – What better argument for a progressive tax scheme that takes more of the marginal dollar as a person acquires wealth and moves into higher tax brackets, not to mention the benefits to our aspiring, wealthy wannabe of state government raising taxes and taking investment money he or she could use to expand a business and using it to compete in the labor pool with our guy or gal by building tourist centers and hockey arenas when he or she could be using the investment capital and labor to build a factory and ‘spin the economic engine.’

Labels: economics, legislature, Minnesota, Pawlenty

It is of course unsurprising that a StarTribue editorial would promote higher taxes as a cure for the state budget shortfall, even while admitting the reserves would be sufficient to cover the deficit. But its last paragraph belies some oversimplified economic thinking.

Pawlenty rejected any state tax increase yesterday, saying he considers the best economic stimulus "more money in Minnesotans' pockets." While money in private pockets can produce economic good, if it stays there, it won't buy the roads, transit, schools and other public assets that a robust economy requires. Strategic use of resources for economic betterment must be state government's guiding principle now.

The state cannot spend money it does not first withdraw from the economy through taxes, so there is a question of whether the government can spend the money more "strategically" than private citizens do. And if people save, says the STrib, that's bad.

This is of course the old Keynesian wheeze of the "paradox of thrift". It hypothesizes that any dollar received by a Minnesotan that is not spent on other goods and services produced by Minnesotans (or at least sold by them) is a leakage from the economic system. To offset that leakage, government spending should be injected into the economy. But of course the dollar the state injects is just a dollar leaked out in higher taxes. The usual story is that state government spending is subject to a "balanced budget multiplier". (Here's AmosWeb with a review of multiplier analysis for those of you who remember it vaguely from a principles class in the past. See also the one for tax multipliers.)

With states there's the additional complication of spending on goods from other states and countries. The simple balanced budget multiplier is equal to 1 if there is no leakage to purchases of goods and services from other jurisdictions, otherwise it is quite likely less than one. For example, the St. Cloud area employs about 14% of its workforce in retail sales, but retail produces only 8% of its area GDP because much of the goods sold come from outside St. Cloud.

How is it that the STrib knows that dollars spent by the state government will be more sticky in the state economy than dollars spent by private individuals? Even if we assume the tax dollars taken in come from those "idle balances" in people's savings accounts, it may very well be that the dollars expended must use resources from outside the state. Furthermore, expectations of higher taxes later to pay for bonding requests may lead individuals to save more now (a story economists call Ricardian equivalence.) In fact, there is no reason to believe a priori that state governments can be at all stimulative to their economies -- though particular programs might be found to do so after the fact.

Add to this the efficiency arguments, that private citizens will better know what to buy to improve their welfare than governments will, and a solid case can be made for not increasing taxes to stimulate a soft state economy.

There may be a case made that Pawlenty's plan -- offer individual property tax relief across the board, paid for by closing the foreign operating corporation tax loophole -- could be more stimulative. I don't know that this is true, but it is something to be determined by an efficiency argument that I can see one making. There is a commission working on these very issues right now with representatives from the Governor's office and the Legislature. I'd wait to see what they find before making any recommendations.

Labels: economics, Minnesota, Pawlenty, taxes

I was at the Patriot Saturday when Michael noted he received a press release from the Governor's office that said a deal he had agreed while in India regarding Essar Group's purchase of the Minnesota Steel and to construct a new plant in Hibbing. News reports describe the problem:

The Essar Group closed Monday on a deal to buy Minnesota Steel, planning to begin construction on a steel mill near Hibbing early next year -- a project that Pawlenty said holds great promise for the state of Minnesota. But later in the week, federal officials contacted the governor to inform him of Essar's possible ties to Iran.

Reuters reports that Essar plans to begin work on an $8 billion to $10 billion oil refinery in Iran early next year, working with the National Iranian Refining and Distribution Co. Such a deal may constitute or lead to business practices that are prohibited by the U.S. government. Pawlenty said Essar officials have confirmed talk in Iran, but say they do not have any commitments there.

If the federal government finds Essar's actions in Iran to be a violation of U.S. policy, Pawlenty said he would withdraw his support for the company's planned steel mill on the Iron Range.

The deal includes $30-60 million in state money for the Iron Range, and potentially scotching the deal has got the Ranger Mafia up in arms.

"It never ceases to amaze me how this governor can change his mind from one day to the next. It's frustrating that a project we've been working on for seven years is finally picked up on by the Twin Cities media a couple of days ago when the governor says it's going to be a good deal for the Range and state. Then days later, a complete reversal," said state Rep. Tom Rukavina, DFL-Virginia, in a telephone interview Sunday evening. ...

"I was stunned. This is so extraordinary. We were told the meeting with Essar went well (on Thursday) and then he gets back to Minnesota and immediately draws this line in the sand. I find it puzzling," said state Rep. Tom Anzelc, DFL-Balsam Township.

Anzelc said he had been out at some hunting shacks talking to some guys prior to next weekend's opening of the deer firearms season and had also been to an anniversary party.

"People are puzzled. But they're still upbeat. After all, we're Rangers," he said.

What on earth does that mean, "we're Rangers"? We're used to getting our way? We're used to getting easy money from the state?

So while the governor says "There are certain things in life that are more important than a steel mill," the Rangers think that trading with a company that deals with Iran is no big deal. All of a sudden, Rangers like globalization.

As to whether there should be a concern of a potential new corporation on the Iron Range and in Minnesota would have dealings with Iran, Anzelc said, "Sure it's a concern. But it's a concern that will always be there when you are engaging in a global economy with a very tense geo-political situation.

"We can't control all the countries of the world and all their actions. Essar is a company from India interested in building a steel mill using our iron ore because it's a steel company that has a market. Our traditional domestic steel interests don't have those interests available. That's why it's Essar," he said.

"Let's look at China. It's the largest communist country in the world with the third largest army. But we're sending them plenty of materials and they're sending back a lot of cheap goods that people buy ... not me. Look at Pakistan. Every T-shirt you see is made there and they're sheltering Osama (bin Laden, the architect of the 9-11 terrorist attacks that killed about 3,000 people in the United States). And we're worried about India building a refinery?" Rukavina said.

You know what? Give me a search warrant and fifteen minutes, and I bet I can find items from China and Pakistan in Rep. Rukavina's home.

But this isn't just trading any ol' thing. This is a refinery. One of the real possible places where the U.S. has leverage with Iran would be a military strike on the one refinery the country has. Iran would like very much to have another refinery to reduce that pressure; U.S. interests are clearly in keeping this from happening via peaceful means. Why the state of Minnesota should give money to that company that helps them build the plant is quite beyond my reasoning skills, but I'm no Ranger.

Labels: Iran, Minnesota, Pawlenty, politics

I'd encourage you to read Larry Schumacher and Charlie Quimby on lack of transparency in Minnesota government. Charlie's correct to write:

Last session, the legislature passed, and Governor Pawlenty signed, the State Government Omnibus Bill, which contained a provision for a web-based contracts disclosure system. But no money was appropriated to create it.

This is just one example of the political struggle to reconcile public demands for more government accountability with pressure to control spending. One side says, here's a needed reform and the other side says, fine, but don't spend any money on it unless you cut something else.

The bill passes with bipartisan support and everyone is on record as being in favor of greater transparency, but there's no money or accountability for actually making anything happen.

This results in a patchwork of the good, the bad, and the unfunded.

I can tell you about how contracts work through our university system, but I can't show you who got paid for what, even though there's no problem with you coming to the library here and getting data on my salary. There's enough blame here to be bipartisan; we should ask our candidates next year if they intend to fund this program.

Labels: legislature, Minnesota, Pawlenty

Governor Pawlenty has a brand new program for rural economic development. Leo Pusateri at True North details what's in the Strategic Enterpreneurial Economic Development program, or SEED. Part of the initiative has the usual attempts at leveraging informational advantages governments have, so it creates trade shows and an Office of Entrepreneurship. That sort of thing may or may not help businesses, but at $2.1 million proposed it's small beer.

But the plan also creates a set of tax credits and micro-lending initiatives for rural businesses. Micro-lending is a fad in international development, even to the extent of creating a network of private loans from households to the developing world. But are we really to believe many entrepreneurs in Battle Lake, say, are being inhibited by not having a bank lend them $20k when they have a solid business plan? And should the government give a 25% tax credit to someone who invests money in an "angel" fund? These things are becoming a bit of a fad in economic development. The tax credits go to people with high net worth -- those are the angels -- and thus will be subjected to a good deal of demagoguery by the Left.

Likewise, SEED expands on JOBZ by adding grants for developing main streets and infrastructure in rural Minnesota. I've noted before that JOBZ is more about job- shifting than it is job creation. But even if the money was attractive, do we think the population drain in outstate Minnesota is going to be solved by an extra $70 million in loans and grants? That strikes me as unlikely to make much of a difference.

All this, of course, is an attempt to deal with the disappointment that both Republican and DFL leaders have had with the impact of JOBZ on outstate Minnesota counties. (Notice the targeting of SEED to rural MN.) In floor debate in the Senate last March,

[Senator Tom] Bakk said the eventual elimination of the Job Opportunity Building Zones (JOBZ) program is an admission of error on his part. Bakk was the Senate sponsor of the proposal four years ago. The program was intended to help economically depressed communities across Greater Minnesota, he said. Reports from the Dept. of Employment and Economic Development have indicated that economically depressed communities have not benefited, he said. Bakk said he has learned that the business tax climate has very little to do with a business’s decision about whether to expand or relocate in the state. The real obstacles to economic development are transportation, workforce availability, and other infrastructure matters, he said. (Link added.)

It's worth noting, by the way, that the Legislature is doing a review of JOBZ, with a report due in February. It will be very interesting to see how that review affects the chances of the Legislature's approval of SEED.

Labels: economics, Minnesota, Pawlenty

While I was traveling, Mark Brunswick has posted a story on the local government junkies saying they can't wait four months for their next fix.

When legislators will meet again in February, will they really pass a gas tax increase in an election year? Will the housing implosion by that time have dried up revenue that could have gone to property tax relief as the economy turns sour?

A property tax bill vetoed by Pawlenty would have given cities like Hibbing a 10.1 decrease in its tax levy. Without the tax bill it is facing a 9.9 percent increase. Minneapolis would have received over $13 million in new local government aid. St. Paul would have received more than $9 million.

Tom Kuntz, the mayor of Owatonna and President of the Coalition of Grater Minnesota Cities, said cities awaiting help for local government aid cannot wait. Local budgets are being finalized by the first of December and a special session is needed by mid-November, he said.

“If the economy turns sour they don’t have the dollars to work with, there’s no chance in heck of getting an increase in local government aid.”

Well that's the game right there, isn't it? The state government cannot, of course, run a deficit, so if they pass the spending bills right then and there, the state will have to make up the money with a tax increase in 2008. But that wouldn't be blamed as much on these local weasels officials. So get your fix while your dealer is still offering credit? Particularly when the governor has said in the past "we'll get you that LGA."

Governor Pawlenty, I suggest you go on a very long trip. Milan is beautiful; I have an osteria I can recommend that is cheap and pours a free negroni at the end of your meal. Come back in January, sir, have a great time. We'll keep an eye on things while you're gone.

UPDATE 9/20: Drew has some interesting speculation about a quiet move made by the DFL leadership during the special session that might increase pressure for a second special session.

Labels: legislature, Minnesota, Pawlenty

The special session, that is. Starts tomorrow night, 5pm, expected to be for one day. According to the StarTribune report,

Pawlenty's announcement, which came at a quickly-called news conference this afternoon, followed weeks of negotiations in which Pawlenty and legislative leaders dickered over the agenda for a one-day session.

On Monday, flanked by top House DFL and GOP leaders, Pawlenty said the package, which could go as high as $160 million, should be divided between the state’s cash-on-hand and long-term borrowing.

Senate Majority Leader Larry Pogemiller, DFL-Mpls., who has been the hold-out against any special session-borrowing, was absent from this afternoon’s announcement.

Earlier in the day he had sent Pawlenty a frosty letter saying that he would not stand in the way of a special session that included borrowing, but did not see the need for it when the state has more than $300 million in surplus funds.

Attaboy, Larry, peevish to the end. "I won't stand in the way" -- now that's real leadership. I suspect Tom Bakk is measuring curtains for the new office.

Pawlenty split the baby with the DFL on the split between borrowing and drawing down the reserve -- $80 million could be missed come February if the budget forecast comes out as badly as I think it might. But I suspect this was a quick way of solving the impasse, a fig leaf for the DFL that gets nothing on transportation and LGA and has to like it.

The PiPress initial piece says

Most of the relief money will help the August flood victims. A bit of it will help victims of the summer's drought and previous natural disasters.

I'm quite certain that isn't the Rogers tornado from last year, so I can't quite figure out what "previous natural disasters" this refers to.

Labels: Minnesota, Pawlenty, pogemiller, politics

The debate over the special session continues. The terms of the trade -- agreed agenda for call to St. Paul -- are narrowing.

The DFL has offered a summary to the governor that includes only funding for the flooded areas of SE Minnesota. It's a fairly comprehensive list. What strikes me is what is not there, which is how to pay for it. Gov. Pawlenty responded this morning and saw this was the problem too. Here's what he still wants:

1. A dollar figure for the spending, which the governor suggests can rely on estimates from FEMA and state and local agencies. He is to provide this number today. He has already acted on some requests and sent $32 million to the area.
2. Bonding authority for any capital spending "related to flood recovery, rebuilding and mitigation as well as authority for the I-35W bridge if we mutually agree it is needed."
3. "I am prepared to call a special session if you will also confirm your understanding by letter that the session will last no more than one calendar day, the agreed upon flood legislation will be the only legislation considered and passed, and that the Legislature will then adjourn sine die."

That's it. No gas tax. No LGA. Nothing else. Not even the seminar on conservatism some people seem to prefer.

The bonding piece is the part that has to happen. It's a way to prevent the DFL from coming back in February and proposing tax increases to "correct" the deficit "created" by Pawlenty by shifting money like that $32 million. Not that this is likely to stop them, but it removes one argument, and is worth holding out for. It's why Pogie is saying right now there's money on the bottom line they can use. Yes, for now, but come February he'll suddenly be lonely for it.

Believe it or not, that's what the sticking point at the end of this thing will be: to bond, or not to bond? Given the amount of backpedaling the DFL has done so far, I expect there will be bonding.

Labels: legislature, Minnesota, Pawlenty

On the air last weekend, I said that if Governor Pawlenty could in fact begin moving monies towards the flooded areas of southeastern Minnesota and towards the I-35W bridge repair, the DFL would ask to come back to the table for a more limited special session to get at least some credit for the clean-up. Pawlenty's task, I said, was to make sure the relief looked real and like it would cover everything. Thus putting up a site like Minnesota Recovers, replete with a TPaw quote on the masthead, is damn good politics. So too is changing the timing of municipal payments. It didn't require any action of the Legislature, and let all the credit go to the executive. Do that, I said, and they will have to take the limited focused session. It would be beyond foolishness for the DFL leadership to allow Pawlenty to deliver relief on his own; it would cost them politically.

It's happening.

House Speaker Margaret Anderson Kelliher and Senate Majority Leader Larry Pogemiller appear ready to drop the idea of a more comprehensive special session to deal with larger issues like property tax relief and a bonding bill and to focus exclusively on the two disasters which struck the state in August. They also suggest they would consider abandoning the idea of a gas tax increase, using $370 million in existing funding to address disaster needs.

“We have absolutely no interest in putting special legislation on your desk that you feel compelled to veto,” the letter said.

“It is unfortunate that you are unable to act decisively and comprehensively to the transportation challenge, either due to philosophy or politics,” the letter said. “However, we agree the emergency needs from the bridge collapse and the flooding remain and must be dealt with immediately.”

If that happens, and the DFL doesn't get the gas tax, or LGA/property tax, or a bonding bill, or all the other things Pogie says he didn't say but his uncontrollable caucus does, that looks like a victory for the governor's office. Those who have doubted him from the conservative ranks will have egg on their faces. Those from the liberal ranks who thought they were getting their untimed down will curse the fates.

Labels: legislature, Minnesota, Pawlenty, politics

Many thanks to Speed Gibson for transcribing the David Strom Show interview with Larry Pogemiller. The whole thing needs reading, but in relevant part:

DS: [...] You are the leader of your caucus.

LP: It's a democracy. People get to vote yes or no. I can't tell Steve Murphy how to vote. I can't tell Tim Pawlenty whether to veto a bill or not. All I can do is control my own vote [and] keep my public rhetoric focused on the two things that are crucial to do right now, which are fix the bridge and do the flood relief. Every public comment I have made has been around those issues. That's all I can do.

DS: That's all you can do, but you are the leader of your caucus. When Steve Sviggum would go and cut a deal with the Governor, there were a lot of people I know in the Republican caucus who would complain, "Weill I'm sorry, this is not what I like. I don't want to vote for this." But at the end of the day, that was the deal that was cut.

LP: [...] The Governor have an agreement.

DS: Can you keep your agreement?

LP: Ahhh... In my 25 year history in the State Senate, I don't think you'll ever find one instance where someone says I haven't kept an agreement.

DS: I asking: can you keep your caucus in control or is it going to turn into a circus?

LP Absolutely it's not going to turn into a circus. The Speaker and I have the power to make sure it's a limited, short agenda. Absolutely.

DS: And are you assuring the people of Minnesota now ...

LP: I'm assuring the people of the state that we're going to do the right thing.

DS: No no, is it going to be a limited short session?

LP: It absolutely is going to be a limited, short session. Absolutely.

DS: So there's not going to be an attempt to pass a "compo", what you call a comprehensive, which is a sales tax people can't vote on ...

LP: David, I have no idea what members of the Senate and the House will try to do. All I can tell you is that it will be a short, limited agenda. We will accomplish flood relief and what's necessary on the bridge. That's all I can guarantee. That's what we will do.

Steve Murphy, Senate Transportation Committee chair, 3 Aug 07:

"I think people are clamoring for us to do something about this," Murphy said. "Our system is underfunded. I hate to tap taxpayers, but we haven't had real money in the system since 1988." That's the last time gas taxes, now at 20 cents per gallon, were increased.

"If someone gets in the way," he said, "they should be prepared to get steamrolled."

Murphy, 22 Aug:

Senate Transportation Committee Chairman Steve Murphy, DFL-Red Wing, said a temporary [gas] tax would be problematic and wouldn't meet ongoing road-and-bridge needs.

"It's snake oil, that's all it is," he said.

Murphy, 29 Aug:

We've got a long way to go from five cents, but at least the governor is making the move in the right direction," Murphy said. "I think that the more people find out what the depth and breadth of this problem is, they're going to be more willing to listen."

Murphy said that a nickel increase falls short because "five cents raises $150 million and we have over a $3 billion underfunding in transportation a year."

Still, he said, Pawlenty is showing courage.

"I've got to give the governor some kudos because that was an incredibly difficult thing for him to do. He's for all these years had this 'No new taxes' pledge, and for him to stand up and say, 'Maybe a nickel is not that outrageous,' is a huge step in the right direction."

Murphy said that state highways, which represent only about 18 percent of all the roads in Minnesota, are $1 billion behind in funding, and that that amount is needed every year for a 10-year construction cycle. Township roads, county roads, city streets and transit add another $700 million to $1.5 billion, he said, and rural Minnesota needs $710 million worth of bridge improvements.

Murphy said a long-term comprehensive plan should include increases in the gas tax, in license tabs, and maybe a wheelage tax and a metrowide or statewide sales tax initiative.

Tarryl Clark, Senate Assistant DFL Leader, 4 Aug:

We hoped all along the governor would be willing to compromise and we're glad to see he's willing to be flexible and move Minnesota forward. Hopefully, (a special session) would be about jobs and infrastructure, including transportation, bonding and Local Government Aid.

Keith Langseth, Senate Capital Improvement Chair, 30 Aug:

Sen. Keith Langseth, the chairman of the Senate Capital Investment Committee, also wants to see a borrowing bill on the special session agenda.

During a special session, Langseth predicted, lawmakers would repass the $334 million borrowing bill that the House and Senate approved during their regular session earlier this year.

If Pogemiller is just saying he can't control his caucus, perhaps it's time for that caucus to get a new leader. Either that, or ...

The biggest obstacle on the road to a special session may be a shortage of trust between Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, and Pawlenty.

Flashback: Pogology.

Labels: Minnesota, Pawlenty, pogemiller, politics

There's some excitement in Republican circles over a conversation some legislators have had with the governor's office. Gary reports on an email he received from Rep. Steve Gottwalt (15A-St. Cloud),

Governor Pawlenty has been very firm with House Speaker Kelliher and Senate Majority Leader Pogemiller that there will be “no special session without prior agreement on the agenda and on the bills.” It must be “transportation specific”; he will not revisit the Tax Bill; he will not agree to an open-ended session. It would be one day only, and probably in September. This comes directly from Pawlenty’s Chief of Staff, Matt Kramer.

That sounds good, but I don't see the gas tax as off the table in that formulation. Rep. Gottwalt also reported that Mayor Rybak is going for the Mee Moua Stratagem.

Reconstruction of the 35W bridge would be a modern replacement, with 10 lanes. However, Mayor Rybak is trying to accomplish several add-ons, including re-configured interchanges and even a bridge that would carry light rail. Those are “extra” costs above and beyond the $250 million being discussed as federal emergency dollars for replacement.

Congressman Oberstar has made it clear the federal dollars cannot apply to such add-ons. Rybak needs to understand this is relief and replacement, not “Santa Claus comes early to Minneapolis.”

One word, Governor: Bonds. And no, not Barry.

Labels: Minnesota, Pawlenty, politics, taxes

If they see it in a movie, that is.

David Strand, who describes himself as a DFL activist in Aitkin, asks in Latin where Governor Pawlenty is taking Minnesota.

At the election of Minnesota Republican Party officers, Governor Tim Pawlenty boasted about using vetoes 55 times during the 2007 Minnesota legislative session. It is remindful of the tale of the Roman Emperor Nero who played the fiddle while Rome burned.

Been a long time since we heard "YOU'RE SCHOOLS ARE BURNING!!!" But we have in Mr. Strand someone else who thinks the measure of how much society cares is how much money it takes from taxpayers.

It might be appropriate to put the question "quo vadis," Latin for "where are you going?" to Governor Pawlenty. Since he claims that his vetoes saved Minnesota from the taxing and spending Democrats who control both state houses, where does the governor think he is taking Minnesota?

There is much evidence to answer the question. First, the size and scope of government is normally determined by public policies.

Utter and complete hogwash. Gordon Tullock describes how little of government spending goes to provision of public goods, and how much is caught up in rent-seeking. Unless one feels the size and scope of government is determined by how much redistribution it does, there is little in the data to support this claim. Research in the international field by Alberto Alesina et al. (2000) , and those referenced by Dan Mitchell also show that after a point, government spending is a drag on growth.

All evidence shows that larger public sector resources translate into success of public policy goals. For example, nations at the high end of public spending have the best rates of most critical measures of human decency. Examples are poverty, homelessness, infant mortality, teen motherhood, abortion rates (especially for teens), violent crime, public school graduation rates, K-12 test scores, election participation, prison incarceration, average life span, energy consumption, modern public transit and economic mobility, the direct measure of how equal opportunity really is.

Did you notice what was left out?

Wealth creation. About this, Strand offers not a strand of discussion. He attempts to say that if you oppose giving government more "resources" makes you in favor of greater poverty, lower test scores, etc., a logical fallacy. It never seems to dawn on him that before you can have additional "resources" someone must create them. How do you expect to get them? By deciding that the engine of progress is to be chained?

Labels: Minnesota, Pawlenty, taxes

We are pleased to announce that Governor Tim Pawlenty will join us just after 3:30 today on The Final Word. Working in your garage? On a boat? Take twenty and listen in (well, you could listen to the whole two hours from 3-5, but I try to keep expectations reasonable.)

Michael and I will have other stories during the rest of the show. And you have to hear what's up today on the NARN:

• Film critic Steven Hunter joins the Opening Act, with Brian, Chad and John, 11-1;
• Columnist Eric Black with the Headliners, Mitch and Ed, telling us how the Minnesota Monitor differs from Elba, from 1-3.

Streaming from here at AM 1280 the Patriot; podcasts of all these shows will be up on Monday here.

Labels: NARN, Northern Alliance Radio Network, Pawlenty

But I think it is.

Larry Schumacher blogged yesterday that one of the people pressing the need for a special session on Governor Pawlenty is St. Cloud Mayor (and former state Senator) Dave Kleis.

Pawlenty, who was overheard telling St. Cloud Mayor Dave Kleis last week at the Sartell Centennial breakfast "We'll get you that LGA," said Wednesday his staff is meeting with legislative leaders to try to work something out.

Kleis, of course, called on Pawlenty to convene a special session so that a tax bill giving cities, counties and townships additional state aid could be repassed after Pawlenty vetoed it because of a provision requiring inflation to be factored into state spending predictions.

Kleis is hoping for more than $1 million in extra state aid to offset the local property tax cost of hiring a dozen new police officers and a dozen new firefighters in the next couple years as he pledged to do if voters approved a property tax bond to pay for a new police headquarters and new fire stations.

That bond kicks in next year and Kleis doesn't want to have to raise property taxes on top of it to staff the buildings.

Did Mayor Kleis promise the voters more than he could afford, betting on the come of more LGA money? Even if he did, the LGA money could come out in the next session rather than in a special. And Governor Pawlenty should stick to the fact that he's "skeptical they can be restrained."

A one-day special session is the equivalent of an untimed down at the end of a football game, usually given to the team behind for one last chance to score. The defense never wants to play an untimed down.

Labels: Kleis, legislature, Pawlenty, St. Cloud

Governor Pawlenty continues to talk to legislators about a transportation bill, but is not inclined to bring the Legislature back to special session.

"I have various ideas" for transportation funding, Pawlenty said at the Capitol, declining, however, to say which ones he favors.

He did say the menu of options includes a gas tax increase, borrowing money, using new technology to relieve congestion, paying for some transportation projects out of the state's general fund, and allowing private investors to build new highways.

...He is still not inclined to support a gas tax increase, he said. "With gas going for $3 a gallon and maybe going to $4 a gallon ... the public is skeptical" of paying higher gas taxes.

Moreover, he said, the gas tax is diminishing as a revenue producer as more drivers switch to hybrids and vehicles powered by ethanol-based E85 and, in the future, by electricity and hydrogen.

That's an interesting empirical question: Would the presence of E85 increase the price elasticitiy of demand for gasoline (and thus reduce the revenue gain from a per-gallon tax increase)? Theoretically it would, but the question is how much, and I am rather skeptical it's that large. I like the next paragraph very much:

While Minnesota has resisted private toll roads, Pawlenty said he sees some limited possibility for allowing private equity money to pay for building new roads but not for expanding existing highways.

There has been an increased interest in public-private partnerships for toll roads of late; Texas is expanding its use of leases of roads to private firms. I see no reason why this option should remain off the table in Minnesota.

But don't hold your breath that this will happen soon.

He will urge legislators to take incremental steps on transportation funding, he said, "rather than hold out for the perfect."

Pawlenty said he would not call the Legislature back for a special session just to pass a transportation bill.

He reiterated he is "not inclined" to order a special session for other unfinished business because "I'm skeptical they can be restrained" to a narrow agenda of essential items.

As pointed out before, the DFL strategy was all-or-nothing. Accepting Pawlenty's plan would have killed the push for gas tax candy for several years.

Labels: legislature, Minnesota, Pawlenty

The Wall Street Journal (subscribers only) thinks Gov. Pawlenty did very well in beating back the DFL tax increases.

Last month the Democrats who run the Legislature in St. Paul pushed through a big tax and spending increase in their $35 billion state budget. Last week Mr. Pawlenty responded by vetoing all six of the spending and tax bills the Democrats sent him. The usual media and interest group suspects are upset, but Mr. Pawlenty is rallying his own supporters and making himself a defender of the taxpaying middle class.

Not to be too picky, but he actually just line-item vetoed five of the six.

In Minnesota, as in many other states last November, Democrats picked up big majorities in both the state House and Senate. First on the Democratic wish list was a budget plan of the kind now being promoted by the party's Presidential candidates: Offer a few tax savings to the middle class but whack "the rich" with a huge tax hike, and use the revenue windfall to finance teacher pay raises, "universal health care," $200 million in subsidies for the Mall of America, and even a pay raise for legislators.

To be fair, again, the few tax savings were the property tax relief, but as noted before, that was a trade of a yes for a maybe.

The Democratic plan would have raised the state's top marginal income tax rate to 9.7% from 7.85%. That's right up there with California, New York and New Jersey in the top five of confiscatory taxation states. Democrats also proposed a gas tax hike, a new real estate tax, and a tax on cell phones. In all, Democrats wanted to raise some $5 billion in income taxes, and new taxes on gas, beer, real estate transactions, cell phones and even a strange new death tax: a tripling of taxes on hearses. These would have raised taxes by about $2,000 for every income tax filer in the state. The Minnesota League of Taxpayers [more correct, the Taxpayers League of Minnesota --kb] parodied the budget plan as here a tax, there a tax, everywhere a tax, tax.

Every Republican in the House voted to sustain Mr. Pawlenty's veto, and the state GOP, which fractured last year, is unifying around the fiscal debate. "We ran the table on the Democrats," says Mike Wigley, the chairman of the Taxpayers League of Minnesota. "We got no new taxes, no bonding bill for the first time in a decade, and a budget lower than what the Governor proposed at the start of the year." Mr. Pawlenty is under pressure from Democrats to negotiate a new budget, but he holds the political high ground.

One reason Congressional Republicans were run out of their majority was because they lost their "brand" identity as conservative fiscal stewards. Mr. Pawlenty narrowly survived re-election in that dreadful Republican year. Now he's shrewdly expending political capital to good effect to beat back Democratic tax-and-spend policies that could damage Minnesota for years to come. Are Republicans in Washington paying attention?

Someone asked me this morning whether Pawlenty would bring the Legislature back in special session, faked out by the headline on this article in the StarTribune. Despite the whining, I expect the governor to stay strong based on the remarks made by his spokeman Brian McClung last Saturday on our show.

Labels: legislature, Minnesota, Pawlenty

True to his word, Governor Tim Pawlenty did execute the veto on the tax bill last night. He put the blame right onto the DFL leadership in his veto message:

I am very supportive of many of the tax provisions in the bill such as increases in direct property tax relief to homeowners, sales tax exemptions for agriculture products, acceleration of the single sales factor for corporate income tax and the increase in the military combat credit.

Unfortuanately, the bill contains a policy provision that would put government growth on autopilot. I was very clear in communicating my opposition to this measure. DFL leadership and staff were aware prior to the end of the session that its inclusion would result in the entire bill being vetoed. This provision could have been removed from the bill prior to final passage, but DFL leadership made a different choice.

When legislators and the Governor assemble the state budget, we shouldn't assume that every program should automatically grow. We need to examine every taxpayer dollar that will be spent and ensure that we are streamlining and keeping government efficient and effective. ... Each program should be evaluated on its merits and the overall growth in the budget should reflect that type of approach rather than assuming autopilot increases.

I've stated a couple of times here and here why I opposed the inflation provision, but let me add one more reason, and perhaps explain why the DFL was willing to risk a lot on getting it in the bill.

It is the Dept. of Finance and the state economist, currently Tom Stinson, who create the forecast. In it they have to forecast various macroeconomic phenomena for the state economy that drive the tax base. Once you know the various tax bases, you can generate a revenue forecast. The rule is, if we do nothing and the economy does what the forecast says, here's the revenue we will receive. This is a mechanical exercise, requiring nobody to make a judgment. Judgment eventually comes into play when the state's Council of Economic Advisors sit down with the state economist and the forecasters, and they argue over whether the forecast (which is bought from a national private forecasting firm) meets their expectations of the economy. The forecasting firm has different scenarios, and the council can advise which of those they think are most likely. The forecasted surplus or deficit is then that number subtracted from current spending.

It is rare that someone in the Legislature questions the forecast, which I think is remarkable. A friend tells me that there were questions during the early 1980s, and that may be some of the reason why the current set-up is what it is.

What the inflation factor does is put a group of economists -- state employees trying to provide good economic information -- in the position of deciding how much money will be spent next year to provide each department the capacity to provide the same level of services they do now. Are they really in a position to make that decision? No. And that decision is at its base a political one, and it's why we elect representatives.

So why would the DFL really want this? The answer is rather apparent -- having someone else say there's a deficit to fund current level of expenditures allows them to avoid responsibility for raising spending themselves. This is the most disingenuous line offered in the debate, from the most likely source:

Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said estimating inflation doesn’t require lawmakers to actually give those increases to every program. But he said government shouldn’t be able to hide rising costs.

Set aside that inflation isn't estimated -- it's a forecasted number that you put on ad hoc. More important, it is the responsibility of government to accept that it has been unable to control costs. To put this onto the budget not only makes government bureaucrats complicit in increasing the cost of government, it removes any incentive for state departments to become more efficient.

Gary awards the Governor the Vezina Trophy (God help me, I've had to learn more about hockey this year than I ever wanted to know).