The news that a district court judge has undone Governor Pawlenty's budget fix via unallotment sounds quite horrible for conservatives. Gary has the expected reactions from GOP officials. However, I want to argue that it's a useful order that Judge Gearin has given, even though I disagree with several substantive points. The arguments are over things that are sufficiently vague that one hopes the higher courts take up the case. She at times seems to want to have it both ways, and at other times seems begging a higher court for help. Here's betting she gets that help.

Here's the full order. The part quoted by the newspapers is indeed one of the points of contention.

"The authority of the Governor to unallot is an authority intended to save the state in times of a previously unforeseen budget crisis," wrote Gearin. "It is not meant to be used as a weapon by the executive branch to break a stalemate in budget negotiations with the Legislature or to rewrite the appropriations bill."

The sentence appears on page 6 of the order. The full paragraph is as follows:

In the beginning of June of 2009, Defendants took the steps to unilaterally balance the budget by unalloting specific programs enacted into law during the session. By exercising his unallotment authority to apply to reductions in revenues that were determined by a forecast made before the budget had even been enacted and by not excluding reductions that were already known when the budget was enacted, the Governor crossed the line between legitimate exercise of his authority to unallot and interference with the Legislative power to make laws, including statutes allocating resources and raising revenues. The authority of the Governor to unallot is an authority intended to save the state in times of a previously unforeseen budget crisis, it is not meant to be used as a weapon by the executive branch to break a stalemate in budget negotiations with the Legislature or to rewrite the appropriations bill.

I believe the facts presented beforehand illuminate Judge Gearin's reasoning. It seems more a matter of timing to her. The biennium had not started. And yet the law doesn't require one to wait for a forecast. The trigger for the unallotment process is a letter from the Commissioner of Finance. The House Research Department reviews this:

Subd. 4. Reduction.(a) If the commissioner [of finance] determines that probable receipts for the general fund will be less than anticipated, and that the amount available for the remainder of the biennium will be less than needed, the commissioner shall, with the approval of the governor, and after consulting the legislative advisory commission, reduce the amount in the budget reserve account as needed to balance expenditures with revenue.
(b) An additional deficit shall, with the approval of the governor, and after consulting the legislative advisory commission, be made up by reducing unexpended allotments of any prior appropriation or transfer. Notwithstanding any other law to the contrary, the commissioner is empowered to defer or suspend prior statutorily created obligations which would prevent effecting such reductions.

Judge Gearin says the law has been determined constitutional, citing Rukavina v Pawlenty. I talked about this in June. (Note the link to the case in the June article has gone dead -- the one above worked this AM.)

In the Rukavina case the Court of Appeals stated: "We conclude that MinnStat 16A.152 does not reflect an unconstitutional delegation of Legislative power, but only enables the Executive to protect the State from financial crisis in a manner designated by the Legislature." That remains the settled law in the State of Minnesota, and it would be improper for this Court to revisit the constitutionality of the unallotment statute itself. It is constitutional. It was the specific manner in which the Governor exercised his unallotment authority that trod upon the constitutional power of the Legislature, and the Legislature alone, to make laws that, in the Court's opinion, was unconstitutional. (p. 4)

She then reviews the history of the 2009 session, noting the Governor Pawlenty signed the HHS appropriations bill, simultaneously noting that he would unallot to balance the budget if he did not get a balanced one. This came days after telling the Legislature that he would not accept a tax increase (see his letter of May 8 in re the tax bill.) After the announcement the Legislature and the Governor passed budget proposals back and forth. The Legislature then does three things: fails to override the tax bill veto; fails to override the GAMC line-item veto; passes a new tax bill unveiled a mere two hours before adjournment. The Legislature was given time to act to come to an agreement with the Governor. They did not agree.

Most of that history does not appear in Judge Gearin's order. She mentions the second revenue bill like it is well-formed, with no requirement upon them to bargain in good faith with Pawlenty. The burden of bargaining in good faith seems put too much on him.

Timing appears to be an issue for Judge Gearin, and on this point I think a valid concern is raised. The trigger letter from MMB Commissioner Tom Hanson is dated June 16. Note that there is in the law NO requirement of waiting for a forecast from Finance or the state economist, just this letter; nowhere does the law say the Commissioner must wait for a new forecast. On that point I think she's wrong. A statement begins two days later on how the unallotment will be effected -- the biennium has not yet been set. Given Judge Gearin's fascination with June, it appears she thought that the Governor was obligated to call the Legislature back into special session. Yet that is nowhere in 16A.152. There is a vagueness that I for one would have liked clarified.

My point, then, is that while Judge Gearin says she can't rule on the constitutionality of the unallotment law, she is trying to put limits on where it can be used. At no point does Rukavina tell you when the unallotment is constitutional, and it does not give the Legislature an upper hand in taxing authority.

Although appropriation of money is the responsibility of the legislature under Minn. Const. Art. XI � 1, it is an annual possibility that the revenue streams that fund those appropriations may be insufficient to actually realize each appropriation. For that purpose, the legislature, by statute authorized the executive branch to avoid, or reduce, a budget shortfall in any given biennium. Minn. Stat. � 16A.152 does not represent a legislative delegation of the legislature's ultimate authority to appropriate money, but merely enables the executive to deal with an anticipated budget shortfall before it occurs.

It may be that you have to be in the biennium to enjoy this power. That is not for Judge Gearin to decide -- that will be up to the Court of Appeals and, I'll dare say, the state Supreme Court. The TRO she places on Pawlenty is in essence an invitation to the higher courts to clarify: Does he have to wait for the beginning of a biennium? If he knows there's a deficit, does he have to try again with a special session? Given that, in the present case, the Legislature never gave Pawlenty an overall budget target to which he could refer for the purpose of line-item vetoes, was Pawlenty entitled to treat the appropriations as things the Legislature would have to bargain over with him? It should be obvious from a reading of the history that they did not bargain. They passed a bill he disagreed with, that they knew he disagreed with, and for which they did not have the votes to override. Yet they continued to send spending bills. It's unfortunate that Judge Gearin chose not to include that history in her order.

At any rate, probably much ado about something that will be overturned quickly. Judge Gearin wants either the Governor and Legislature to agree to something, or for a higher court to review the constitutionality of the law as being perhaps overly broad. She'll get at least one of those, at which time her order will be a footnote. But she's doing us a favor, clarifying what has long been a rather vague statute.

Labels: DFL legislature, Minnesota, Pawlenty

In case my dean wants to know why I was constantly checking the cell phone during a meeting today, it was to see the new Minnesota budget forecast. ("My name is King, and I'm a budget addict." "Hi King!")

General fund revenues are now forecast to fall $1.156 billion (3.7 percent) below earlier estimates for the 2010-11 biennium. After adjusting for actions taken by the Governor following the legislative session, general fund expenditures are $44 million lower. When combined with a $91 million reduction in the ending balance from FY 2008-09, a budget deficit of $1.203 billion is now projected for FY 2010-11. About 70 percent of the projected deficit is due to a reduction in expected income tax receipts.

The loss in revenues is pinned on mostly a fall in wages (income from interest and capital gains "changed little".) The previous forecast was drawn in up February, was little changed from the November 2008 forecast except for the calculation of the effects of the Obama stimulus. Nine months between forecasts in this environment is an eternity, and there was no way anyone expected even this summer that the number wouldn't revise down by a billion or so. So I don't think this report is a shock or a sign that the economy is any more terrible than what I thought it was yesterday.

On the other hand, a new hand is dealt to the Legislature and Governor Pawlenty. They will be having press conferences in a while and we can expect DFL legislators to start their call for asking the rich to pay their fair share. Public employee union leader Eliot Seide was on the radio this morning (I listened during the Morning Show) saying the rich only pay 2/3 of their fair share and that getting the right amount from the rich would add $3.8 billion to revenues. For the life of me I can't figure out where either number comes from; what's this "fair share" he keeps talking about? Meanwhile, the governor is offering to talk to legislative leaders saying he doesn't want to use unallotment again. But having demonstrated he is willing to do it and not running for re-election, he undoubtedly feels he bargains from a position of strength. If you thought end of session in May was fun, pop some corn and settle in. This could be a hoot.

A couple of other quick notes while talking state budget. I did read this profile of state economist Tom Stinson and its effort to make him a pain in Governor Pawlenty's side. The article creates controversy where one doesn't exist, and the reporter was calling for weeks trying to dig up dirt on this topic according to people I spoke with. Tom's doing his job; everyone knows he tends to "go low" with the revenue figure, since the cost of underpredicting revenue is a lot lower than the cost of overpredicting (as we will now see; but the overprediction is certainly not an error made by the Minnesota Finance staff. Very few of us had 10% unemployment forecasts back in February.) The only shock in that article that I saw was Tom's age. I thought he was younger.

The other thing is this decision to list a separate estimate of inflation in the out-biennium forecast. I don't like it, I never have, and I wish they would stop it. You cannot assume a cost that doesn't yet exist. The decision to spend a public dollar takes a vote; it is not implied by previous decisions as taxes are.

Labels: DFL legislature, Minnesota, Pawlenty, taxes

Property taxes would increase an average of 3.5 percent across Minnesota next year if local governments adopt their proposed levies, the state Revenue Department announced Thursday.

That would be less than the 5.6 percent increase in average property taxes this year and the average 6.9 percent increase over the past three years.

"City councils are very well aware of how poor the economy is and are doing everything they can to keep the levies down," said League of Minnesota Cities lobbyist Gary Carlson.

By law, cities and counties could have increased their property tax levies by the full amount that Gov. Tim Pawlenty cut their state aid. But counties appear to be levying for just 40 percent to 50 percent of their lost state funding, said Jim Mulder, executive director of the Association of Minnesota Counties.

The state cut aid to cities by $130 million over the past two years. Cities have levied $95 million in property taxes to replace those funds and absorbed $35 million in cuts, Carlson said.

Source. The cap of property taxes was a bone of contention between DFL legislative leaders and Pawlenty, after Pawlenty cut intergovernmental aids. Giving local control of taxes seems to have reduced spending, rather than have the burden of some paid for by the taxes of others.

Notable: Minneapolis property taxes are scheduled to rise almost 12%, highest in the state. Will any DFLer make this an issue in Mayor Rybak's run for governor?

Labels: Minneapolis, Minnesota, Pawlenty, taxes

Analyzing the current fiscal trend and the Left's answer to it, Keith Hennessey concludes:

This is why I try to encourage elected officials to use the phrase �spending discipline� rather than �fiscal discipline.� Our long-term deficit problem is a spending problem.

Welcome to Minnesota, where Governor Pawlenty has announced he wants a constitutional amendment to cap spending. The amendment reads: "Shall the Minnesota Constitution be amended to require that state government general fund expenditures be limited to the amount of actual general fund revenues received by the state in the previous two-year budget period?"

The reaction is predictable. You get DFL opponents saying things like "you can't cut your way to greatness." You get the StarDFLTribune cynically claiming that constitutional amendments that commit to INCREASED spending (such as the Legacy Amendment) are a reason why you can't have spending cuts.

Hennessey argues that the following line of attack follows the Left's hold on government:

• Increase government spending, especially through rapidly growing entitlements. At the state level it�s Medicaid.
• Wait. While you�re waiting, define deficits as the problem, rather than spending.
• Try to label as radical and extreme those who argue for slowing spending growth and preventing tax increases. The goal is to discredit these solutions as legitimate.
• Once deficits get large enough, shrug and say we have no choice but to raise taxes. This is especially true for entitlement programs directed toward the elderly, who have less ability to adjust to changed government promises.
• Argue we must protect low and middle-income from higher taxes, so upper-income taxpayers must bear the entire burden increase.
• Raise taxes on upper-income taxpayers.
• Rinse and repeat.

Around Minnesota, where deficits are not allowed, you increase spending faster than the increase in personal income during expansions, letting the procyclical nature of tax revenues fill the gap. When your economy goes into recession, you label as radical or extreme anyone seeking to cut the deficit by spending cuts -- you vilify the "no new taxes" crowd. (I'd put in links for that, but I'd insult some liberal advocacy group by forgetting to link their sackcloth-and-ashes act.) You end up with an 11th hour "woe is us, we must raise taxes" ploy, and stick it to the rich at midnight. Rinse and repeat begins February 4, 2010.

Spending limits have a long history, as this National Conference of State Legislatures summary shows. Pawlenty's proposal is different from most in our history, which either set a limit tied to population growth or growth+inflation. (Cato argues that limits set by personal income growth have been ineffective.) Those that set a maximum percentage of personal income (share of a level, not a growth rate) would find us probably near the limit now. Unlike the Pawlenty logic, I actually do plan on spending more when I'm older if I think my income will rise over time. I would argue this plan would have had a more tested version than this. (How do I know in May when the Legislature adjourns what revenues were for June, the end of the biennium, for instance?) It's worth noting that Milton Friedman more preferred the pop-growth-plus-inflation formula.

I worry that this amendment will barely register a nod from the Twin Cities political establishment. But clearly Pawlenty has seen the light that Hennessey is shining. At my home when the checkbook looks empty, I don't usually say I have an income problem (and I sure don't ask my neighbor to cover it for me.) I say I have a spending problem, and I fix it by spending less.

Labels: DFL legislature, Minnesota, Pawlenty

For many years my parents paid for my meals. By the time I was 30, they decided they didn't have to do this anymore. I could afford to buy my own dinners.

While I was holding up a pedestrian on the street, the victim asked me why I was doing this. "Well, it's my parents' fault. They stopped buying my dinner. They had always done it, and now just because one of them is out of work and I turned 30, they stopped. What ingrates."

Of course the above story is farce, unless you're the Hennepin County Board of Commissioners.

County Administrator Richard Johnson presented a $1.6 billion budget Tuesday to the county board for next year, down about 6 percent from this year's $1.71 billion.

But even after cutting 163 jobs and reducing capital improvements, the county still needs to raise property taxes by 3 percent solely to pay increased costs at Hennepin County Medical Center, Johnson said.

Those higher costs were caused by the state's cancellation of General Medical Assistance for poor adults, he said.

Hearing that, county commissioners began their budget deliberations by blasting Gov. Tim Pawlenty again for shifting the state's budget problems to them. The county estimates that 40 percent of the state's poor adults who were covered by General Medical Assistance live in Hennepin County.

The tax increase is required "just because the governor cut the legs out'' from under thousands of low-income adults who depended on General Medical Assistance, Commissioner Gail Dorfman said.

So rather than have property owners in Hennepin County pay for the poor in Hennepin County, the people in the entire state of Minnesota should pay for the poor in Hennepin County? The county had already planned to raise taxes. Commissioner Jeff Johnson writes about the negotiations earlier this month.

I�ve heard a lot of talk the past few weeks about the needs of county government, the needs of HCMC and the needs of those who receive government benefits. I�ve heard much less talk about the needs of the taxpayers who fund county government, HCMC and the government programs that provide those benefits. I�m hopeful as we move forward toward a final levy decision in December we place a little more emphasis on the well-being of Hennepin County taxpayers.

But it's not their fault, Jeff! It's the mean parent in the governor's mansion done made them do it! When you decide it's the right of one person to live at the expense of another, it's little surprise that you make a villain of those that do not.

Labels: health care, Minneapolis, Minnesota, Pawlenty, taxes

Governor Pawlenty, in response to the DFL's request for extra time via a leadership summit, sends a letter to Sen. Pogemiller and Speaker Anderson Kelliher. I received a copy, and this is in full:

Thank your for your recent letter regarding plans for a "Minnesota Leadership Summit" in early September.

My Administration and I are declining to participate in your summit. As we have witnessed over the past year, DFL legislators have done a thorough job of admiring our state's budget difficulties, but have refused or been unable to take action to address them.

The state already has an annual "Minnesota Leadership Summit." It's called the legislative session and it lasts approximately five months. This past year, rather than taking timely and decisive action to deal with our budget deficit, the Legislature's DFL leadership wasted the first few months of the session. Passage of your final budget bills in the last few minutes before midnight on the final day of the session was indicative of how you managed the situation.

Rather than calling together former legislators and governors to rehash already established concerns, the Legislature's time would be better spent coming up with reasonable solutions, negotiating with my Administration and having them signed into law.

The DFL could not have expected their invitation to be taken, so they will now use this letter to show how he's still Governor Go-It-Alone. But was that worth it to give Pawlenty another opportunity to highlight the legislative session's failure?

Labels: DFL legislature, Pawlenty

Mitch points out the complaint among the Minnesota Left that Governor Pawlenty left other states' money on the table in the unallotment strategy. It's of course a bit of a prisoners' dilemma problem: If Minnesota forgoes other states' money (or, as Mitch rightly abbreviates, OPM) there's no reason to believe other states won't spend Minnesota's.

But there's a better, more selfish reason for spurning government cheese: the cheese is temporary. It leverages state taxpayers in order to get a two-year benefit. When the stimulus is withdrawn, what will happen to the state's effort? We can just imagine the calls to "stop the cuts" paid for by government employee union dues in 2011 or 2012.

It's not just beggar-thy-neighbor between the states, it's beggar-thy-taxpayer within the state. Governor Pawlenty is smart enough to not fall for that shell game and leave his successor a battle to restrain spending more in the next biennium. One has to wonder why the DFL, already focusing on the size of the 2011-13 projected deficit, would want us to add $62 million or more to the next biennium's deficit and beyond just to get $72 million of OPM now.

Labels: DFL legislature, Minnesota, Pawlenty, taxes

At Division of Labor, Frank Stephenson points to a graph from the Economist, which tries to make the point that state governments are not spending enough. Scott Beaulier adds that "The scale on the Y-axis is suspect and implicitly makes positive state budget spending [growth] look like the desirable, normal outcome!" Well, one will claim, particularly if one is a DFL legislator, that you haven't fixed this for inflation. So I thought I would, just for Minnesota. (Source data.)
This is not just for state level spending but for ALL levels of government spending except federal. So if there's a shift between state and local, the effect is a wash. Had The Economist graph been adjusted to inflation, I think the pictures would be similar.

As a share of state GDP, sub-national government spending has stayed between 18-21% since 1992, and the DFL-passed spending bills are estimated to put that number a bit above 20% in the next biennium. Worth noting is that the unallotment planned by Governor Pawlenty represents only a half of a percent decline in that number. The graph below assumes no compensating changes by local governments or school districts in driving up taxes to replace lost revenue from state government. State real GDP is forecast to rise by 2.4% in 2010 and 3.8% in 2011.

It is normal for that number to rise during a recession, as government spending doesn't tend to fall as much as GDP when recessions happen. But to argue, as many do, that we're somehow starving government in Minnesota is not borne out by the data. Real spending still rises even with unallotment, though more in line with the restricted spending in the first years of the Pawlenty Administration than the 3.5-4% per year wishes of the DFL. I don't recall seeing people dying in our hospitals or our kids getting stupid then.

Labels: DFL legislature, economics, it's the spending stupid, Minnesota, Pawlenty

It has been just over one month since the Governor announced he was ending negotiations and would go it alone on budget cuts. We thought it was unwise then and it remains so now to do budgeting behind closed doors. Unallotment is meant to be a scalpel, not an ax and it is meant to be used at the end of the two-year budget cycle, not the beginning. It is for unanticipated budget shortfalls, not ones created by vetoes and a refusal to negotiate.

This is wrong on at least two levels. First, the DFL legislature had in fact created the budget in private, asking next to no help from either the governor or the Republican caucus. It did so on May 8, and then did so on the last night of the legislature, passing a bill barely by midnight. It is rather rich for Clark to argue that the governor will go it alone when they did not take his wishes into account (something Rep. Gene Pelowski understood.) Gary Gross is correct in saying that Clark and her colleagues assumed they could get Pawlenty into special session, where the pressure would bear down on him as much as them. She is upset that the Governor side-stepped that box.

Second, Clark has misrepresented the nature of the unallotment process. Luckily, a review of the process was done only last October. The House Research document on unallotment speaks to the issue of timing:

The statutory duty to reduce allotments is mandatory to the extent needed to make up a projected deficit not solved by use of the budget reserve account. However, the statute does not specify a timetable. The authors presume unallotment would have to occur in time to make up the projected deficit within the biennium. Arguably, the Commissioner of Finance must unallot immediately once the conditions that require unallotment have been determined to exist, and the commissioner has approval of the governor and has consulted the LAC. However, in the past, it has been a common practice of commissioners of finance and governors to wait until the legislature had time to rewrite the budget before unallotting. The requirement to obtain the governor�s approval and to consult with the LAC may imply that the commissioner has some discretion in the timing of unallotment. (pp. 4-5)

The governor notified the legislature of his intention to use the power if he did not receive a plan from them. They chose not to act on that power except to run forward a last-minute bill that had already been vetoed once (and had that veto sustained.)

The Minnesota Supreme Court also spoke on the unallotment process in Rukavina v Pawlenty (684 N.W. 2nd 525 [2004]), finding it constitutional for the Legislature to have ceded that power.

Although appropriation of money is the responsibility of the legislature under Minn. Const. Art. XI � 1, it is an annual possibility that the revenue streams that fund those appropriations may be insufficient to actually realize each appropriation. For that purpose, the legislature, by statute authorized the executive branch to avoid, or reduce, a budget shortfall in any given biennium. Minn. Stat. � 16A.152 does not represent a legislative delegation of the legislature's ultimate authority to appropriate money, but merely enables the executive to deal with an anticipated budget shortfall before it occurs.

Although purely legislative power cannot be delegated, the legislature may authorize others to do things (insofar as the doing involves powers that are not exclusively legislative) that it might properly, but cannot conveniently or advantageously, do itself. (cite omitted). It does not follow that, because a power may be wielded by the legislature directly or because it entails an exercise of discretion and judgment, it is exclusively legislative. (cite omitted). Pure legislative power, which can never be delegated, is the authority to make a complete law--complete as to the time it shall take effect and as to whom it shall apply--and to determine the expediency of its enactment. We conclude that Minn. Stat. � 16A.152, does not reflect an unconstitutional delegation of legislative power, but only enables the executive to protect the state from financial crisis in a manner designated by the legislature.

Indeed, to the extent possible Governor Pawlenty has delayed most unallotments to not take place until July 1, 2010, to both hope for more revenue from an improved economy and to allow the Legislature time to make changes in cooperation with the Executive. The door isn't closed: The governor offers the chance to find a better solution, and makes plain the consequences of not compromising.

It isn�t accurate to say that the DFL didn�t submit a balanced budget. It�s accurate, though, to say that the first balanced budget they submitted to Gov. Pawlenty passed the Senate with minutes left in the session. It�s equally accurate to say that the Tax Bill that passed was a hodgepodge bill, filled with a litany of tax increases and spending shifts.

And let's not forget that this was trotted out at 10:30pm for passage before midnight in an uncivil manner. Senator Clark should also answer for that clusterfarg.

Labels: Clark, DFL legislature, Minnesota, Pawlenty, St. Cloud

I guess I should have seen it coming, and people told me it was conventional wisdom, that Governor Pawlenty would decide not to seek a third term. �I have only two personal thoughts about him to reflect on; speculation about Governor2010 can wait for another day.

Labels: Pawlenty

North Dakota is cutting its income tax rates by about an eighth across the board. Corporate rates too. Think Governor Pawlenty knows the Maryland story?

I hope the governor is watching New Jersey, where a fight over a flat tax is going on in the Republican primary. I don't like the Lonegan proposal only because there should be a zero rate up to some income level. (As you might have told yesterday, I'm an old Hall-Rabushka supporter.) Governor Pawlenty, should he decide to run for a third term, could make fundamental reform -- one bracket, not three or four as the DFL proposed -- the cornerstone of the next campaign.

Labels: Minnesota, Pawlenty, taxes

In four short paragraphs, we get a veritable cornucopia of crap.

We tend to believe that the United States is the best place to live. And of all of these United States, Minnesota is the best of the best. Collectively, we want opportunity and education, quality health care and transportation systems, as well as readily available police and fire protection.

So why can�t we agree on how to pay for these things that we all use? Our Legislature last week presented the state with a two-year budget that is balanced and fair. It taxes those who can afford it the most and includes cuts to spending where possible. Our governor says he will veto this bill and cut spending according to his own whim.

This no tax policy favors the rich at the expense of the rest of the state.

Gov. Tim Pawlenty spends much of his time with the top 2.5 percent (by income) of the population of Minnesota. Is this why his tax policy favors them? Is it because his experience is different from the majority of Minnesotans?

Where do we start with this?
"We tend to believe"? �Why hedge this? �Are you suggesting that this might be a wrong belief?
But that group is not the favored group right now. �We read for the remaining 500 or so words of the article about an "ecumenical" group that seems to have no place for 20 million or so business owners. �Isabel Paterson once noted:

Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends.

Labels: DFL legislature, Minnesota, Pawlenty, St. Cloud

Friday's opinion page in the Wall Street Journal (WSJ) has a terrific article (note: subscription required) on our governor, Tim Pawlenty - top of the page! The author, Kimberley A. Strassel, begins the article with this classic, Minnesota quote:

"'Minnesota nice' comes in two forms: first, gracious hospitality; second, smiling stubborness. Republican Gov. Tim Pawlenty this week delivered his spendthrift legislature a humiliating tast of the latter. You betcha."

The DFL is identified plainly as the irresponsible player in the budget process, holding the DFL accountable for their ludicrous suggestions including: "... a new top income tax rate of 9% (the 4th highest in the US); across-the-board income tax increases; sales taxes on internet downloads; the end of the local property tax cap (enacted only in 2008); alcohol taxes; cigarette taxes; eliminating the deduction for an organ donation (no joke); and killing the mortgage interest deduction."

This opinion is a great read. The close includes a suggestion to Congressional Republicans that they might start looking up north for fiscal responsibility. "It is the fundamental tenet of our party, and the conservative coalition more broadly. If we don't have that, we are nothing."

Thank you, T Paw!

Labels: Freedom, Pawlenty

I probably used Twitter more than ever this weekend in arguing a few points with people over the budget discussions. You'd be better off following that trail to find out what I said. A few points of summary:

1. I doubt the DFL really thought either override vote would pass. It was theatrics and nailing a few positions down for the 2010 elections, particularly on the GAMC line-item veto. Expect what Gary calls the Fine Whine Tour over the next sixteen months. Certainly the reporting over the weekend over the "somberness" and crying of DFL legislators over the vote indicates this.
2. Pawlenty spokesman Brian McClung (via Twitter) says legislative leaders are to be at the Governor's mansion in the next twenty minutes. There was this odd conflict last night over who was supposed to call who next after the governor dropped a plan on the DFL late Saturday night. One side said the governor's representative said they'd be in touch, the other side said the DFL would sleep on it and call back. Reminded me of teen love and phone standoffs that often happen therein. Besides, I doubt the DFL was going to do anything before getting their override votes. (UPDATE: Politics in Minnesota reporter says meeting delayed to 12:15 at DFL request: unclear why a delay.)
   
3. The DFL seems still to be in denial over the recessionary effects of a tax increase. The least recessionary thing they could have done was to do something with the governor's tobacco bonds, but because that cuts revenue for them to spend in later years they don't want to do that. So they are stuck using a tired Keynesian argument that tax increases are less harmful than government spending increases. This is a better argument at national than subnational levels of government. Speaker Kelliher and the two tax committee chairs really needs to read Feldstein and Vaillant before talking about this again.
   

Labels: DFL legislature, Minnesota, Pawlenty

Speed Gibson:

Know what I think of the DFL lecturing us about ethics? Pull my finger.

Labels: DFL legislature, Minnesota, Pawlenty

It is worth contemplating the anxious reaction of the DFL leadership to Governor Pawlenty's announcement last night that he'll use his line item veto powers to balance the budget if he does not get agreement with them before Sunday. Within hours of his announcement DFL House Speaker Margaret Anderson Kelliher sent a letter to the governor. (Thanks to Politics in Minnesota for posting copies of many of these letters.)

According to your press availability this afternoon, your latest offer to solve our budget deficit implies that you will sign the budget bills sent to you by the House and Senate, and then proceed to unilaterally unallot portions of the state budget. As you clearly have been planning this course of action for some time, Minnesotans have a right to know how you plan to proceed with your unallotment strategy. It is best if this offer can be fully vetted in a public forum.

She attempts to personalize this by crossing out "Governor Pawlenty" and handwriting "Tim", which I think is rather arrogant as well as her demand in the next paragraph that "an immediate meeting of the Legislative Advisory Commission must be convened" so they can dress down the chief executive officer of the state.

Which is what he is. To re-use a rapidly wearing out phrase, elections have consequences. He is not a king, he is the duly elected governor of this state, and he earned therefore the right to the line-item veto. To put it in sports terms, "scoreboard."

When my boss makes a decision after hearing five months of discussion, and after having received a memo from me, I do not call it arrogant for him to decide not to do exactly as my memo suggests. The CEO gets to make the final decision. And that's exactly what Governor Pawlenty told her in response last night:

You characterized my announcement this afternoon as an "offer". It was not an offer, it was a decision.

The CEO does not react to the anxious demands of his or her organization. He leads; he makes decisions. He leaves the door open to discuss those decisions but does not relinquish his executive rights. What many have praised in President Obama has been coolness in leadership, a firm vision of what he wants to do and a determination to do it. I don't like what he's doing, but I have to tip my cap to his public stylings (as opposed to his private thuggery.) Governor Pawlenty is displaying at this moment that same cool hand: "The budget will be balanced; no endgame shenanigans or uncertainty of a shutdown or special session. There will be no tax increases; get on with your lives."

Leaders lead.

If the Legislature intended to have further discussions it could have held these bills from the Governor until such time as a revenue agreement was reached. They offered these bills to induce an endgame where they could negotiate the revenues ex post. I don't write my household budget by writing down all the expenditures I want first and then figure out how to pay for them. I write my budget listing income first and then what I can afford. (Do you write a budget? Here's an example of how. Note what's on top.) They have made a hash of the session, a vacuum into which Pawlenty has had no problem stepping forward. The blame for their fate is in the mirror into which they stare nervously this morning as they wonder what they'll say when they take their end-of-session flyaround on Tuesday.

Labels: DFL legislature, Minnesota, Pawlenty

Apparently the DFL made a mistake. �They sent all their spending bills piecemeal to the governor, for which he thanks them. �If they don't want to establish any new revenue he likes, fine.

Turning the heat up to a boil in the closing days of the legislative session, Republican Gov. Tim Pawlenty said today that he would use his powers of line-item veto and unallotment to balance a state budget facing a $4.6 billion deficit.

Pledging there would be no government shutdown or special legislative session, Pawlenty said that every bill sent to him by the DFL-controlled Legislature would be subject to his surgical veto pen, likely beginning with a massive Health and Human Services bill awaiting his signature.

"There is a key principle at stake here. You can't spend more than you have. The DFL-majority just did that," said Pawlenty, flanked by Republican legislators at a Capitol news conference. "In these economic times, the people of Minnesota want to see decisive action. We're going to take action to make sure this session ends on time with a balanced budget."

When the legislature sends an instant tax bill they know he would veto, and when they refuse a compromise offer, the DFL doesn't turn the heat up to a boil"; only when the Governor uses his Constitutional powers to balance a budget they won't does the water bubble: It's not just the balance sheet that's bankrupt at the STrib.

Labels: DFL legislature, Pawlenty

Did not the DFL try this before?

State legislators planned to take final votes on five major budget bills today, covering everything from K-12 education to ethanol subsidies to flood protection.

But the bills won't settle the session. Pawlenty hasn't said whether he'll accept them. And there's still a budget hole lawmakers haven't figured out how to fill.

So we're going to send all the bills that require money to be spent and not the bill that identifies where that money comes from? I am teaching people this week about how to teach about family budgeting. I promise you, at no point do I teach "figure out your mortgage, savings, insurance, food, and entertainment expenses before you figure out your income.

They did this very same thing in 2007, which led to a special session. Pawlenty would not sign spending bills then without the source of funds identified. � The endgame ended up in favor of Pawlenty.

Stupidity is the DFL doing the same thing over and over and expecting a different outcome.

Labels: DFL legislature, Pawlenty

Speed Gibson makes good points about the DFL legislature's failures of the current session, and pins the tails on the right donkeys: Kelliher and Pogemiller.

Both of these leaders are incompetent. So are their lieutenants, Taryl Clark and Tony Sertich. They've had two years to learn their jobs, but the events this past week show no tangible improvement. Again, forget the policies and proposals for the moment. Look at the process and the resulting lack of progress. When even the normally undemanding media is openly complaining, even the DFL must admit they have a problem.

Look at this $ 992 million tax bill, just announced. Gone, suddenly gone, are the "thoughtful" Senate and House bills that made their way through weeks of deliberation. All that work for nothing, replaced by something hurriedly cobbled together, a bill they could have written in January. It needn't have waiting for the February forecast, but OK, they could have written it March. Instead, we see it in May, with two weeks left in the session. I have to believe even a few in the DFL were surprised and disappointed by this. ...

To my untrained mind, this session has only one real purpose for the DFL: get Pawlenty. That's what the "listening" tours were about. That's what all this posturing the past two months has been about. And now it's May, crunch time. As this new tax bill concedes, operation "Get Pawlenty" is headed for the rocks.

What Pogemiller and Kelliher don't understand is that they're no match for Pawlenty in a political duel. They have only their strength in numbers, and those numbers should seriously think about who they're following and why.

Gary Gross is calling it "seat of the pants taxation":

As a result of the DFL�s infighting, they were forced to take the step of rewriting the Tax Increase Bill from scratch, passing it through the House and Senate, then have Gov. Pawlenty veto it before he headed out for the Annual Governor�s Walleye Opener on White Bear Lake.

What�s worse is that the DFL hasn�t shown any inclination towards finding cost savings. There�s no denying that they�ve figured out cuts but that�s a different story. Cutting budgets just means that you�re cutting spending and services. Finding cost savings means that you�re cutting spending but keeping service levels the same.

The tactic of "get Pawlenty" has focused on his proposal to pull future tobacco settlement revenues forward to cover some current spending that the governor has decided cannot be reformed in the way Gary describes. What the governor does is say "look, I can't cut a billion more here in this biennium: too much, too fast, and unwise in a recession. What I can do is pull money into this biennium and get you to spend less later when the economy improves." A smaller reform, details TBA, starting two years from now. It's not a great plan in my opinion, but it's not bad. (Better would be to identify what you're cutting later, rather than letting the Legislature figure it out for you.)

But the only other options are to find current cuts without cutting services, as Gary describes it, or raise taxes. When Sen. Bakk defeated Rep. Lenczewski in conference and got this tax bill -- which the governor declared DOA before they even passed it -- the leadership put itself in a box: It has said it won't accept the tobacco bonds while agreeing with Pawlenty that the last billion can't be cut. It therefore must act contrary to wishes of its own national leadership either to raise taxes or cut spending in E-12. If it thinks it can do that and also "get Pawlenty", they have yet to show how.

UPDATE AND BUMP: Just before I left I checked the comments email box and got this at the bottom of a statement from Marty Seifert (I assume this is a summary by House GOP caucus staff -- I haven't seen an official letter):

Also today, Governor Pawlenty made the first significant offer to bring the session to an on-time close. In a letter to the Legislature, the governor said he would accept the Senate DFL's position of not funding the budget reserve, accept the House's desire for a larger K-12 education shift, and halve his proposal for appropriation bonds. Democrats responded by calling the offer "not responsible" even though two of the three parts are DFL initiatives. By rejecting their own proposals, Democrats are making it awfully difficult to bring this session to a close by May 18.

We might need a corollary to the rule of holes: when you've painted yourself into a corner, stop painting! Because the DFL is still working that brush.

And they might still want to remedy this year's deficit.

Labels: DFL legislature, Minnesota, Pawlenty, taxes

On Saturday I asked whether Gov. Pawlenty would join Gov. Jindal et al. in refusing any of the stimulus money. Jim Gegharty provides an interview, in which Pawlenty responds:

Minnesota ranks forty-sixth in terms of getting federal spending in relation to the amount of taxes paid � for every dollar we sent in to Washington, we get about 72 cents back. We�re a major payer of the federal government�s tabs, unlike many other states that I won�t mention. I say, when you�re paying to buy the pizza, it�s okay to have a slice. Now, if you were a liberal Democratic governor and you opposed military spending, are you not going to take National Guard funding? If you were a liberal who opposed No Child Left Behind, are you going to take federal funding in education? So I�m wondering why that standard is only being applied now to conservatives.

All the governors are going to take almost all of the money. I�m not aware of any governor turning down a substantial amount.

So let's see:

1. Others are taking the money too, so why shouldn't I?
2. Since I have to pay anyway, I might as well get my stuff. (Sounds like the argument for spending on the Twins.)

I hope Littlest learns better than this. We wouldn't accept this logic from our children.

UPDATE: Craig Westover adds to the discussion saying conservative answers for where to cut spending fall short of standing on principle, too.

The way out of the current economic situation is not further sacrifice, but less. A more revealing question than �What government services would you be willing to see curtailed?� is: �What government services have you, or will you, unilaterally give up?� As no individual virtue is found in imposed government largess for the benefit of others, there is no virtue in waiting to accept curtailment of government largess to one�s individual benefit. Perhaps the answer to your question is as simple as �just say no.�

Labels: economics, Minnesota, Pawlenty

You have to admit, when the StarTribune refers to the state corporate income tax as "a stinker", it's a good day for the people who support lower taxes.

[W]ould the corporate tax cut stimulate the economy in the way Pawlenty predicts? Or would it simply drain away revenues that already are shrinking?

Economists and business leaders are mixed on whether lowered business taxes would prove a jump-starter. But they are virtually unanimous in their assessment that the corporate income tax is, to put it bluntly, a stinker.

The discussion though always turns to how the government makes up the money:

[F]or all its problems, the corporate business tax has been a boon to state coffers. The tax yielded only $588 million five years ago and now hauls in $1.02 billion a year.

"Given our economic situation, if we're going to get rid of that, we have to think of what replaces it," said Senate Taxes Committee Chairman Tom Bakk, DFL-Cook. "Given where this state is right now, we can't afford to turn our backs on a billion dollars of revenue unless it's offset somewhere else."

But the forecast in November was not for this level of income. Only $597 million is expected in FY 2010 (to start July 1 2009) and $809 million in FY 2011, and barely rising above $900 million by FY 2013. Compared to $5 billion or more in deficits for the next biennium and the one thereafter (we'd expect), this is not that much.

Tax competition between the states (illustrated by this chart from the STrib) is costing Minnesota jobs and corporate tax revenues. Brent Bartsch writes that North Dakota is already considering cuts in the corporate rate. This kind of tax competition is more known in Europe (thus calls for "tax harmonization", which is cartel behavior by governments) but also can happen between states. �When other states are scrambling to hold down deficits, however, you can bet on nobody else following your lead on corporate taxes, at least for awhile. �That would make Pawlenty's play on taxes for small businesses and corporations potentially a winner.

Labels: economics, Minnesota, Pawlenty, taxes

After the State of the State speech, Senate Majority Leader Larry Pogemiller argued that Gov. Pawlenty's proposal to reduce corporate income tax rates to increase job creation is a "failed strategy" at the national and state level. See for yourself at the end of this clip.

There has long been debate over the responsiveness of business location and employment to state corporate tax rates, but to call it failed is almost certainly an overreach. Chile is a good example of a country that grew after tax rate cuts in the 1980s (see Perry and Leipziger, for example); evidence for the US could be found in Alan Auerbach's work (see for example the 1994 NBER Macroeconomics Annual.) More recently, Djankov et al. (2008):

We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on �the same� standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade.

Wheeler [2006] also documents the evidence on reduction of state taxes; she summarizes the findings:

1. Employment -- "Four out of seven studies found small effect on employment; one found 6 percent increase in employment when 1 percent tax decreases were offset by transfer payment expenditures. Two studies found effects only in limited cases using data prior to 1975."
2. Domestic investment-- "One study found that a 1 percent decline in the ratio of taxes to personal income that is financed by an equal reduction in transfer payments would lead to a 9 percent increase in investment."
3. New firms -- "One study found that a 1 percent decrease in the effective tax rate leads to a 9.5 percent increase in the number of firm births in the communications industry and a 2.7 percent increase in the furniture industry."

I would hardly call this "discredited". I would argue instead that Sen. Pogemiller's reaction is informed more by ideology and a fear that he might have to make larger spending cuts, and without much concern for the level of economic activity in Minnesota.

Labels: DFL legislature, economics, Minnesota, Pawlenty, pogemiller, taxes

Ed Morrissey reports on the stalling of our school buses last week because of the blending of biodiesel. The superintendent in Sauk Rapids reported the same thing -- several buses were having trouble on Wednesday, and they could not risk broken down buses Friday. Things appear to have been worse in the Cities. (Wiki on gelling of biodiesel.)

We currently require a 2% blend of biofuel in our diesel(known as B2). The Legislature passed last May a rule requiring an increase of diesel to a 5% blend, B5. Many metro area bus districts have actually moved to B10 and B20. Governor Pawlenty and DFLers have both supported biodiesel standards here. Is anyone going to ask the question whether they are appropriate for our climate?

Labels: DFL legislature, Minnesota, Pawlenty

I didn't get to hear Governor Pawlenty's state of the state speech (I might watch it tonight after I get home from a late meeting), and as expected it was long on rhetoric, particularly about taxes:

Imagine a typical Minnesota kitchen table. A mom and dad have just tucked the kids into bed with a kiss and a prayer, and they come back to the table to confront economic reality.

On the table are bills, notices and a notepad with a budget that�s tighter than it�s ever been. Hope and fear are also at the table.

How do we pay these bills? How do we fix the car? How do we pay this mortgage?

How are we going to afford college or even retire someday?

The same emotions, concerns and urgency at that Minnesota kitchen table must be at all the tables we sit at here at the Capitol � the budget hearing table, the agency tables, and the negotiating tables.

And this day, on behalf of Minnesotans sitting at their kitchen tables, I ask each member of the legislature:

Please don�t add to their burden by increasing their bill from government.

Please don�t take more of their hard earned money.

Please don�t raise their taxes.

As I posted this morning, if you're going to make statements like this, you have to state what choices you really are making. (Turns out I said that last year too.) And one statement he made shows one place where he's being rather bold: Despite balancing the budget, he wants to reduce business taxation.

The way to renew our prosperity is to unleash creativity, innovation, entrepreneurship and job growth.

Successful economies are built by people. Our economic landscape is shaped by men and women who see unmet needs and opportunities in the world around them, and devise goods and services to meet them. For all the turmoil in our nation's financial markets, the malfeasance, corruption, and neglected oversight, this truth remains: While government can commission public works, write checks and foster conditions for job growth, it can�t match or replace the power of people who create goods, services, and jobs. ...

In 2009, it costs too much for employers to create and keep jobs in this state. If we want to build up employment, we need to bring those costs down. I�m proposing a Minnesota Jobs Recovery Act.

For starters, Minnesota�s business tax rate is way too high. A recent study by the Tax Foundation concluded that if Minnesota were a country, we�d have the third highest business tax rates in the world. It�s way out of line and it needs to get fixed.

Today, I�m proposing that we cut Minnesota�s business tax rate in half. This means reducing the current 9.8 percent business tax rate to 4.8 percent over the next 6 years. This will take us from having one of the worst business tax rates in the country, to having one of the best. It will help us keep and attract more jobs.
...

These days, lack of financing is a major barrier to small business success. To jump start small business job creation, I�ve proposed a 50 million dollar package of tax credits that will create over 100 million dollars in new investments.

In addition, I�m proposing a 25 percent refundable tax credit for small business owners that re-invest in their business quickly in order to stimulate our economy.

I�m also proposing a capital gains exemption for qualifying investments in small Minnesota businesses. This will encourage investment in Main Street and help grow jobs.

Wisconsin has a 7.9% corporate income tax rate; perhaps the Minnesconsin idea could be applied as a start? Even at the lowest in Pawlenty's proposal, we'd still be higher than South Dakota and North Dakota if income is under $8000.

The two changes work at cross-purposes, leading me to wonder how the Pawlenty Administration intends to implement the credits. Tax credits are more valuable when the marginal tax rate is higher; as the tax rate cuts work through the system, the amount one gets back on an investment through the credit becomes lower, especially for small businesses (unless the credit is refundable, which seems unlikely.) The proposal sounds similar to Ohio's plan, which was subject to a constitutional case a few years back. The research tends to support the idea that state investment tax credits, by reducing the user cost of capital, increase the amount of capital formation in a state (see Chirinko and Wilson (CW) [2006a and 2006b] and Ernst and Young [2003]). Tax competition between states tends to be substantial, and CW 2006b show that states tend to create these together to avoid losing businesses to neighboring states. Given we already have a kind of investment tax credit in JOBZ for outstate investment, metro area firms are most likely to benefit from Pawlenty's new plan.

I suspect that the offer to cut corporate marginal tax rates is going to fall on deaf DFL ears. (I heard from one reporter that the DFL is already labeling the speech a billion-dollar addition to the deficit.) I am looking forward to the opening Pogemiller Yell. (You know that "Please don't tax me" line got a little color in Pogie's cheeks.) But by and large it was a relatively mild speech based on the reading. No dramatic veto pens, even when many expect he's going to get a budget he has to veto. Is he signalling softness? Or is he just keeping his cards close to his vest until the budget gets released in a couple of weeks? I think the latter, but I don't know that.

Labels: Minnesota, Pawlenty, taxes

Read this about how to close the deficit.

Count the number of paragraphs before you get to "cut spending".

Grow's formula raises six taxes (and a fee) before you finally get to "cut private school aid for such items as transportation and textbooks." Emphasis mine. God forbid we touch the public schools.


Grow argues that even the laundry list of tax increases can't fix this deficit, that at the end,

The political reality is Republicans can doodle with cuts as much as DFLers doodle with tax increases. In the end, both cuts and taxes are going to be needed.

But note to Doug Grow: There are no needs. There are only choices to be made. If Governor Pawlenty decides, either today in the State of the State or sometime later, to sign tax increases, that is his choice. Same is true of the DFL leadership. I do not want to hear "we had no choice." You do. And you asked for the job of choosing. There is no theoretical basis for calling some spending 'need' and other spending 'want'. It's all 'want'. Tell us what you want, and we'll vote to tell you if it's what we want, too.

Grow wants a lot, and wants your money to pay for it.

Labels: DFL legislature, Minnesota, Pawlenty, taxes

There goes my budget:

Gov. Tim Pawlenty plans to cut money for cities and counties and for human services to make up for a $426 million short-term deficit.

Pawlenty presented his plan Friday afternoon. It includes $110 million in cuts for cities and counties. It will be deducted from the money they were set to get Dec. 26.

...Pawlenty's plan also includes cutting spending for human services by $73 million and taking back $40 million allocated to the University of Minnesota and the Minnesota State Colleges and Universities system.

The Taxpayers League's Phil Krinkie is applauding this decision. The key was to get it out there before the LGA money was to be distributed. You can only unallot monies that haven't been spent, and if you sent out the LGA money on the 26th you would either have to make deeper cuts to human services and higher ed, or impose a quicky tax increase. Besides bad timing, the latter option probably is impractical in such a short period given the lag between passage of a bill and implementation. I will be waiting to see DFL reaction to this, but my expectation is that any commentary will be muted -- their turn comes to deal with the $4.8 billion deficit to be closed for the upcoming biennium, so they'd be better off letting Pawlenty accept the responsibility for this without any cover or criticism.

We're already looking around the university for money not to spend, cutting travel and looking for low-enrollment classes we might be able to cut. I don't know the local effect because I haven't yet heard what the split on that money would be between the U and MnSCU (and whether the latter puts more pain on larger institutions, which has been their wont in the past.) The university has been trying to keep us up-to-date with information. If I learn more that I can share, I'll update this.

UPDATE: Here's the governor's announcement. MnSCU takes a $20 million hit, and the U of M system takes $20 million.

For the remainder of FY09, the reductions represent approximately five percent of the unexpended general fund appropriation for each.

�These reductions present a challenge, but the availability of reserves and unspent state appropriations at these institutions should allow them to respond without dramatic impact on students,� Governor Pawlenty said. The MnSCU system has approximately $70.8 million in reserves across all campuses and about $7 million in central reserves. The University of Minnesota has $15 million in central reserves and $50 million of unspent state appropriations not needed to cover binding obligations.

Most departments excepting police and corrections and military & veterans affairs are going to take a 10% hit. Meanwhile, the legislative leaders have volunteered to chip in $2.2 million of their funds; it expects to spend $80 million according to budget documents.

Labels: legislature, Minnesota, Pawlenty, taxes

Gary Gross notes in a letter to the editor today (expanded upon in a blog post) that the state budget shortfall isn't a revenue problem but a spending problem.

In 2007, the first budget that the DFL passed was vetoed by Gov. Tim Pawlenty. Thankfully, the House GOP sustained that veto. The vetoed budget would have increased spending by 17 percent. The budget that we�re operating under represents a 9 percent increase.

...Now Wolden would have us believe that we�ve got a revenue problem. Nonsense. We�ve got a prioritization problem.

I think that's only partly right. There is a revenue problem -- it fluctuates too greatly with changes in state economic activity. I don't know yet of a study that has some measure of elasticity (the change in state revenues per 1% change in gross state product or gross state disposable income) but the last few budget cycles have to make this quite large.

In his 2008 State of the State address, Governor Pawlenty said this tax system is outdated and needs to be fixed. The commission he created at that time should be reporting to governor and a second one to the Legislature next month. There will be a temptation to cast those aside in the rush to fix the present budget shortfall. That would be a mistake; now would be an excellent time to reduce the degree to which revenue fluctuates with the business cycle.

Public choice theory teaches that surpluses seldom are held over for rainy days like our current economy. It's in no elected official's best interest to do so. When the budget generates excess revenue during an economic boom, it's going to be spent. And there's nothing in the budget process that forces legislators to look at the out-year spending ("the tails", as budget wonks say) so that $88 million of the next biennium's deficit is the result of the transportation bill. They knew this in May, dear reader. They didn't even talk about it in October.

We are now on the downward slope of that curve. It would be wise to do something before allowing us back up the hill, because government spending is set by the red line, not the blue. And no, Governor, that's not a hockey analogy.

Labels: DFL legislature, Minnesota, Pawlenty, taxes

When you talk to people familiar with the state legislative process, a term you hear often is "the tails". This refers to the impact of a decision about this year's budget on the projected spending and taxation and surplus or deficit for the next biennium. (Projections are not provided beyond that.) It is what allows legislators to discuss the possibility of needing additional cuts in the next Legislature, or the possibility of new spending programs.

After the budget compromise of last week was announced, one thing that was said to me was that "they chopped the tails", meaning the reduction in spending (or the removal of the foreign operating corporation exemption -- the tax increase that dares not speak its name) had made a good deal of progress in reducing the size of the FY2010-11 deficit. I said to those people I would wait to see the evidence when someone released the fiscal impact report.

The report is now out from the House research staff, and the tails barely got nibbled.

You will hear that we cut out $268 million from spending in this biennium and $340 million from the next. True enough. But the additional LGA monies and the money to K-12 education take back $137 million in this biennium and $428 million in the next. The net changes are thus $131 million reduced for 2008-09 and $88 million INCREASED for 2010-11. The total reduction in the next biennium's defict is only $137 million, of which the FOC exemption removal is estimated to bring in $140 million. This is what happens when you pay for $935 million in the current deficit with $617 million in reserves and fund shifts.

Here's a summary of where the money goes and comes. Most of that additional $88 million is the impact of the transportation bill (HF 2800) that was enacted over Gov. Pawlenty's veto. Here's that bill's tracking sheet -- notice that $86 million of spending in the next biennium for that bill is not paid for by any of the tax increases the DFL enacted. At a minimum, one would have thought the Legislature that gave us that additional spending would have come up with a way to pay for it before it went back home for the year. But as well, that calculation should make it plain that the only progress made on the tails was the result of a tax increase. I know the governor's office doesn't want to call it that. I'll simply say been there, done that.

But a majority of the blame has to go to legislators who cannot even clean up their own mess after passing HF 2800. Our discussion Saturday on the Final Word with Sen. Geoff Michel and Rep. Steve Gottwalt indicated they were also concerned about the next biennium's budget. With the reserves depleted, can there be any doubt that another tax increase lies on the horizon if the current DFL majority gets a veto-proof margin in the House?

Labels: legislature, Minnesota, Pawlenty

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