Legislative budget bills criticized for leaving cut decisions to executive branch

House State Government Finance Committee chair Morrie Lanning said he is frustrated with fiscal notes on GOP reform proposals. He called the fall-back option of dictating that the Dayton administration choose where to make cuts is unfortunate but necessary if GOP majorities are to achieve guaranteed savings. (Staff photo: Peter Bartz-Gallagher)

The budgets being advanced by Republican legislative majorities have elicited a lot of grumbling from both DFL and nonpartisan fiscal hawks and insiders to the process. But while the most vocal criticism has revolved around the use of spending and savings figures that are not sanctioned by state agency fiscal notes, there have also been expressions of alarm over the GOP approach to enacting many of the envisioned budget cuts.

A number of the omnibus finance bills working their way through the Legislature contain provisions stipulating that if the projected savings in particular areas do not materialize, then the state agencies overseeing the appropriations in question should simply choose how and where to make cuts.

And while there is precedent for directing the state’s finance agency, the Minnesota Department of Management and Budget (MMB), to make cuts on its own, lawmakers have never proposed to punt such a large package of budget reductions – potentially several hundred million dollars’ worth – to the executive branch.

Republican leaders contend that their reforms are a sincere attempt to make state government run better – and that, owing to the novelty of their approach, it is extremely difficult to parse costs and savings with much precision. The “here, you do it” provisions in some of their bills, they say, are an earnest effort to help the state compensate for any shortcomings in their accounting that may emerge later.

But budget watchers like former state Finance Commissioner John Gunyou say it is bad policy to use the agencies in the executive branch of government as a backup. “The problem,” Gunyou said, “is that we elect people to make policy decisions, and they are abrogating their responsibility when they give the power to another agency to decide the cuts.”

The agency backup plans, which are mostly handed to MMB, appear in a couple of prominent budget bills in the House and Senate:

• The House state government finance bill directs the state Department of Revenue to hire a private company by Oct. 1 to create a so-called tax analytics and business intelligence system to identify individuals and businesses that are probably underpaying their taxes. The measure comes with a $133 million estimate of state savings for the upcoming biennium. If the arrangement fails to provide the state with $133 million, the legislation directs MMB to cut state agencies to close the gap.
• Against the wishes of MMB and the state Department of Human Services, the House health and human services bill asks for a federal waiver related to the federal Medicaid program that would allow the state to book a purported $300 million in savings. If the bill were enacted and the savings fell short, the commissioner of the Department of Human Services would have to make the cuts by reducing reimbursement rates to health care providers.
• The House capital investment bill expects to reap $70 million in reduced debt service payments by refinancing state bonds. If the refinancing does not generate that much savings – and sources familiar with the situation say it is unlikely the state could save that much less than a year after its last debt refinance – the bill instructs MMB to make cuts to previously approved bonding projects until it reaches the desired threshold. (MMB officials testified before the House Capital Investment Committee that the agency does not want that authority, but the committee was unmoved.) According to estimates by fiscal staff, reaping $70 million in interest payment savings would require the cancellation of $400 million to $500 million in existing bonding authorizations.
• The Senate state government finance bill tells MMB to reduce general fund spending by $475 million for the biennium. The bill contains five directives to MMB to shape their decisions in reaching that goal. They include reduction in full-time employees; salary and benefit changes; elimination of deputy and assistant commissioner positions; cost savings from hiring private firms to help with operations; and verification of the eligibility of dependents claimed on employee group insurance coverage.

According to the language of the Senate state government bill, “The commissioner of management and budget must reduce general fund appropriations to the Legislature for the biennium ending June 30, 2013, by $2,130,000. To the greatest extent possible, these reductions must come from savings provided by the salary and benefit changes contained in this act.

Senate Finance Chairwoman Claire Robling, R-Jordan, said the state’s

persistent deficits require legislators to try unconventional cost-saving reforms. She added that in her view, the fact that fiscal notes from state analysts project lower savings than the estimates of Republican legislators is ultimately no reason to withdraw the proposals from the budget.

“We need to do something different. We’ve had deficits for a long time,” Robling said.

House State Government Finance Committee Chairman Morrie Lanning, R-Moorhead, whose omnibus bill includes the tax analytics proposal, said he is frustrated with fiscal notes on GOP reform proposals. He said the fall-back option of dictating that MMB choose where to cut is unfortunate but necessary in his bid to reform state government.

“If the savings or cost projections don’t meet what the fiscal note says, we have to have a fall-back position,” Lanning said. “I’d rather not do that. I hope we don’t have to. I hope it doesn’t end up with MMB having to do this, but we have no choice.”

There is recent precedent for asking the state’s finance agency to cut the budget. But the past actions have involved pocket change by comparison.

In at least two instances in the last decade, lawmakers booked proceeds from land sales and left the agency to close the gap if the sales were not completed.

In 2008, budget unallotments by the Pawlenty administration asked MMB to cut $40 million. In 2010, the agency was asked to cut $3 million. The current situation is unique and risky, budget experts say, because if the projected savings fall short, the resulting budget hole could be very deep.

Christina Wessel, an analyst for the Minnesota Budget Project, notes that the current proposals depart strikingly from past precedent. “What’s different here,” she said, “is the magnitude, and the latitude that the commissioners are given.”

Sen. Richard Cohen, DFL-St. Paul, sharply criticized the lack of fiscal certainty in the reforms. He speculated Republicans could have a “conspiratorial” aim in mind: They might be projecting results that are implausible in order to perpetuate the cycle of structural deficits and thus set the stage for continuing cuts in a long-term war of attrition. If that’s so, said Cohen, who served as finance chairman when the DFL controlled the Senate, “Then there is a method to the madness.”

Gov. Mark Dayton, a DFLer, opposed the unspecified cuts that Republicans requested of MMB in the so-called phase one budget bill that they passed and subsequently saw vetoed earlier in the session. The bill had asked MMB to make more than $100 million in cuts of their own choosing.

In his veto letter to legislative leaders, Dayton raised separation of powers concerns regarding the nonspecific cuts. He wrote: “[Y]ou would abdicate your responsibility to make those difficult spending choices and your power to determine those cuts to an appointed official of the Executive Department. That is both inappropriate and unconstitutional,” Dayton wrote.

The maneuvering reflects the perennial difficulty of enacting cuts to popular programs, said Taxpayers League of Minnesota President Phil Krinkie.

“By and large,” Krinkie said, “the state bureaucracy does not have a constituency. Whenever legislators – whether Republican, Democrat or independent – are looking to reduce spending, they realize the programs have constituencies. The State Arts Board has a constituency, public radio has a constituency. Legislators of all philosophies and backgrounds are looking for: Where can I go and not run into opposition? State agencies are a wonderful target.”

Krinkie, who is a former state government finance chairman, claimed that “creative accounting” on the part of lawmakers is hardly unprecedented.

The political difficulties of program cuts have been evident in the path that the House capital investment bill has followed. The committee, led by Chairman Larry Howes, R-Walker, originally proposed to cancel some bonding projects to generate $70 million in debt service savings. Projects on the chopping block included the Central Corridor light rail project, Como Zoo renovations and enhancements to metro parks.

But when political pressures mounted over the House’s wish list, Howes backed away from the proposed cancellations and opted instead to seek savings through a refinancing of existing bond debt. That approach is risky, said DFL minority lead Alice Hausman, because of uncertainties about factors such as interest rates and the bond rating agencies. (Any such refinancing effort would be months off, because the state can’t sell bonds until there is a balanced budget in place.)

If the refinancing does not work out, the bill now gives MMB the authority to cancel bonds until $70 million in debt service reductions are achieved – a move that, as Hausman noted, would be politically fraught for the Legislature to undertake. Most of the projects that MMB would have to choose from were only passed in 2010, and at this point are paying only small amounts of debt service. Hausman said nonpartisan analysis shows that most of last year’s bonding bill would need to be cancelled in order to get to $70 million in savings.