D.C. standoff means budget questions in Minnesota

Negotiations in Washington over the fiscal cliff were supposed to bring clarity to how much money Minnesota could expect to receive from the federal government in the next biennium.

But while the deal that was ultimately hashed out earlier this month brought some certainty to federal income tax rates, it put off for two months $1.2 trillion in cuts that were slated to take place if Congress failed to act. The agreement also failed to produce a deal to raise the country’s debt ceiling, meaning that the federal government could run out of money to pay its bill by mid-February if no additional action is taken.

Those developments could have significant repercussions for Minnesota as legislators begin to craft a budget for the next biennium. The timing of another looming standoff in Washington appears particularly troublesome for state budget officials. Gov. Mark Dayton is scheduled to release his budget in late January. That will be followed by the release of the February forecast, which will provide the numbers that legislators will rely on to create their budget. In other words, the next big federal dust-up over spending is likely to be taking place just as serious work is set to begin on Minnesota’s budget.

“The bigger issue is the lack of clarity and the overall uncertainty that the two-month extension puts on states,” said Jeff Hurley, a senior policy specialist with the National Conference of State Legislatures. “It’s just a continued amount of uncertainty on the overall level of reductions to expect from the federal government.”

The state already faces a projected $1.1 billion deficit that will make balancing the books difficult. That doesn’t account for inflation, nor does it include more than $1 billion that’s owed to schools.

The so-called “sequestration” cuts were designed to be so onerous that they would force Congress and the president to reach consensus. Half the cuts would come from defense spending and half from the remainder of the budget. While some large federal programs – most notably Medicaid, which funneled $5.5 billion to the state in fiscal year 2011 – would be exempt from cuts, plenty of others would be subject to reductions. In the current biennium, 29 percent of Minnesota’s budget is covered by federal funds.

Some of the potential cuts in federal dollars, according to calculations put together by the Minnesota Office of Management and Budget:

• $14 million in special education funding;

• $12 million in education funding for schools with large numbers of poor kids;

• $7 million in nutritional assistance for low-income families;

• $7 million in heating assistance for poor households;

• $3 million to provide clean drinking water;

• $2 million for substance abuse prevention.

The consensus among political observers has been that Congress will find a way to avoid these cuts because they are politically unpalatable. But that certainty has dwindled as the protracted dispute over spending and taxation has continued to play out in Washington. “I’ve been saying for a while there would be [a deal], but I’m just growing more pessimistic by the day,” Hurley said.

That leaves significant uncertainty for legislators as they begin to wrestle with the state budget. Rep. Lyndon Carlson, DFL-Crystal, chair of the House Ways and Means Committee, will convene a hearing on the November budget forecast on Monday that will feature testimony from MMB officials regarding potential ramifications for the state.

“We don’t know what the federal action is going to be and just how that will filter down,” Carlson said. “No one knows what the outcome is going to be on the spending side.”

Sen. Richard Cohen, DFL-St. Paul, chair of the Finance Committee, is similarly uncertain about how the fiscal standoff in Washington will ultimately affect the state’s budget. “I just don’t know at this point,” Cohen said. “They’ll have to act in some fashion sooner as opposed to later.”

At the least the standoff in Washington could delay serious deliberations on a budget agreement. Until legislators know with a fair amount of certainty how much money they can count on from Washington, there’s little sense in trying to balance the books.

“Everything will be tentative until they act,” Carlson said.