Dead Set on Destruction

Even Republicans are alarmed by the governor's fiscal mismanagement

As the do-nothing legislative session of 2004 slowly recedes amidst a chorus of "coulda-shoulda-woulda" finger-pointing, it's not too soon to focus on the financial catastrophe that will be facing state lawmakers when they reconvene at the Capitol early next year. As has been true throughout Gov. Tim Pawlenty's tenure in office, the budget is in a shambles, and his disingenuous claims of fiscal responsibility are coming back to haunt him.

For all the griping about this stalemated session, future woes can be traced back to last year. Remember when Pawlenty crowed after the 2003 session about how he balanced the budget without raising taxes? It was based on creative accounting. What the governor and his no-tax cronies did to make ends meet was to pretend that inflation would not happen for the next two years when determining the cost of government services--all the while counting inflation-added revenue coming into the state's coffers during that time.

If you buy into Pawlenty's fuzzy math--which the Star Tribune did in a glowing story about the state's budget status last week--Minnesota is still staring at a $400 million deficit for the upcoming 2006-07 biennium. (The state sets its budget every two years, and, by law, it must be balanced.) But since the governor moved his political henchman Dan McElroy out of the Finance Department to serve as his chief of staff and head stadium cheerleader, Pawlenty's own administration now concedes that $400 million woefully underestimates the size of the problem. With Peggy Ingison replacing McElroy, the department calculates that another $600 million in red ink must be added to the total to compensate for Pawlenty's no-inflation gambit. In other words, the state is a nice, round, billion dollars in the hole.

James Dankert

Pawlenty's apologists like to claim that we can grow our way out of the deficit. But a booming economy has already been factored into the projection. The administration's baseline (not the most optimistic) assumption is that the state economy will expand by 4.6 percent in 2004 and 3.9 percent in 2005, which would be the largest real growth in Minnesota's gross domestic product in 20 years. Anything less will only add to the $400 million deficit. Meanwhile, a marginally improving economy coupled with the recent rise in interest rates is widely expected to boost the rate of inflation, meaning that Ingison's $600 million estimate of the inflation-related shortfall is probably too low.

So the state is probably facing a deficit of at least a billion dollars. That doesn't seem like much compared to the more than $4 billion shortfall Pawlenty confronted during the last budget cycle, right? Except that Pawlenty used every chit and loophole available to him to "balance" state coffers last year. A billion dollars of onetime money from the tobacco settlement fund was raided down to the last penny. Hundreds of millions more in onetime money was taken from the budget reserve. Funding payments to schools were delayed and inflation again was not accounted for, giving new meaning to the term "cooking the books."

And while Pawlenty likes to brag about the absence of new taxes, $400 million worth of "fees" were tacked on to everything from fishing licenses to state parks to court filing procedures--not to mention that the buck was passed on to local property taxes to fund critical services. Even that didn't do the trick. When it was all said and done, Pawlenty still had to hack between $1.5 and $2 billion in services, depriving tens of thousands of people of health care and cutting hundreds of teaching jobs, among many other negative consequences.

And he still didn't fix the problem. Three weeks after the session ended, Moody's, an investment house, lowered the state's bond rating.

 

The state's financial situation has become so dire that two former finance commissioners--Jay Kiedrowski, who served under Gov. Rudy Perpich, and John Gunyou, who worked in the administration of Republican Gov. Arne Carlson--have started writing op-ed pieces and giving presentations before various civic groups trying to draw attention to the problem.

"In the past, it didn't matter what party the governor belonged to--whether it was Perpich, or Carlson, or Ventura--the financial management of the state was pretty much the same," Gunyou says. "The personalities and some of the priorities may have been different, but all of them exercised moderate stewardship that accepted the benefits of investing in a relatively high level of services in a fiscally responsible manner.

"That isn't happening now," Gunyou continues. "Class sizes are going up in the schools. There are double-digit tuition increases for higher education. People are being thrown off the health care rolls. You've got a guy like Art Rolnick of the Federal Reserve Bank of Minneapolis--hardly a bastion of socialism--saying investments in early childhood development make the most sense, and we're not doing that."

But Gunyou has a bigger criticism, namely that nothing is being done to address bad budget practices. "Everything is short-term, looking ahead to the next election," he argues. "We are two years into this administration and there has been virtually no structural reform of the budget--they have just cut services and frozen spending. Yet we continue to have a structural deficit between ongoing revenue and ongoing spending. We are spending $1.1 million a day more than we are taking in. That's irresponsible financial management. Now the best-case scenario is that we will have a billion-dollar shortfall. The choice is raise taxes or cut more. What Jay and I have been saying is that they have cut too much already."

Incredibly, Pawlenty continues to blithely claim that he can balance the upcoming budget without raising taxes. While it may make for good reelection politics, it's a position that alarms even Republicans like Gunyou and statewide business leaders from the Chamber of Commerce. They fear that such foolish policy will severely damage the state's economic competitiveness for years to come.

Begin with K-12 education, which now comprises a whopping 44 percent of the state budget. The website for Pawlenty's own Department of Employment and Economic Development has a 2004 missive titled "Business Location Factors," which states, "The most common proxy indicator of workforce quality is education. The share of the population with a high school education often matters when it comes to business growth."

Yet for the first time in modern state history, K-12 schools are enduring a real-dollar cut in government spending this biennium. Just keeping up with such costly (and inflation-sensitive) line items like health insurance for school personnel will add tens of millions of dollars to the K-12 budget next biennium--and that's without any improvement in services. Meanwhile, most local school districts have already used up their ability to raise local property taxes to supplement state education funding.

Moving on to transportation, bus operations face the same inflationary costs and social-engineering cuts as schools do. And highway congestion is now a way of life in Minnesota, due in large part to the fact that the state hasn't raised the gas tax since 1988. "The Chamber of Commerce says we need a billion dollars a year for transportation, and that's just on roads, not public transportation," Gunyou says. "Everybody wanted to raise the gas tax--the chamber, other business groups, city and county governments. Everybody but the Pawlenty administration. So instead of raising the gas tax, the state borrowed $800 million."

Gunyou maintains that the money was borrowed from a future federal highway allotment and some of it was in 20-year bonds. "To get what isn't even a year's need according to the chamber, we have borrowed for 20 years," he says. "And how are we paying for the bonds? By cutting highway maintenance. There will be less patching and repairing and upkeep. That's just grossly irresponsible financial management."

 

The list goes on. Health care and human services make up 26 percent of the budget, making it a good bet that more citizens will be priced out of state health insurance if Pawlenty has his way during the next session. As has been noted before, sick people don't drop out of society when their insurance isn't covered; they just become more expensive patients, driving up the cost to hospitals, private insurers, and, through Medicaid, the state and federal governments.

It's not hard to see that education and health care/human services eat up nearly three-quarters of the state budget. How will Pawlenty make up a billion dollars without ravaging one or both of these budget areas?

The neoconservative philosophy, to which Pawlenty obviously subscribes, is that the best way to get rid of government is not to rail against the services provided, but to simply starve the funding sources and then claim that you have no choice but to make the cuts. During his brief tenure in office, he has done exactly that, while laying waste to the state's proud heritage of fiscally prudent investment. This panders to the false notion that government is increasingly reaching into our pocketbooks, but it's worth noting that today, the percentage of state and local government taxes on Minnesota earnings is less than it was a decade ago.

And then there are profound job losses. According to the U.S. Department of Labor statistics, from January 2002 to May 2004, approximately 7,500 government jobs have been eliminated in Minnesota. Lest you think this is a national trend, Minnesota is one of only 12 states whose total number of government employees declined in both 2002 and 2003.

According to Christina Macklin, policy analyst for the Minnesota Council of Nonprofits, another 1,000 jobs have been lost in the nonprofit sector during that time, many of them due to state budget cuts. These were well-paying jobs--averaging about $15 an hour, Macklin says--with workers providing services to Minnesotans who are still very much in need.

Admittedly, there is one bright spot. Maybe all these folks can find work hawking beer and peanuts in the new stadiums Pawlenty continues to insist the state can help provide for Carl Pohlad and Red McCombs. To be fair, when it comes to budget priorities, the governor certainly keeps his eye on the ball.

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