Minnesota Eats Itself

Steve Johnson and Lou Fancher

I. Stay the Course and Starve the Beast

In some ways the checkered two-year reign of Tim Pawlenty has looked less like an exercise in governance than a deliberate and increasingly harrowing game of chicken. Since famously signing on to the Taxpayers League of Minnesota's "no new taxes" pledge during his 2002 gubernatorial run--a classic instance of a politician being led in shackles to exactly the spot where he meant to stand all along--Pawlenty has remained steadfast in his commitment to austerity now and forever. His first budget cycle, in 2003, found the state facing a $4.2 billion hole in its finances that Pawlenty himself, as a tax-hawking member of the state legislature, had been instrumental in creating.

Pawlenty balanced that first biennial budget with a flurry of fiscal derring-do that left many legislators and onlookers alike to sort out later what had actually happened:

* $2 billion in cuts to state services

* more than a $1 billion taking of onetime monies, most of it from the tobacco settlement fund

* the imposition of approximately $400 million in additional user fees

* the shifting of more than $150 million worth of obligations onto local property taxpayers

* and the juggling of hundreds of millions more dollars through various accounting shifts and delayed payment arrangements.

Less than three weeks after the passage of this budget, Moody's Investors Service--"the most thorough of the bond houses, and the one we always paid the most attention to," says former Republican Governor Arne Carlson--downgraded Minnesota's bond rating from AAA to AA1.

Now another budgeting period is upon us, and though the long recession has passed and this year's deficit figure is smaller, the state is by many measures in worse shape than before. Last year's job creation figures placed Minnesota below the national average, and the Federal Reserve Bank jobs forecast for 2005 is 0.9 percent growth, or less than half the typical rate in the higher-tax days of yore. The public school system, which used to be deemed a cornerstone of the state's prosperity and quality of life, is widely seen to be slipping. A survey released last month in conjunction with a University of Minnesota-sponsored report called The Changing Shape of Minnesota indicated that the plight of the schools is one of the two problems most on Minnesotans' minds, along with getting and keeping health care. Last biennium, Pawlenty took away $185 million from education en route to his $2 billion in budget savings, becoming the first Minnesota governor in modern memory to cut school spending; this year he's putting the state's health care assistance programs on the block. Viewed from this angle, Pawlenty is either a) trumping both those worries with anti-tax, antigovernment rhetoric, or b) flirting with political suicide.

On a fiscal level, although its pool of tax dollars is increasing at a rate slightly greater than its rate of expenditures, the state budget is once again in a deep hole. That's because Pawlenty relied so heavily on onetime monies instead of creating a permanent fix by structurally balancing the sources of taxes and spending in his last biennial budget. Pawlenty and his allies have tried to obscure the looming deficit by touting a figure of $700 million, a fiction concocted by including inflation on tax revenue coming into state coffers and excluding it when figuring what the state owes to maintain services. If one assumes a very modest inflation rate of roughly 1.5 percent for the next two years (it was 2.7 percent in 2004), that deficit balloons, doubling to about $1.4 billion. And if inflation exceeds that conservative estimate, well....

Given the political and fiscal hurdles Pawlenty's approach has created, it's no wonder that many pols and bean-counters are crying uncle, and not strictly along the usual partisan lines. In a remarkable gesture, three former state finance commissioners--from DFL, Republican, and Independence Party administrations, respectively--have written jointly signed editorials and taken to the hustings to implore the governor to "stop the fiscal charades" and explore raising taxes. They favor revenue from gas and cigarettes.

Meanwhile, such wild-eyed socialists as the Chamber of Commerce, the Association of Minnesota Counties, and the Republican chairman of the House Transportation Policy Committee joined recently in calling for an increase in the gas tax, which hasn't been raised since 1988, to address present and future troubles with state roads and highways. (Pawlenty has since cooked up a bond-and-borrow scheme for the state's roads that may placate them.) Thus far, however, Pawlenty's lone idea for significantly increasing the state's general fund revenue has been to threaten that the state will get into the casino business if Native American tribes don't fork over $350 million in gaming money every year to preempt their would-be competitors.  

Otherwise Pawlenty seems poised to keep to the same three-point strategy he followed in '03: piling on user fees, pushing tax bills the state used to collect down to the local level (mainly in the form of precipitous property tax hikes), and, of course, slashing relentlessly at the size and scope of state government.

Pawlenty, in other words, is merely staying in lock-step with the unifying aim of the Bush-era national Republican Party: starve central government and end its nagging claims on the prerogatives of wealth by bleeding it dry of revenues--do away with it by degrees, that is, through a war of attrition spurred by tax cuts. As Republican anti-tax guru Grover Norquist said years ago, "My goal is to cut government in half in 25 years, to get it down to the size where we can drown it in the bathtub."

A striking number of moderate and old-school Republicans around the country (few of them in Congress, alas) have turned vocal in their dissent from Bush's fiscal approach--including such eminences as former Minnesota Governor Arne Carlson. In a few states, blocs of Republican legislators have broken with the national party when forced to choose between fiscal solvency on the home front and the costly, unfunded mandates of Bush's No Child Left Behind program. It's hardly a stampede, but a growing herd of Republicans seems to want some distance from Bush, or at least the consequences of his policies.

But Tim Pawlenty, it should go without saying by now, will never be one of those Republicans. It's the ambition, stupid: The governor has harbored national aspirations from the start. Leading up to the 2002 campaign season, remember, Pawlenty was poised to run against Paul Wellstone for the U.S. Senate until summoned to heel in that famous phone call from Dick Cheney, who advised him that the Bush administration would look kindly on his standing aside so that Norm Coleman could challenge Wellstone. Run for governor instead, Cheney suggested.

Since doing so, Pawlenty has become a sporadically hot topic in national GOP chatter. And it's no secret that his reputation for refusing to raise taxes is the key to his popularity with the Bush circle and his future as a presidential or vice-presidential contender. At a November conference sponsored by the Minnesota Council of Nonprofits, the capitol reporter for Twin Cities Public Television, Mary Lahammer, told an auditorium full of people that the number of legislators who have again signed the Taxpayers League's no-tax pledge is down to 22. "But Pawlenty will do it, because Pawlenty truly is a presidential candidate," Lahammer said, before dishing at great length about the warm, buzz-generating welcome Pawlenty received from Republican bigwigs at last summer's convention.

You can hear what's at stake for Pawlenty personally in the words of his colleague, House Majority Leader Steve Sviggum. It's widely believed that voter resentment over the state's cuts in aid to local governments cost Sviggum's caucus 13 seats in the last election, causing a fair number of House Republicans to become more amenable to a tax increase. But when asked about the possibility of a budget bill containing new taxes, Sviggum sounds like the line in the sand is more a matter of personal loyalty than political philosophy. As he told the Star Tribune earlier this month, "I wouldn't do that to him."


II. When Is a Tax Not a Tax?

Pawlenty's last biennial budget garnered $394 million worth of new fees from the citizenry by a variety of means, such as hikes in the price of state park passes. Aren't these tax increases by another name? The governor and Taxpayers League legislative director David Strom both take the position that fees are not the same thing as taxes because taxes are meant to pay for "general" goods for the general public, while fees are paid for "particular" goods by particular individuals.

This distinction is hooey--specious in principle and difficult to apply in practice. The American Heritage Dictionary says that a tax is "a contribution for the support of a government required of persons, groups, or businesses within the domain of that government." A user fee for government services is in effect a kind of consumption tax, and this explains why Strom and Pawlenty aren't eager to tar user fees with the label of "taxes" at all: They like consumption taxes, because they're so regressive. In fact, this is one reason Republican economic ideologues have stepped up their calls for a national consumption tax in the past year or so. Nominally a consumption tax encourages saving money (i.e., non-consumption), but it's also a great way to assure that the toiling classes, from lower all the way to upper-middle incomes, will continue to pay the highest portion of their income in taxes, since they have no choice but to use most or all of their income to consume life's necessities.  

User fees are a politically potent tool in part because they make sense, or at least have gained acceptance, in some settings. People seem to have largely accepted state park access fees, for instance, even though every citizen already "owns" the land in principle. But what about public defenders for citizens accused of crimes, a remedy originally devised by the courts specifically for defendants who couldn't afford attorneys? According to the governor, the indigent ought to pay fees for services like everybody else. (The Minnesota Supreme Court disagreed, declaring that it was unconstitutional for the state to impose a fee on accused persons who were represented by a public defender.)

Or how about the care of children and senior citizens? Are they items of the general or the particular welfare? Increased fees on facility licenses and family co-pays coupled with budget cuts and eligibility restrictions have forced nearly a quarter of the state's child care facilities to close their doors in the past two years, leaving many parents to choose between substandard child care and unemployment. And the largest single pot of money on Pawlenty's list of new fees was $98 million raised over a two-year period by tripling the surcharge (after it was raised nearly 50 percent just the year before) on Minnesota nursing homes participating in the state's medical assistance program. In a maneuver specifically designed to help the nursing homes pay the surcharge, the state has allowed the facilities to charge their residents an extra $5.56 per day. Consequently, more than 10,000 elderly and disabled Minnesotans are now forking over an extra $2,000 per year, with no commensurate increase in goods and services provided, and regardless of whether or not they participate in the medical assistance program. The nursing homes are merely middlemen, sending that money along to the state, which deposits it in the general fund for discretionary spending.

Revenue enhancement through taxes that go by other names is only one trick of the no-new-tax trade. To further maintain the appearance of fidelity to his anti-tax pledge, Pawlenty has also dramatically altered the terms of the cooperative relationship that existed between state and local governments in Minnesota for many years. The result has been to "hold the line" on taxes at the state level only to see the real costs reappear as local levies.

The governor and his Republican allies frequently claim that Minnesota's per capita state taxes are the second-highest in the nation. What they don't say is that a large chunk of that money takes the form of local government aid. As its name implies, LGA is transferred to local units of government across the state, to aid them in providing a wide variety of vital services to local residents. Those transfers keep local government taxes relatively low. That's why, when it comes to measuring the total amount of money consumed by government (the combination of state taxes, local taxes, and non-tax revenue), Minnesota's per capita burden falls to a very middling 24th in the country.

In his budget for the current biennium, Pawlenty cut the state's LGA transfers by $140 million while shifting responsibility for funding many programs, some of them mandated by state law, onto local government. This double whammy was compounded by Pawlenty's cuts to education funding, at a time when the schools were facing huge increases in the cost of health care and transportation.

The cuts in education were particularly striking, because just two years earlier the state had agreed to take on primary responsibility for funding local school districts. Pawlenty, at the time minority leader of the State Senate, was among those who championed the plan and took credit for the sharp reductions in local property taxes resulting from the takeover. It was the end days of the Clinton-era stock market bubble, and Pawlenty was not alone in claiming the state could finance its commitment to education, which cost nearly $1 billion a year, out of surpluses in the state budget. Then the market took its nosedive, the fallout from 9/11 exacerbated the downturn, and the state found itself awash in red ink and lacking a dedicated source of revenue to pay for its billion-dollar obligation.

As might be expected, the LGA cuts were especially harsh for local governments that had received a disproportionate share of the LGA monies, including many of the state's less affluent towns and cities. Faced with the loss of key personnel such as police and firefighters, or the possibility that they would fail to fund state-mandated services, many local governments levied steep property tax increases. Property taxes also rose in areas where voters passed school referendums to mitigate some of the state cuts and inflationary costs on education. In all, local property taxes were increased by $355 million across the state in 2003.  

Judging by the net loss of 12 Republican House seats in last November's election, Minnesotans believed DFL claims that this property tax spike was caused by Pawlenty's LGA and education cuts and his shifts in budgetary responsibility--that those costs, in essence, were Pawlenty's taxes. Pawlenty in turn blames local government officials for not copying his fiscal restraint, and DFL legislators for not passing his proposal to severely limit the amount local government could levy in taxes.

But Pawlenty's last education budget overtly called for school boards to levy local property taxes in at least a couple of provisions. One is a line item known as "transition revenue," which previously had received all of its $30.8 million annual funding from the state. Pawlenty's budget lowered the state's responsibility to $12.1 million and indicated that the other $18.1 million could be accessed by the school boards if they levied local property taxes. On another line item, known as equity revenue, Pawlenty again ratcheted down the state's commitment, from funding the entire $41.2 million each year down to $18.9 million, with local property tax levies responsible for the remaining $22.3 million. A third shift in the education budget, in which local levies were responsible for generating $39.9 million of the $191.3 million annual cost of the line item known as operating capital, was proposed and enacted by the House and Senate conference committee in the waning days of the 2003 legislative session.

Put them all together and one sees that the state shifted the responsibility for $80.3 million worth of annual education funding back over to local property taxes, $40.4 million of it directly suggested by Pawlenty's budget. Local school boards had the option to decline to levy the recommended taxes, but doing so would have deprived them of the state's portion as well, and in tight times, no district could afford to leave that money on the table.


III. Who Bleeds Next?

Pawlenty is bound by law to submit his budget proposal for the upcoming biennium no later than next Tuesday, January 25. His prefatory comments indicate that he is heeding the message sent by voters in November: There will likely be no further cuts to LGA, and the education budget he proposed last week appears to keep pace with the growth of inflation, though no more. But the deficit is $1.4 billion, and other expenses loom. The cost of housing sexual predators and a burgeoning population of meth addicts is straining the corrections budget. Nearly all of the state's onetime monies are gone. To make ends meet, the governor needs to decimate some significant area of the budget, and he's left little doubt that it will be accomplished by razing the state-supported health insurance programs. If so, many tens of thousands of impoverished single adults will lose their state health insurance.

Pawlenty's approach to health care bears his usual trademarks--a preponderance of fees and a desire to shift costs onto other units of government. Even low-income citizens face new or increased payments for eyeglasses, dental care, and prescription drugs, and working poor families face increased insurance premiums that jeopardize their ability to stay on the insurance plan. Thousands of "noncitizens" and single adults have already been bumped off the insurance rolls, shifting the cost of their care to locally supported hospitals and community clinics. But Pawlenty's fiscal approach demands the ongoing diversion of tax dollars ostensibly dedicated to assisting poor, sick people to prop up the state's general fund.

Half of the governor's total budget cuts in the last biennium, nearly $1 billion, came out of health and human services. Prominent among them were curbs on benefits and tighter eligibility standards for citizens enrolled in the state's three public health insurance plans--Medical Assistance (or Medicaid), General Assistance Medical Care, and MinnesotaCare. General fund dollars sustain approximately half of Medical Assistance (with the feds supplying the other half) and all of GAMC.

But since its inception in the early '90s, MnCare has been bankrolled primarily through various taxes that go into a health care access fund. The largest revenue source is the provider tax, which accrues through a 2 percent fee levied on patients by hospitals and doctors for the health care services they provide. Another contribution stems from a 1 percent tax on health care premiums. Then there are the MnCare premiums paid by those enrolled in the program.

Until recently, MnCare operated exactly as intended for more than a decade. The number of enrollees, whose ranks consisted mainly of working poor families, was relatively stable, and the taxes paid into the health care access fund provided an adequate and reliable source of revenue. In January 1998, the fund showed enough of a surplus to reduce the provider tax from 2 to 1.5 percent, and eliminate the premium tax altogether.  

That all changed when Pawlenty pledged to balance the state's $4.2 billion budget deficit without raising taxes. Along with the drastic cuts in the benefits and eligibility guidelines of the three state health insurance plans, he raided the $192 million surplus in the health care access fund and put it into the general fund. Suddenly, provider tax money collected from sick patients by hospitals and doctors in order to reduce the number of costly uninsured people in the state was being used to stanch the red ink caused by other areas of the budget. When the provider tax was first implemented, doctors and hospitals were told that the money would be used only for health care. Pawlenty's budget fix violated that agreement.

During the frenzied last-minute budget negotiations two years ago, the governor assured Sen. Linda Berglin (DFL-Minneapolis), who co-authored the legislation that created MnCare, that he would use $110 million in federal Medicaid money to help replenish the access fund. But last spring, he reneged on his word, using the money to help balance another of the chronic general-fund deficits that have occurred on his watch. To top it off, because the health care access fund no longer contained a surplus, the provider tax was bumped back up to 2 percent and the premium tax was reinstated. (Again, so much for the no-taxes pledge.)

Over the past two years, the intended savings from Pawlenty's eligibility and benefit reductions have created even more instability in state finances. The changes made to MnCare now make it more advantageous for many low-income people to instead enroll in Medical Assistance or GAMC. While MnCare enrollment is projected to drop from 120,000 to 111,000 from fiscal year 2003 to fiscal year 2005, enrollment in Medical Assistance is expected to climb from 301,000 to 336,000 over the same period. And despite throwing 3,000 "noncitizens" off the GAMC rolls and cutting the eligibility of at least 1,500 others, total enrollment in that insurance plan is expected to hold steady at 37,000 people between 2003 and 2005.

Not all of this fluctuation is related to citizens shifting from one plan to another. The state's lackluster ability to create jobs and the decision by many employers, especially Target, to reduce or eliminate health insurance for some of their part-time or low-level workers is contributing to the growth of demand for government assistance. (One University of California study, for instance, recently claimed that Wal-Mart's inadequate wages and benefits forced the company's employees to seek $86 million in state aid.) The result is that fewer needy citizens are getting their health insurance from a program that happens to have a stable funding source apart from the general fund, while enrollment in two other programs that rely heavily on general fund dollars is swelling.

One of the figures Pawlenty cites to dramatize his claim that health care costs are "out of control" is the forecasted 32 percent increase in GAMC costs during the next biennium. But that's because those setting the budget targets had assumed that GAMC's enrollment, and hence its costs, would go down. Pawlenty's last budget "fix" is one of the reasons it hasn't. A state economy rendered sluggish by a lack of government investments is another.

Health care professionals are expecting another round of carnage when Pawlenty delivers his biennial budget proposal next week. If education is spared, the Department of Corrections is given more money, and new taxes are kept off the table, health care programs will bear the brunt of the $1.4 billion in cuts needed to balance the budget. In recent weeks, Pawlenty and Sviggum have indicated that their "solution" will likely involve another raid on the health care access fund, which will have amassed a surplus of $226 million by fiscal year 2007, and the elimination of all state-funded health care and health insurance for childless adults, creating an annual "savings" of nearly $800 million. Such a plan would lead to the near-total dismantling of GAMC. Speaking to the Pioneer Press two days after Christmas, Pawlenty explained, "If you are an able-bodied single adult, who can otherwise perhaps find an opportunity in the marketplace, those are the people we are going to look at and say: 'Are our benefits out of line?'"

It's the old "welfare mother" stereotype revisited. In its review of the last biennial budget, the Minnesota Council of Nonprofits defines one group of GAMC enrollees as being "ineligible for MA [Medicaid] because they live in an Institution for Mental Disease (IMD)." "About 60 percent of the people on GAMC have a severe mental illness," says Glenn Anderson, the executive director of the Human Development Center in Duluth. "In many cases they are eligible for Social Security disability, but are too mentally ill to make the application. They need regular psychotropic medications, need to see a psychiatrist or a therapist, and need chemical dependency treatment."  

If Anderson's estimate is accurate and Pawlenty is indeed poised to wipe out GAMC, about 20,000 of these folks will lose their access to basic health care maintenance. Pawlenty and Sviggum also say that they will propose a broad-based series of measures to control health care costs, based on the recommendations of a state commission led by former Sen. Dave Durenberger. Some of these reforms, such as steering patients to providers who utilize "best practices" medical care and urging employers to band together in a critical mass to negotiate lower premiums and provider rates, are sound policy. But Pawlenty chose to ignore two other Durenberger commission recommendations that might bring some sanity to both health care and the upcoming budget. One would impose a dollar-a-pack tax on cigarettes. Another would expand, not reduce, public health insurance, warning that health care costs will continue to spiral upward if those who currently lack insurance coverage aren't allowed "universal participation" in the system.

Durenberger is echoing what study after study has shown. When poor and needy citizens lack health insurance, they don't receive cost-effective, preventative medical care and ongoing maintenance of their chronic ailments. Instead, they show up in hospital emergency rooms and community clinics, having allowed their condition to deteriorate to the point where they require more drastic and expensive treatment. Bound by law to treat these patients and without any health insurance to pay for it, hospitals inevitably absorb these "uncompensated care" costs by raising their rates for private insurers and, in the case of public hospitals, consuming more tax dollars.

In December 2003, the Minnesota-based State Health Access Data Assistance Center published a study on the impact of MnCare on state health care costs. Using data from 1992-1996, it concluded that every one-percentage-point increase in MnCare's enrollment resulted in a decrease in uncompensated care spending of $2.19 per capita. Put another way, the study claimed that between 60 and 100 percent of the actual spending on hospital services for MnCare enrollees during that four-year period would have been uncompensated care costs borne by the state's hospitals if MnCare didn't exist.

Medical malpractice reform is nearer to Pawlenty's heart than the impact of uncompensated care; he has endorsed tort reform proposals in the legislature that would limit the size of legal judgments against providers. But the fact is that Minnesota has already passed a number of laws to reduce frivolous or outsized liability lawsuits. The medical liability crisis is not nearly as acute in Minnesota as elsewhere: The state's internists and surgeons pay the second-lowest malpractice insurance rates in the country, and Ob/Gyns here pay the fourth-lowest rate nationally, according to the October 2004 issue of Medical Liability Monitor, a trade publication devoted to the subject. Julie Sonier, assistant director of health economics programs for the Minnesota Department of Health, says that medical malpractice premium collections represent just 0.5 percent of total health care spending in the state, versus 2 percent nationally.

Even if the hidden cost of unnecessary tests ("defensive medicine") could be factored in, it is difficult to imagine any tort reform that could produce savings as dramatic as what an increase in MnCare enrollment did to uncompensated care costs. Case in point: By far the biggest provider of uncompensated care in this state is the Hennepin County Medical Center. As Pawlenty prepares to dump thousands more citizens from state-supported health insurance, 5.3 percent of HCMC's expenses are already consumed by uncompensated care, a major factor in the huge deficits besetting the hospital's budget. Ultimately that debt is the responsibility of Hennepin County property taxpayers.


IV. Goodbye to All That

In June 2003, St. Olaf College economics professor Terry J. Fitzgerald wrote an analysis entitled "Business Cycles and Long-Term Growth: Lessons from Minnesota" for the Federal Reserve Bank of Minneapolis. More specifically, Fitzgerald took an in-depth look at how the state's per capita income had managed to go from 14 percent below the national average in 1929 to 8 percent above it in 2001.

Fitzgerald found that the state's per capita wealth really began climbing in the 1960s and continued steadily upward through the rest of the century. During that time, the number of Minnesotans who were employed rose from 41 percent in 1970 to 54 percent in 2000, a faster rate than the national average. Earnings per worker and worker productivity also increased more rapidly. This correlates with Minnesota's increased emphasis on education. In 1950, the percentage of Minnesotans who had completed four years of college was about average nationally; ditto the percentage of state residents completing four years of high school. But by 2000, Minnesota ranked third in the nation in the percentage of residents with a high school diploma, and seventh in the percentage who held a bachelor's degree. "Obviously, there is an important interplay between an education system that supplies educated people and a state economy with enough jobs that demand those educational skills," Fitzgerald wrote.  

Now our education spending and job growth are below the national average. And while many other state budgets have survived the recent recession and have begun funding new investments with existing savings or new taxes, we borrow billions for roads, run in place on education, and continue to hack at billion-dollar shortfalls.

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