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State Budget Treading Water

The final bill of 2010 balanced the current budget, but the state still faces a nearly $6 billion deficit for 2012-2013.
(Published May 26, 2010)

Gov. Pawlenty on May 21 signed into law the special session budget compromise that will address the immediate state budget deficit and the uncertainty created by the May 5 Minnesota Supreme Court decision in the challenge to the governor’s use of unallotment.

The new law, Chapter 1 of the first 2010 special session, is a nearly 250-page bill that will result in net savings to the state budget of $2.972 billion for the 2010-2011 biennium. Much of the bill contains the unallotments originally imposed by the governor at the end of the 2009 session, thereby ratifying them. Ratification by the Legislature prevents further legal actions in response to the governor’s use of unallotment last year.

For cities, Special Session Chapter 1 ratifies the governor’s 2009 and 2010 local government aid (LGA) and market value homestead credit (MVHC) unallotments, but does not further reduce state aids to cities or go beyond the cuts in the supplemental budget bill passed earlier in the session.

Unfortunately, the vast majority of the savings in the bill were due to two accounting maneuvers—a shift in school aid payments and in the early recognition of the property tax receipts of school districts. Combined, these two accounting shifts—which total $1.961 billion—comprise 66 percent of the 2010-2011 budget solution. The heavy reliance on these accounting shifts will present a major problem for the 2011 Legislature and the new governor next year when they must enact a 2012-2103 biennial budget.

Based on the provisions in Special Session Chapter 1 and other budget bills enacted during the 2010 session, the state now faces a $5.766 billion deficit for the upcoming 2012-2013 biennium. That projection has hardly changed from the official February state budget forecast where the deficit was originally projected to be $5.789 billion. This slight $22.9 million reduction in the deficit is remarkable in light of the fact that the first supplemental budget bill, Chapter 215, which the governor signed into law on April 1, permanently reduced city, county, and township aid and credit payments by $105 million per year or $210 million for the fiscal year (FY) 2012-2013 biennium, which includes city aid and credit payments in calendar years 2011 and 2012.

The table below attempts to recap the confusing actions of the 2010 Legislature and the impact on the 2010-2011 as well as the 2012-2013 biennial state budgets. Keep in mind that the February forecast was prepared prior to the Supreme Court decision calling into question the validity of the governor’s unallotments. That decision increased the 2010-2011 deficit by $2.43 billion, but actually reduced the FY 2012-2013 deficit by $1.2 billion due to the fact that the governor’s school aid payment deferral under the unallotments was assumed to not occur. The budget bill signed last week by the governor in fact extended the school aid payment deferral, which under the bill is scheduled to be repaid in FY 2012.

Table showing actions to balance the state budget (in millions) for fiscal years 2010 through 2013.

The projected $5.8 billion deficit assumes that the state repays school districts roughly $1.4 billion in delayed school aid payments, but does not include any assumption for inflationary impacts on state expenditures. Accounting for inflation grows the deficit by $1.181 billion. Even if the 2011 Legislature decides to extend the school aid payment deferral, the FY 2012-2013 deficit would still be in excess of $4.4 billion.

Although the special session budget bill balanced the state’s 2010-2011 budget without additional 2010 cuts to cities, the state will not end the current biennium until June 30, 2011. The state will update the budget forecast in late November and if the forecast shows another short-term deficit for the remainder of the current biennium, it is possible that cities and counties could see an additional unallotment this December.

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