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Balance Future Unallotments with Tax Increases

February 10, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Not too many years ago, unallotment was a hot topic as conservative Governor Tim Pawlenty repeatedly slashed state spending without legislative approval as budgets got tight. Minnesota statute grants governors the ability to unilaterally reduce state expenditures in the event of an unforeseen budget deficit, a process know as unallotment. Pawlenty’s use of unallotment underscored the need to reform this seldom used but important executive power.

Minnesota law allows the commissioner of Management & Budget (MMB) to “unallot” or reduce certain types of expenditures after all of the following conditions have been met: (1) a balanced budget has already been enacted, (2) projected revenues are less than anticipated, (3) the governor has approved the unallotment, (4) the MMB commissioner has sought advice from the Legislative Advisory Commission (although the executive branch is not required to act on this advice), and (5) the budget reserve has been exhausted.* When these conditions are met, the unallotment power of the governor is broad, with “few limits on the types or amounts of appropriations that may be unalloted.”

Minnesota’s unallotment statute was enacted in 1939, but there are no known exercises of the authority until 1981, when Governor Quie used it to address an unforeseen budget deficit. The authority was exercised again in 1987 by Governor Perpich and then went unused until the Pawlenty administration, when it was invoked on three separate occasions: 2003, 2009, and 2010. Pawlenty’s third attempt at unallotment in the last year of his administration was struck down by the Minnesota Supreme Court as unconstitutional because the Governor was unalloting before a balanced budget agreement with the legislature had been reached.†

However, when an unanticipated deficit arises within a biennium after a balanced budget has been enacted, the power of the governor to unallot is extremely broad and potentially subject to abuse, particularly in the hands of an anti-tax governor. For example, the current unallotment statute stacked the deck in the favor of Governor Pawlenty in his negotiations with the legislature over unanticipated budget deficits. Pawlenty could—and did—disregard legislative proposals to increase revenue or reduce expenditure not to his liking, knowing that at the end of day he could make nearly whatever budget cuts he choose through unallotment without involving the House or Senate, effectively circumventing the legislature’s constitutional role in the budget process.

The purpose of unallotment—to provide an emergency mechanism to balance an unanticipated deficit when legislative consent is unattainable—is valid. However, unallotment should not skew the budget negotiation process in favor of an anti-tax executive, which is precisely what the current authority does. Nor should it skew the process in favor of a progressive governor who is more inclined to raise revenue than cut spending. Rather than giving the governor an upper hand in budget negotiations with the legislature, a properly designed unallotment authority should be a last resort to be utilized only after all legitimate attempts at compromise have failed.

To this end, state policymakers should consider reforms to the current unallotment statute. One solution would be to resolve an unanticipated deficit through an equal combination of spending unallotment—implemented at the discretion of the governor—and automatic income tax surcharges or some other statutorily prescribed revenue increase. The rate at which the automatic tax is levied would be sufficient to close half of the deficit, with the remainder closed through spending unallotment.

Whatever tax increase is prescribed by this process, it will almost certainly not generate new revenue immediately. With any tax increase, there is a lag between the time the tax is authorized and the time when revenues actually begin to roll into state coffers. To deal with this delay, the state would be authorized to issue short-term debt, to be repaid when new tax revenues materialize.

An emergency budget measure constructed along these lines would give a governor the ability to deal with an unforeseen deficit without providing the executive branch with inappropriate leverage in budget negotiations with the legislature. Unlike the current process which relies entirely on spending unallotment, the reformed process described above would incentivize an anti-tax governor to compromise in order to avoid the automatic tax increase. At the same time, a progressive governor would be incentivized to compromise in order to avoid spending reductions. A mechanism of this nature would provide the state with the flexibility to deal with an unanticipated deficit without granting inappropriate and possibly unconstitutional leverage to the executive branch.

The time to reform the unallotment process is not during the throes of a budget crisis, when panicked policymakers will be reluctant to surrender any strategic advantage they might have vis-à-vis their ideological adversaries. Rather, the time to address the flaws with the current statute is during a period of surplus when state officials are not in crisis mode and calm and reflective motives can prevail. The upcoming 2014 session will offer as good an opportunity as any to fix the problems with Minnesota’s current unallotment law.

 

*This and much of the other information in this article is derived from a December 2010 House Research Information Brief. This brief provides an excellent overview of the powers, limitations, and constitutional issues pertaining to Minnesota’s unallotment statute.

†In a nutshell, the Court determined that the purpose of unallotment was to resolve an unforeseen deficit, rather than to allow the governor to circumvent the legislature’s constitutional power to participate in the budget setting process.
 

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