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Why Conservatives Should Reject the Pawlenty Budget

May 06, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Despite all of the posturing about controlling growth in government, Governor Pawlenty does not have the most fiscally conservative budget on the table during the current round of budget negotiations.  The Minnesota Senate is actually making deeper funding cuts than those proposed by the Governor in each of the next two biennia.

Based on information from the non-partisan legislative fiscal staff (PDF), spending reductions in the Senate budget exceed the Governor's proposed cuts by $226 million in the next two-year biennium (FY 2010-11) and by $651 million in the biennium after that (FY 2012-13).

 

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This information should be a wake-up call to recent tea party participants who are complaining about growth in government.  The Minnesota Senate is proposing to shrink the state general fund significantly more than the Governor.

It is certainly true that Governor Pawlenty is not proposing a net state tax increase.  If the Governor, unlike the Minnesota Senate, is not proposing a state tax increase but is also not cutting spending by as much as the Senate, how then is he balancing the state's budget?  The answer is simple.  He's shifting.

The largest shift in the Governor's budget is the E-12 funding shift.  The Governor is proposing to shift a portion of school levy and aid payments from the FY 2010-11 biennium into the FY 2012-13 biennium.  The result of this is a net savings to the state of $1.3 billion in the FY 2010-11 biennium.  (In fairness to the Governor, it should be noted that the House is proposing an even larger shift of $1.8 billion.)

The problem with shifts is twofold.  First, they compel school districts to draw down reserves or engage in short-term borrowing in order to fill a temporary hole in the budget created by the shift.  Second, education shifts do not to solve the long-term gap between state revenues and state spending because the revenues provided by the shift are strictly one-time dollars.

In addition to school funding shifts, the Governor has invented a brand new accounting gimmick called "tobacco appropriation bonds."  Essentially, the Governor is proposing to sell future tobacco settlement dollars for the sake of a one-time cash infusion of $1.1 billion in the FY 2010-11 biennium.  The Governor would use these one-time dollars to pay state debt service on other bonds; this is the equivalent of borrowing from one credit card to pay off another.

Both of these shifts do nothing to address the state's long-term structural budget deficit.  Once the one-time dollars are gone, the state's budget is back in the hole, as illustrated below.

 

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The proposals of the House, Senate, and Governor all achieve a budgetary balance in the FY 2010-11 biennium.  However, only the Senate proposal achieves balance in the next biennium.  The Senate achieves structural balance in the FY 2012-13 biennium because it is not relying on one-time shifts to solve that state's budget deficit in FY 2010-11.  Of the three proposals, the Governor's budget is the most "shifty" and thereby produces the largest structural deficit in the FY 2012-13.

The Senate's budget proposal is far from perfect.  For example, the Senate is proposing to cut $453 million from E-12 education.  Adjusted for inflation, state support for E-12 education has already fallen by 14 percent and total school revenues have fallen by five percent from FY 2003 to FY 2009.  In light of this decline, the last thing school districts need is another funding hit in FY 2010 and 2011.  More school funding cuts will hurt the state's economy in the long-term.

However, Minnesota's fiscal conservatives should embrace the Senate's budget proposal over that of the Governor.  Right-wingers around the nation have protested federal policies that are shifting today's costs on to tomorrow's taxpayers.  To be ideologically consistent, Minnesota's conservatives should reject the Governor's proposal to shift the state's budget problem on to the backs of future taxpayers through creative accounting gimmicks.

It is certainly true that the Senate is proposing to increase taxes.  On the other hand, it is cutting general fund spending more than the Governor and balancing the state's budget in a painful yet honest way by increasing taxes to pay for what spending remains.  Unlike the Governor's proposal, the Senate proposal does not pass the buck on to future taxpayers and future officeholders.

Progressives and conservatives do not have a lot of philosophical agreement, but one principle unites us.  Both agree in honest, transparent taxation that produces a balanced state budget not only today, but for the future.  The massive shifts proposed by the Governor are anathema to both.

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