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Minnesota budget deal pushes problem down the road

Source: Thomson Reuters Foundation - Fri, 15 Jul 2011 22:23 GMT
Author: Reuters
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By David Bailey

MINNEAPOLIS, July 15 (Reuters) - Although Minnesota reached a budget deal that will end the longest state government shutdown in recent memory, it merely pushes long-term fiscal problems two years down the road, experts said on Friday.

The tentative agreement announced by Democratic Governor Mark Dayton and Republican legislative leaders on Thursday relies on delaying payments and borrowing against future revenues, rather than taking any hard decisions on cutting spending or raising taxes.

And it will do little to ease the tensions between the two political parties over fiscal and social policy issues.

"It does nothing to address the fundamental problems the state has been facing for years," said David Schultz, a Hamline University professor and expert in Minnesota politics.

The deal in Minnesota comes as President Barack Obama and Republicans wrestle over higher taxes versus spending cuts as they try to hammer out a deficit-reduction plan while facing an Aug. 2 deadline on raising the federal government's debt ceiling.

In Minnesota, details on spending bills were being hammered out on Friday and work was expected to continue over the weekend toward holding a special session as early as Monday where the budget could be approved to end the shutdown, now in its third week.

The planned ${esc.dollar}35.4 billion two-year budget would close a ${esc.dollar}1.4 billion gap between Democratic and Republican proposals by delaying ${esc.dollar}700 million of payments to schools and issuing ${esc.dollar}700 million of bonds backed by tobacco settlement money.

"It leaves the structural problem virtually unchanged and in fact actually makes the structural problem just a little bit worse looking out into 2014 and 2015," said Tom Stinson, a University of Minnesota and state economist.

Ratings agency Fitch had stripped Minnesota's AAA bond rating partly over structural deficits and partly because the tobacco bond proposal was even on the table, he said.

"It is just not good financial practice to indulge in that kind of smoke and mirrors," Stinson said.

FISCAL VICTORY FOR REPUBLICANS

The deal includes none of the income tax increases Dayton had proposed, in a clear fiscal victory for Republicans that has so far met stiff opposition from Democratic lawmakers.

"They won on this one across the board," Schultz said, adding that he thought the deal would be approved.

The agreement is expected to exclude big social policy changes Republicans had sought, such as restrictions on stem cell research and abortion that were reported as hang-ups in talks ahead of the shutdown.

Still, Schultz said, Republican lawmakers could bypass Dayton on policy issues by placing proposed amendments to the state constitution before voters as they have with a gay marriage ban amendment for the 2012 general election.

Capital bonding proposals Dayton had made early in the year were cut in half to ${esc.dollar}500 million in his latest budget offer, and are no longer required to complete the deal.

Even if the legislature approved the spending plans on Monday it could take until the end of the week to get the state government back up and running, Schultz said.

More than 22,000 state workers were furloughed in the chaotic government shutdown that started with the new fiscal year on July 1.

State parks, historic sites and highway rest stops were closed before the July 4 holiday weekend. The state lottery was suspended and two horse racing tracks were forced to suspend operations due to a lack of government oversight.

Only functions deemed critical were continued such as prison staffing, state police patrols and operations at nursing and veterans homes. Still, not all prison and police functions were deemed critical.

About 100 state-funded road construction projects were also suspended during the shutdown. (Reporting by David Bailey, Editing by Cynthia Johnston and Leslie Adler)

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