CHICAGO — In hopes of ending a budget stalemate that shut down Minnesota government on July 1, Gov. Mark Dayton met with legislative leaders Thursday after Dayton offered to accept a Republican plan to bridge a $1.4 billion gap through additional delays in school aid and the sale of tobacco bonds.
Dayton, however, attached conditions to the GOP proposal that he originally rejected when it was first offered late last month ahead of the July 1st start of fiscal 2012. The governor — a member of the state’s Democratic-Farmer-Labor party — wants the Republicans who control the legislature to approve a $500 million capital construction program and drop controversial policy proposals.
Dayton said he still believes a tax increase is the better option over the two one-shot revenues offered by Republicans but he said the public is demanding an end to the shutdown and the proposals allow the state to avoid deeper cuts.
“It thus achieves my principal objective throughout these negotiations, which has been finding the revenues necessary to prevent the severe reduction in, or even the elimination of, the assistance upon which many Minnesotans’ lives depend,” Dayton said in a letter hand-delivered to Senate Majority Leader Amy Koch and House Speaker Kurt Zellers Thursday morning.
The GOP responded by agreeing to meetings later in the afternoon in an effort to break the logjam on a new $35 billion budget.
Both sides have dug in their heels over the last two week. Dayton has pressed for a mix of spending cuts and an income tax hike on the state’s top earners to balance a $5 billion budget gap. Republicans have refused to go along with a tax increase. Dayton has trimmed the size of his request and offered to switch the tax hike for other taxes but the GOP has not budged. Only a $1.4 billion gap remains in their proposals.
Dayton won election last fall pledging to rely on a tax increase and spending reductions to balance the state’s next two-year budget. The GOP won control of the Legislature, campaigning that they would not raise taxes.
The impasse has shuttered most state offices and employees have been furloughed, driving Fitch Ratings’ decision to lower Minnesota’s rating to AA-plus from AAA last week. Any state debt service payments that come due during the shutdown continue to be paid under a standing appropriation and a court order that deems state debt obligations a critical state function.
Under the compromise offered by Republicans, the state would increase already planned delays in school aid payments by $700 million. The remaining $700 million of red ink would be erased by borrowing against future state payments under the 1998 master settlement agreement with tobacco companies.
Dayton said in the letter he remains uneasy with the tobacco bonding.
“I thought then, and still believe strongly, that the second measure is far less preferable than a new, progressive source of additional revenue,” he said. “However, despite my serious reservations about your plan, I have concluded that continuing the state government shutdown would be even more destructive for too many Minnesotans.”
The catch in the agreement is Dayton’s demands that Republicans drop their policy demands along with a 15% across-the-board reduction in the state’s agency workforce. The policy proposals include funding for private school vouchers and curbs on collective bargaining rights. Dayton also wants lawmakers to agree after a budget is adopted to support a capital budget of at least $500 million. Earlier this year he floated a $1 billion plan that it did not pass.
If an agreement is reached, Dayton said he would call a special session to pass a budget within the next three days.
Fitch said in its downgrade announcement that political gridlock has driven the state’s reliance on one-time revenue gimmicks to balance recent budgets. Fitch said given the budget impasse it expected a similar solution to the current budget deficit. The action directly affects $5.7 billion of state GO bonds. Minnesota retains its AAA from Standard & Poor’s while Moody’s Investors Service rates it Aa1.
“While negotiations continue, it is impossible to know at this point when a budget agreement will be reached or the shape that the final agreement will take. However, it appears likely that the outcome will continue the use of non-recurring balancing tools and that deferred payment obligations will continue to be a drag on the state’s finances,” analysts wrote. “Fitch believes that as a result Minnesota’s financial posture is no longer consistent with an AAA rating.”
