CHICAGO — Minnesota lawmakers are expected to approve a new two-year budget in the coming days after Gov. Mark Dayton and legislative leaders agreed to delay school aid payments and issue tobacco bonds to end a stalemate over $1.4 billion in spending that shut down state government July 1.
The offer to use two one-shot revenue sources was first floated by Republican leaders in late June, just days before the start of the new fiscal year, but Dayton rejected it as a short-term solution to the state’s structural budget woes.
The governor, a member of the state’s Democratic-Farmer-Labor party, on Thursday offered to accept that plan with several conditions attached, and Republicans, who control the Legislature, agreed.
The conditions include Republican support for a $500 million bonding bill for capital projects, dropping demands for a 15% reduction in state agency positions, and other policy proposals, such as funding for private school vouchers and curbs on collective bargaining rights.
Dayton, Senate Majority Leader Amy Koch of Buffalo, and House Speaker Kurt Zellers of Maple Grove emerged from talks Thursday evening to announce they had a “framework” for an agreement. “We are committed to working together … to get this nailed down so we will be ready to go to a special session as soon as possible,” Dayton said.
Republicans and Dayton had dug in their heels over the last two weeks. The governor has pressed for a mix of spending cuts and an income tax hike on the state’s top earners to eliminate a $5 billion budget gap. Republicans refused to go along with any tax increase.
Dayton trimmed the size of his request and offered to switch the income tax hike for other taxes but the GOP did not budge with only a $1.4 billion gap remaining between their proposals.
Republican leaders said they were pleased the state will close its deficit without tax increases, but they expressed disappointment that spending will top $35 billion. They had wanted further cuts to keep the budget in the $34 billion range.
Dayton had sought to avoid the use of one-time revenues that analysts and finance officials blame for the size of the budget deficit, but the agreement does give him a bonding bill, though it is half of what he proposed earlier this year.
Investment bankers had already begun to reach out to state finance officials Friday, even though the tobacco bond issue is in its infancy, the drafting of legislation had just begun, and no decisions have been made on total size, structure, security, or other features.
“We are just beginning the process,” state debt manager Kristin Hanson said Friday after returning to work in the wake of the budget pact. “We don’t even have the legislation written yet, but we will know more next week.”
Minnesota has not previously leveraged its payments under the 1998 Master Settlement Agreement between most states and the major tobacco companies, though former Gov. Tim Pawlenty proposed a $1 billion issue to help balance the budget in 2009. The state currently deposits its annual payment into the general fund and it can be used without restriction, according to state reports.
Tobacco companies made $6 billion in payments to states in 2011 under the agreement, down 5.6% from a year earlier, according to a report from Herbert J. Sims & Co.
Minnesota receives about $200 million annually. Annual payments are based on a complex formula that adjusts for the size of the cigarette market, inflation, consumption, and other factors.
Dayton said in his letter to legislative leaders Thursday that 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 state already has felt the wrath of analysts for its reliance on non-recurring revenues to deal with red ink. Fitch Ratings attributed its recent lowering of Minnesota’s rating to AA-plus from AAA to political gridlock that has driven a reliance on one-time revenue gimmicks to balance recent budgets. Fitch said given the budget impasse, it expected a similar solution to the current deficit. The action affects $5.7 billion of GO bonds.
Minnesota retains its AAA rating from Standard & Poor’s while Moody’s Investors Service rates it Aa1.
