Minnesota state budget (2011-2013)

Note: This article was last updated in 2013. Click here for more recent information on state budgets and finances.

Gov. Dayton signed the $35.7 billion biennial state budget into law on July 20, 2011. The budget changed funding to education and also to health and human services.

In December 2011, state budget officials delivered a surprise estimate of an $876 million surplus for the remainder of the state's budget due to revenues $358 million higher than expected. Also, spending was $205 million less than prior estimates. By law, surpluses are supposed to go into two state funds: a budget reserve and a cash-flow account.

Health and human services

The Health and Human Services portion of the budget was expected to be $11.3 billion.

The budget cut or delayed millions of dollars in payments to hospitals, doctors and health plans. The budget penalized hospitals that didn't reduce the number of patients who re-entered the hospital within 30 days of discharge and gave vouchers to move about 7,200 lower income adults from the state-subsidized MinnesotaCare program onto private health insurance.

Education

On April 5, 2012, Gov. Dayton vetoed a Republican plan to use state reserves to repay schools the $2.4 billion the state owed them due to accounting shifts and forced borrowing to avoid tax increases or deeper cuts elsewhere in the budget..

Under the budget, $700 million in funds due to districts statewide were delayed until the next two-year budget cycle. The $700 million delay was in addition to a previous delay of $1.4 billion that had yet to be repaid.

The delay of the funds would cost the individual districts. As of December 1, 2011, at least 26 districts reported they would have to borrow a total of $382 million to meet cash needs, incurring $3 million in financing costs.

Revenue

The state closed out the 2012 fiscal year with $336 million more in revenue than was forecasted in February.

State leaders revised that figure and announced on February 29, 2012, that the state had a surplus of $323 million. The forecast document said that the first $5 million of the new surplus would refill the reserves back up to $653 million. Whatever amount remained of the surplus would be used to reduce the school payment shift put in place to close the budget deficit.

Bond sale

A state authority planned to finalize a bond sale late in mid-November that would leverage a portion of the state's tobacco lawsuit settlement reached in 1998. The state would sell $787 million worth of bonds, which would direct $640 million to patch a budget deficit and $150 million toward a debt reserve fund, set-up costs and other expenses that limited the amount available for budget purposes. The highest annual debt costs came toward the beginning, when the state's budget was already anticipated to be in rough shape. Officials were projecting $1.2 billion in total overall debt costs. Through the tobacco securitization bond sale, the state gave up rights to a big chunk of tobacco payments through 2031. Minnesota received about $170 million in 2010.

Transfer of funds

The budget included a requirement that the Counties Transit Improvement Board pay more for regional transit operations over the next two years, meaning $15 million in additional expenses for the board whose funds come from a sales tax collected in five metro counties - Anoka, Dakota, Hennepin, Ramsey and Washington.

Credit rating

Despite ending the standoff, Moody's Investor Service down graded its outlook on Minnesota from stable to negative in light of the budget's reliance on one-time funds. Moody's said that Minnesota faced "significant obstacles" in achieving a structurally balanced budget in the next cycle as a result of those actions. Moody's rated the state Aa+, and Fitch Ratings lowered the state's credit ranking to AA+ in July 2011. Standard and Poor's had the state its highest rating of AAA, but downgraded the state to AA+ in September 2011, citing “continued structural imbalance” in the state’s budget.

Rainy day fund

At the start of fiscal year 2013, the state's reserve and cash flow accounts were funded full strength at roughly a combined $1 billion, due in part of budget surpluses.

State government shutdown

The budget was signed into law on July 20, 2011, after a 20-day state government shutdown. The governor and legislature failed to negotiate a deal on the fiscal year 2012 state budget before the start of the fiscal year on July 1, 2012, and so on that date the state government shut down. The Democratic governor and Republican-controlled legislature could not reach an agreement on how to close a $5 billion deficit, with the governor favoring taxes and the legislature favoring spending cuts. This was the second state government shutdown in six years.

The House signed off on the $13.6 billion K-12 education bill just over an hour after it was made public, and it contained a provision to delay an additional $700 million in school payments, a key part of the final budget deal struck by Dayton and Republican leaders. The passed budget relied on that money delayed from going to schools and from future payments on a legal settlement with tobacco companies to erase a $5 billion deficit through mid-2013.

Deal reached

A special legislative session began on July 19, 2011, and lawmakers worked through the night and passed the nine budget bills.

On July 14, 2011, the governor accepted the Republicans' offer. In exchange, Republicans agreed to drop all controversial policy positions as well as their proposal to cut 15 percent of the state's work force and not pass a $500 million bonding bill.

Republicans had initially rejected in January the governor's bonding bill which provided $500 million for infrastructure and building projects, including construction and improvements at the state public universities and colleges, renovation of the Mayo Civic Center in Rochester and a new stadium for a minor league baseball team in St. Paul. Republicans agreed to the bonding bill as part of the budget compromise.

Lawmakers said on Thursday, July 14, 2011, that they would hammer out the details of the deal and the move the bills through the required special session. Once they were approved the shutdown would officially end.

Negotiations

"The governor is the only one who can call a special session, so he's in the driver's seat as to how long this shutdown lasts," Brodkorb said. On June 23, 2011, Ramsey County District Judge Kathleen Gearin rejected the governor's request for a mediator to resolve the budget crisis, and she also rejected an argument by four GOP senators that she should order Dayton to call a special legislative session. The governor had rejected Republican proposals to pass a "lights-on budget" and said instead that he would not call a special session until an overarching agreement was reached.

Gov. Dayton met with Republican lawmakers on July 5, 6 and 7, but the shutdown continued. On July 6, the governor offered Republicans the choice of hiking the state cigarette tax by $1 a pack or raising income taxes on Minnesota residents earning more than $1 million a year. Republicans rejected these choices. On July 7, the governor met with Republican Senate Majority Leader Amy Koch and House Speaker Kurt Zellers. They discussed the K-12 budget but did not try to negotiate an overall budget deal. On July 11, 2011, the governor offered the millionaire's tax in exchange for Republicans agreeing to other tax increases. Republicans rejected the offer.

Former Democratic U.S. Senator Walter Mondale and former Republican governor Arne Carlson formed a bipartisan, unofficial committee of former legislators and budget officials on July 5, 2011 to come up with a budget proposal. The committee released a proposal on July 7, 2011. The plan proposed cutting projected state spending by $3.6 billion, which they said would amount to a 1.5 percent increase in each of the next two years, and also increasing income taxes on all earners and on alcohol and tobacco taxes to generate $1.4 billion. The plan stated "no shifts or gimmicks should be used to balance the budget." Under the plan, the overall two-year budget would be $35.6 billion although Republican lawmakers wanted a budget of no more than $34 billion. Dayton issued a statement praising the commission for its work. He said the plan was in line with his budget proposal, but he took issue with the income tax hike on every Minnesotan.

Millionaire tax

The Governor wanted to make budget cuts and raise some taxes, whereas Republicans opposed increasing taxes and wanted instead to rely on cuts. Gov. Dayton, a Democrat, wanted to spend $35.8 billion, funded in part by a $1.8 billion tax increase on the state’s top earners, whereas Republicans who held House and Senate majorities said they would not spend more than $34 billion and they rejected any tax increase. Dayton's proposed "millionaire's tax" would mean that the 7,700 people making more than $1 million a year in Minnesota would pay higher income taxes, either permanently or as a two-year surcharge, which would generate $500 million to $700 million in revenue. The governor proposed adding two percent to the existing 7.85 percent income tax. That would put the state third in the nation for top income tax bracket tax. Minnesotans who make more than $1 million a year already were projected to pay $1.081 billion in state income tax for the 2011 tax year.

Republicans defeated the governor's income tax measure on May 17, 2011, and the governor warned that he was prepared to take the budget fight into next year to get a tax increase through the Legislature.

Impact of shutdown

As a result of the government interruption, Fitch Ratings downgraded the state's bond rating from AAA to AA+ and cited as a result the "increasingly contentious budgeting environment."

The shutdown resulted in more than 20,000 employee layoffs. State employees were laid off rather than furloughed, so that they could collect unemployment during the shutdown. They did not receive severance packages. Many lawmakers were still receiving pay although 48 out of 134 House members and 14 senators deferred their pay — 31 Democrats and 31 Republicans. Employees deemed to be "essential" and still on the job were also still being paid. Included in the list of "essential employees" were the governor's chef and housekeeper.

The stoppage meant the end of non-emergency road construction, closure of the Capitol and stopped child-care assistance for the poor. More than 40 state boards and agencies were closed to working with only skeleton staff.

The Minnesota Department of Transportation shut down more than 80 highway rest stops by early afternoon on June 30, 2011, and state parks were closed. Minnesota was losing an estimated $200,000 a day from the closure of state parks alone. Each day of the closure, the state lost $1.25 million a day in lottery sales. The Department of Transportation was forfeiting between $40,000 and $50,000 a week from uncollected MnPass tolls. The Department of Natural Resources had estimated tourism losses of $12 million for each week the government was closed.

Critical services, including the State Patrol, prisons, disaster response and federally funded health, welfare and food stamp programs, continued. As of July 6, 2011, a judge had been determining what services could continue during the shutdown and had been holding hearings with individual social services groups that were waiting on inspections, licenses and background checks. The judge granted an exception to food banks and the governor requested on July 5, 2011, that the list be expanded to include special-education aid, addiction and mental health services, services for people with HIV and victims of domestic violence, sexual assault and other crimes.

In anticipation of a government shutdown, on June 13, 2011 Lori Swanson, the state Attorney General, asked Ramsey County District Court to rule that some core functions of state government must continue even if a lingering stalemate over the budget forced it to shut down on July 1.

Ramsey County Chief Judge Kathleen Gearin ruled on July 29, 2011, that core functions of government must continue in the event of a shutdown, but found that the court lacked the authority to order funding for the functions beyond the basic functions. The functions that would continue included basic care for Minnesotans in prison, nursing homes, veterans home and state hospitals, as well as funding for health care, computer system maintenance and internet security.

Governor's proposed budget

The state's budget forecast anticipated a shortfall over $5 billion over two years starting in July 2011. Estimates by state finance officials showed that maintaining all programs mandated by state law would cost $5.8 billion more in the next biennial budget than the $33 billion the state spent in the prior biennium. Gov. Mark Dayton presented his budget to the legislature on February 15, 2011, and addressed the state's $6.2 billion deficit. Minnesota's budget hole shrank by $1.2 billion thanks to a two percent federal payroll tax break passed by Congress in December 2010. In response Dayton announced he was withdrawing a proposal to impose a three percent surcharge on incomes over $500,000 a year and dropping $200 million in proposed cuts to health and human services programs. It was an announcement not well met by Republican members of the legislature who believed more cuts should be made.

The budget proposal included cutting $950 million in planned spending from health care and higher education, among other categories, while increasing spending on K-12 education by $465 million. In total the state budget reduced spending by $2.4 billion. Lawmakers on June 6, 2011 criticized Gov. Dayton for failing to specify what many of those other budget cuts would be.

Tax increases

The governor said he wanted to raise the state's top income-tax rate temporarily to 13.95 percent for single-filers making more than $85,000 annually, which would be the highest in any state. The governor also proposed raising the top rate on couples earning more than $150,000 of taxable income to 10.95 percent, up from 7.85 percent, as well as adding a three percent surcharge on taxable income above $500,000 for the next two years. The governor expected the tax to generate $4.1 billion in new revenue. The governor also proposed creating a new, higher property-tax bracket for homes valued at more than $1 million. Gov. Dayton's proposed income-tax increases were expected to generate $2.8 billion of new revenue.

The governor also wanted to require anyone living in Minnesota for more than 60 days per year to pay a prorated portion of their income taxes in Minnesota, which would change the current law requiring only those who live in Minnesota for more than six months of the year to pay state income taxes. The change would generate $15 million a year, according to state Department of Revenue projections.

Within weeks of Gov. Dayton's budget, the Minnesota Senate rejected his call to raise taxes on the wealthiest citizens. The Senate voted 63-1 against Dayton's proposal, with all Republicans and all but one Democrat joining in the majority. Senate Republicans argued that Dayton's proposed tax increases would hurt the state's economic recovery.

Legislative budgets

The legislature adjourned its regular session on May 23 pursuant to the state constitution. A special session had not brought about an agreed upon budget by June 8, 2011. If there was no budget by July 1, the state's government would begin shutting down.

On June 6, Republicans proposed increasing spending on schools, courts and public safety by $110 million, which was closer to Gov. Dayton's proposed spending, although Republicans did not detail what would be cut to increase spending in those areas. The parties were still quite far apart as of June 7, 2011, and some feared a state government shutdown, which would happen if an agreement was not reached by July 1, 2011.

The House and Senate each passed budget bills, but they were not reconciled and Gov. Dayton said that he would not start negotiating until Republicans sent him a complete, reconciled budget from both chambers. Republicans opposed raising taxes, but the governor was committed to increasing taxes on top earners.

The Senate passed a bill on February 3, 2011, eliminating $930 million from the state budget with cuts to colleges, local governments and public health programs. The Republican legislative leadership had said any tax increases to fix the budget hole were off the table.

In contrast to the governor's proposal to increase the tax rate for the wealthiest state residents, the House Tax Committee passed a bill that would cut income taxes for all Minnesotans, but could also force property tax hikes in cities across the state.

The House passed $1 billion in cuts which were similar to temporary spending cuts imposed by former Gov. Pawlenty. The bill reduced aid payments for local governments and cut funding for colleges and community health programs. Gov. Dayton said that they were "piecemeal cuts and partial solutions," that addressed only a portion of the state's $6.2 billion two-year budget hole.

The Republican caucus was expected to introduce its budget proposal in the second week of March. Health and human services funding was expected to be hardest hit because it represented a third of general fund spending. HHS funding was slated to increase by nearly $4 billion in the next biennium.

The budget battle between the legislature and governor was likely to come to a veto, because the Republicans were seeking deep cuts in aid to the Twin Cities and steep reductions to health and human services, which could boot thousands of Minnesotans off public programs.

Medicaid

While many states were looking to cut the number of Medicaid recipients, Minnesota had received permission to expand its rolls by 95,000. The expansion began March 1. 83,000 people who were enrolled in two state-funded programs, along with 12,000 uninsured, enrolled in Medicaid. Gov. Dayton told The Hill that Medicaid had more comprehensive benefits and lower co-pays than the state programs — General Assistance Medical Care and MinnesotaCare.

Gov. Dayton approved the expansion, something former Gov. Tim Pawlenty refused to do. Republican legislators opposed the move saying it tied up too much state money. Dayton said he would veto any legislation that attempted to reverse his decision.