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Comparison of Senate Phase 2 Budget-Balancing Proposals

On February 21, the House and Senate passed an agreement that addressed Minnesota’s 2002-03 budget deficit and made a dent in the deficit in 2004-05.  This “Phase 1” proposal relied largely on reserves and other one-time resources in the current biennium and on spending reductions in the next biennium.[1] 

General Fund Changes – Phase 1 ($ in millions)	FY 02-03	FY 04-05
One-Time Resources	1,345	0
One-Time Spending Reductions	131	0
Permanent Spending Reductions	374	721
Additional Spending Reductions (inflation)	0	1,127
Revenue Increases	0	0
TOTAL:	1,850	1,848
Remaining Problem:	-439	-1,367

However, the February Forecast shows that the deficit has grown, which means additional work is needed to balance the budget in what is being called Phase 2.  There is not yet consensus on how to address the remaining deficit, although the Senate Republican Caucus has announced a plan and the Senate Finance Committee passed a proposal on March 8.  These Phase 2 plans are summarized in the table and described in more detail below.

General Fund Changes – Phase 2 ($ in millions) Parentheses indicate an increase in general fund spending.		Senate Finance Committee		Senate Republican Plan
		FY 02-03	FY 04-05	FY 02-03	FY 04-05
One-Time Resources		802	4	439	0
	Cash Flow Account	155		155
	Workers Compensation Special Fund	52
	Tobacco Endowments			219
	Transportation refinancing	245
	21st Century Minerals Fund			65
	K-12 timing shift	313	4
	County Social Services shift	37
Permanent Spending Reductions		(15)	(407)	0	0
	K-12 Education	(1)	(377)
	Higher Education	(5)
	Human Services		(13)
	Judiciary/Corrections	(1)	(2)
	Professional and Technical Contracts Moratorium	(8)	(15)
TOTAL:		787	(403)	439
Size of Problem:		-439	-1,367	-439	-1,367
Bottom line:		+348	-1,770	0	-1,367

Policy-makers have three budget-balancing tools available — using reserves, reducing spending, and raising revenues.  In Phase 1, only reserves and spending reductions were used, and this continues to be the case for the Senate Phase 2 proposals released to date.  The Senate Republican plan addresses the remaining 2002-03 deficit through additional use of one-time resources.  The Senate Finance Committee proposal uses funding shifts to cover the remaining 2002-03 deficit and includes restoration of some of the expenditure cuts that were part of Phase 1.  It is expected that there will be a second component of this proposal that would include tax provisions to rebuild the state’s budget reserves and perhaps address at least some of the remaining 2004-05 deficit. 

Reserves and One-Time Resources

The Senate Republican plan draws on funds from three sources:

• $155 million of the Cash Flow Account, which normally is used to address short-term cash flow problems during the year.  This leaves the account empty, as $195 million was used in Phase 1.[2] 
• $219 million from the $554 million tobacco endowment dedicated to smoking prevention. 
• The $65 million 21^st Century Fund, which was created in 1999 to finance a taconite production plant that has not been built.

The Senate Finance plan uses a different set of resources, although the one point of similarity is that it also uses $155 million from the Cash Flow Account.  In addition, the Senate Finance plan draws on two other funds:

• $52 million from the Workers Compensation Special Fund.[3]
• $245 million in general fund appropriations for transportation projects appropriated in 2000.  These projects would be funded instead by bonds.

The Senate Finance Committee plan makes additional revenues available in 2002-03 by changing when payments are made to local units of government.  Currently, major appropriations to schools are made with 90% of the appropriation coming in the current fiscal year and 10% in the next fiscal year.[4]  Under the Senate Finance Plan, 85% would be paid in the current fiscal year and 15% in the next. 

The Senate Finance Committee proposal would also change the way in which counties receive community social services funding.  These payments currently are paid to counties in four installments.  Under the Senate Finance plan, counties would receive these funds in one payment on or before July 10.  It is not yet clear what the impact of these funding delays will be on local governments.

Expenditure Changes

In Phase 1, $374 million in permanent spending cuts were made in 2002-03 and $1.8 billion in 2004-05.  The Senate Finance Committee plan restores $15 million of cuts in 2002-03 and $407 million in 2004-05. 

For 2002-03, the Senate Finance agreement restores $5 million of funding to HESO State Grants and $1 million for the Crime Victims Ombudsman and Battered Women Shelters per diems. 

Phase 1 contained a $35 million reduction in contract expenditures and a $40 million hiring freeze.  The Senate Finance Plan reduces the contract reduction to $27.3 million and excludes the following agencies from the moratorium:  Minnesota State Colleges and Universities (MnSCU), the Higher Education Services Office, Department of Corrections, and Department of Human Services with respect to contracts for state operated services.  The Senate Finance plan further exempts employees of state correctional facilities and employees of state operated services under the Department of Human Services from the hiring freeze. 

Under Phase 1, $1.8 billion of expenditure cuts were made in 2004-05: $721 million from targeted reductions, the hiring freeze, and contracts moratorium, and $1.127 billion of discretionary inflation.  The Senate Finance plan restores discretionary inflation for the general education funding formula, which is estimated at $375 million in 2004-05.  However, this simply means that the amount of funding needed for the general education funding formula to keep up with inflation will be included in the Financial Forecast.  The 2003 legislature will need to have sufficient revenues available for this $375 million to be appropriated to K-12 education in the 2004-05 budget.

Click on the footnote number to return to text.

[1] See Minnesota Budget Project, Analysis of the House-Senate Budget Agreement.

[2] Phase 1 allowed for access to the state’s tobacco endowments for cash flow purposes. 

[3] The Workers Compensation Special Fund was created in the 2000 legislative session when$325 million was transferred out of the Assigned Risk Plan (which provides workers’ compensation coverage to employers who are unable to purchase coverage in the private insurance market).  Phase 1 drew upon $95 million from the Assigned Risk Plan and $230 million from the Workers Compensation Special Fund to address the 2002-03 general fund deficit.

[4] See House Research, Minnesota School Finance: A Guide for Legislators.

Updated March 12, 2002

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