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Unallotment could leave $7 billion problem in two years

By Brad Swenson

Gov. Tim Pawlenty's decision to balance the state budget on his own with no new revenue will leave a $7.2 billion problem in two years for the next governor and Legislature, the Senate's tax expert said Tuesday.

"Pawlenty's leaving us with one heck of a mess here," said Senate Taxes Committee Chairman Tom Bakk, DFL-Cook, in an interview in Bemidji. "The problem is almost twice as bad, going forward."

Bakk, also a 2010 Democratic gubernatorial candidate, came to Bemidji from an earlier Legislative Advisory Commission meeting in St. Paul where Pawlenty officials were questioned about the Republican governor's plan to erase a $2.7 billion budget deficit for the two-year state budget that starts today.

Sides sparred over potential job losses under either Pawlenty's unallotment or under the $1 billion tax increase DFLers sought but Pawlenty vetoed.

State Economist Tom Stinson said Pawlenty's budget solution could cost up to 4,700 jobs across Minnesota, including up to 1,970 local government jobs and 1,630 state jobs because of state funding cuts.

"Stinson said if you had taken the Senate's $1 billion tax increase, Minnesota would have lost about 1,000 jobs," Bakk said. "But this plan, he said, will cost you somewhere between 3,000 and 5,000 jobs. So, from a jobs standpoint, this is worse."

Republicans all along have been saying raising taxes is a "job killer," Bakk said. "As it turns out, according to our state economist, quite the contrary."

It's also more than the loss of jobs, says Sen. Mary Olson, DFL-Bemidji, who accompanied Bakk.

"Those are just direct job losses," she said. "That's not looking at what kind of an impact a reduction in the quality of life and a well-educated workforce is going to have on attracting future jobs to the state

"Every time we lose a college age student, who might have stayed in Minnesota, because the cost of tuition is so much higher here than going to another state, chances are reduced that the student will come back and go to work here in Minnesota," Olson added.

A Senate analysis shows that Pawlenty's unallotment and shift of nearly $1.8 billion in school aids to the next biennium will leave a $7.2 billion budget gap for that biennium.

Just because of the poor economy, the 2012-13 biennium starts out with a $3.1 billion deficit before adding shifts, Bakk said. Pawlenty's delay of capital equipment sales tax refunds and corporate tax franchise tax refunds pushes another $105 million forward.

Restoring the elimination of the General Assistance Medical Care program that provides health care to the state's most poor adults adds another $888.7 million.

Inflation is estimated at $1.3 billion.

Bakk called questionable Pawlenty's shift of $600.7 million in property tax recognition adjustment, which is statutorily required. It means school districts such as Bemidji which has an excess levy referendum partially funded by the state will get the full payment in October, the next biennium, instead of half in May and half in October.

School districts would have to borrow to cover those expenses, as well as for general school aid of $1.2 billion which is also delayed.

"The big challenge is school aid payment," Bakk said. "It is a cut, because $3.1 billion is our deficit in the next biennium. ... If we wanted to buy back the school property tax recognition adjustment and the $1.17 billion, where is that going to come from when the deficit in addition to that is $3.1 billion?

"It's very easy for him (Pawlenty) to say the next Legislature, the next governor, will repay this delay," Bakk added. "With what, when we're facing this kind of a problem ($3.1 billion) at the front end?"

Bakk said he's cautioning school districts in his legislative district to "minimize their borrowing, because the state doesn't have the resources to pay this back. ... There's no money out in the next biennium to pay it back."

The best solution now is to stimulate the economy, create jobs and bring in additional tax revenue with economic turnaround, Bakk said.

Bakk said he tried several approaches this budget to convince the governor that new revenues, mixed with cuts, are needed. But he would accept none. He tried offering $300 million in various business tax credits, to be given over a four-year period, if Pawlenty would accept $300 million in income or sales tax increases.

"After all these credits are phased in, you can make the argument this is revenue neutral," Bakk said he told Pawlenty. "You can get some economic stimulus at the same time. I thought he should have bit on that."

But Pawlenty wanted to take no risk in raising taxes, Bakk said. "He just wouldn't go there."

"There are always things we can try to do around the edges to try to save money and become more efficient, and we should do those things," Olson said. "But most of the money we spend is being passed through to someone else, whether it's to cities and counties in the form of LGA or whether it's to school districts or whether it's to hospitals to help pay for health care, nursing homes. That's the vast majority of the money we're spending."

Bakk said Pawlenty's unallotment of Local Government Aid to cities could raise property taxes $238 million.

The LAC on Tuesday passed a resolution that the unallotments "are not in the best interest of Minnesota." Legislative leaders also questioned Sinton's job loss numbers, saying it would be much more than 4,700.

Commissioner Tom Hanson of Minnesota Management and Budget, a Pawlenty appointee, said the Legislature only passed a balanced budget in the last eight minutes of this year's legislative session. That is when lawmakers approved a tax increase that Pawlenty vetoed.

When the tax increase failed, the budget had a $2.7 billion deficit that Pawlenty opted to plug by making cuts on his own instead of calling lawmakers back into special session.

House Speaker Margaret Anderson Kelliher said Pawlenty made his decision to unallot well before the session ended. She said he was disengaged, not interesting in negotiating a budget deal with Democrats.

"It is absolutely essential that the Legislature curbs the power of the executive branch," she said, adding that bills will be considered in 2010 to limit a governor's unallotment power.

Minnesota State Capitol Bureau reporter Don Davis contributed to this report.