Minnesota Legislative Update: 2007 Session Wrap-Up

The Minnesota House of Representatives and Senate passed five major budget bills and the omnibus tax bill on May 21 to end the 2007 legislative session. Deliberations continued until the final hour, concluding at the constitutional deadline of midnight.

The final hours of the session were often acrimonious as legislators sought to recraft multiple budget bills to win the approval of Governor Tim Pawlenty. The dramatic conclusion followed a legislative session in which the Legislature and the governor jockeyed for advantage in the face of a new political reality: Unlike the last eight years, during which control of the Legislature was divided between the Republican Party (which controlled the House) and the DFL (which controlled the Senate), this year both houses of the Legislature were controlled by the DFL. Thus, this year the DFL was poised with greater strength to challenge the legislative priorities of a Republican governor.

The governor insisted on two things: no tax increases and limiting increases in state spending to 10 percent. DFL legislators countered that, in past years, the governor's refusal to allow state tax increases resulted in increases in fees and local property taxes and that state spending increases are a more appropriate mechanism and necessary to make needed investments in health care, education, transportation and other areas of the state budget.

While it had been customary during most of the last decade for the House, Senate and governor to reach a "global budget agreement" for each legislative session—a framework for state spending which legislators used to guide the drafting of detailed budgets—this year no such agreement was ever reached. Instead, in early May the House and Senate passed a first round of budget bills and a tax bill. All but two were vetoed by the governor. Following the first series of vetoes, the House and Senate passed a second round of budget bills and a tax bill tailored to respond to the governor's veto messages and win his approval.

The governor signed the remaining budget bills, although he line-item vetoed $30 million of appropriations within the bills. He vetoed the tax bill.

Budget and Taxes

The 2007 legislative session began with a projected $2.2 billion surplus. Approximately half of this surplus was one-time money only available for the next budget cycle. The remainder of the surplus was money projected to recur in future budgets.

The governor proposed a spending increase of 9.8 percent over the last biennium. The Legislature approved a 10 percent increase, bringing the biennial state budget to $34.7 billion. More than half of the state's budget is spent on E-12 education and health and human services. The remainder of the budget is split among state administrative costs and programs for transportation, higher education, economic development, agriculture, veterans, public safety, and the environment.

The $1.8 billion tax bill the governor vetoed would have spent $123 million in an attempt to give homeowners property tax relief and raised $125 million by restricting the use of foreign operating corporations by businesses to increase corporate income tax deductions. The bill would have fully phased in sales as the only factor considered in corporate income tax calculations by 2011 instead of 2014 as provided under current law. Property and payroll are now considered in addition to sales. The tax bill also would have provided tax subsidies for expansions of the Thomson West company's campus and the Mall of America as well as a guarantee of costs for the 2008 Republican National Convention in St. Paul. Proposed increases in the statewide business property tax and individual income tax for the wealthiest Minnesotans were not included in the final tax bill.

In addition to the budget and tax issues, legislative activity included extensive debate on policy issues facing the state. More than 2,500 bills were introduced in the House and Senate during the four-month legislative session. Only a fraction of these—fewer than 150—became law. The following are highlights of the key issues in the 2007 legislative session.

Capital Improvements

Traditionally, the even-numbered year of the biennium is the time for funding major capital bonding projects. In the odd-numbered year, the Legislature usually addresses numerous requests to fund projects that are urgent or emergency items. The governor recommended $70 million in general obligation (GO) bonding for 2007. The House and Senate approved a bill with twice that amount in GO bonds and another $164 million in general funding for capital projects. The governor vetoed this first bonding bill.

On the last day of the session, the Senate passed an alternative bonding proposal that was not taken up by the House. These capital projects will be revisited in 2008 when the governor and Legislature consider a larger capital bonding bill, or they may be reconsidered if the governor calls a special session in 2007. A special session is unlikely.

Constitutional Amendment

A constitutional amendment to increase funding for wildlife habitat, clean water, parks, trails, zoos, arts and cultural programs again failed to pass in 2007. The amendment would ask voters to approve a new dedicated funding source for these purposes.

The dedicated funding source would be an increase in the state sales tax of 0.375 percent. The governor did not express an opinion regarding the tax increase, because a constitutional amendment does not require approval of the governor.

Supporters will return next year with the hope that the bill will pass early in the 2008 legislative session and be placed on the ballot for the 2008 elections. House Speaker Margaret Anderson Kelliher has indicated that the constitutional amendment will be among the first pieces of legislation to receive attention in the 2008 session.

Consumer Protection

New Attorney General Lori Swanson and House DFL legislators worked together on numerous consumer protection proposals. The DFL-led effort left the business community to play defense on many of these proposals for most of the legislative session. However, the governor consulted extensively with business leaders as legislation made its way through both houses and, with the governor's support and the attorney general's and legislators' willingness to negotiate, business leaders were able to reach compromises on a number of bills. Here is what ultimately passed:

• Auto Dealer Disclosures—Car buyers must be informed when a credit report has been requested and must be told the cost of new-car add-ons such as rust proofing. A provision requiring used car dealers to accept returns of vehicles within two days of purchase and a requirement that auto dealers disclose their mark-ups were stricken from the bill.
  
• Freedom to Breathe Act—Beginning August 1, 2007, smoking will be prohibited statewide inside restaurants, bars and other public places. The law does not include exemptions for separate smoking rooms or ventilation systems. Supporters argued the bill will protect workers as well as consumers.
  
• Gift Cards—A new law prohibits the issuance of gift cards or certificates with an expiration date or fee. Provisions allowing customers to receive the balance of the card in cash or use the card to pay outstanding debts were not included in the final bill.
  
• Identity Theft—Additional restrictions on the use of Social Security numbers—which were enacted in 2005 and 2006 and were scheduled to take effect July 1, 2007—were postponed for a year. Some business leaders had feared that a number of legitimate business uses would have been prohibited unintentionally by the new restrictions. The one-year delay will give businesses such as banks, insurers and securities firms the opportunity to work with legislators and Attorney General Swanson on language that balances the need of businesses to use Social Security numbers in conducting their operations with restrictions that protect consumers from misuse of their Social Security numbers.
  
• Predatory Lending—A new law prohibits mortgage lenders from approving loans that are not suitable for borrowers, bans some risky types of loans and provides fines and prison terms for mortgage fraud. Supporters of the new law say it will give Minnesota the strongest predatory-lending law in the United States and help reduce the number of foreclosures.

Education

Only one version of the E-12 education spending bill reached the governor's desk this session, and the $13.8 billion bill—which funded increases in the general formula allowance and special education—was a disappointment to both the Legislature and the governor. The House and Senate had also prioritized funding all-day kindergarten and early childhood education. Although all of these budget items received funding increases, other demands on the state budget proved to be higher priorities. Neither all-day kindergarten nor early childhood education received the increases proposed at the beginning of the session.

The majority of the $794 million in new spending is attributable to a basic funding increase of two percent the first year and one percent the second year and another $330 million for special education. The increase in special education funding may relieve some pressure on school districts which have had to shift funds from other accounts to meet special education requirements.

All-day kindergarten received a $32.5 million increase in funding that, combined with the existing all-day kindergarten programs, will likely allow more students to be in a full-day setting and possibly lower fees for parents or eliminate fees in some districts. The precise effect of the additional funding for local districts will vary greatly across the state and will ultimately depend on what budget pressures each district faces.

The governor as well as legislators in both parties expressed frustration that, given other budget priorities, greater funding of E-12 education was not possible. Funding all-day kindergarten and early childhood education is a priority for many legislators, and we can expect new initiatives in this area in the 2008 legislative session.

Energy

Perhaps the hallmark issue for this session was energy policy.

The Renewable Energy Standard Act of 2007 requires that Minnesota electric utilities provide 25 percent of their total electrical output from renewable sources by 2025. The ethanol industry received a boost as legislators approved financial incentives aimed at doubling the number of service stations selling E85 (motor fuel blends of 85 percent ethanol and 15 percent gasoline) in Minnesota from 300 to 600.

Minnesota now has one of the most aggressive laws in the nation regarding climate change and greenhouse gases. The Next Generation Energy Act of 2007 establishes statewide greenhouse gas reduction goals leading to 80 percent by 2050. Greenhouse gas emissions will be identified and evaluated for all sectors, not just utilities. There are several studies regarding energy generation and reducing greenhouse gases required by the new law. Most of these studies must report their findings to the 2008 Legislature.

Health and Human Services

The governor vetoed the original health and human services bill due to its cost in this budget cycle and its funding obligations into the future.

Modest progress was made in dealing with skyrocketing health care costs and the accessibility and quality of health care. Some 30,000 more children will be eligible for publicly-funded health care programs, $35 million will be spent to improve mental health services, and nursing homes receiving state funding will see a two percent cost-of-living increase.

Higher Education

Higher education tuition increases drew considerable attention during the 2007 session. A main focus of the higher education bill was containing tuition increases.

The governor vetoed the first version of the higher education bill, because it allocated more funds than he had requested and did not fund the ACHIEVE program he championed.

The final bill authorizes new spending of $361 million over the next biennium. In addition to increases in base funding for institutions, there will be modest increases in financial aid. Tuition increases will be kept to the low single digits. In order to fund the governor's ACHIEVE initiative, money was taken away from financial aid. Specifically, a proposal to improve the financial aid formula for students—to reduce a student's share of tuition and to reduce the required parental contribution—was eliminated. The ACHIEVE program encourages low-income high school students to take challenging courses to prepare for college by providing them with scholarship grants as a reward for completing such courses.

A controversial provision, known as the Dream Act, would have mandated that public institutions offer resident tuition to illegal immigrants. This provision was dropped from the bill after encountering stiff opposition from Governor Pawlenty.

A large portion of next year's bonding bill will be devoted to higher education projects. Thus, increased funding for institutions will come in the form of capital funding and not general funds. The Office of Higher Education was ordered to study Minnesota's financial aid system and report its findings to the Legislature during the 2008 legislative session.

Transportation

Despite an intense lobbying effort by DFLers, the governor and Republican legislators held firm in their opposition to gas tax and other tax increases for roads and transit. The House and Senate passed a bill that would have provided several billion dollars in new money for roads and transit over the next ten years. The governor vetoed the bill, and the House was unable to override his veto.

The House and Senate then passed a so-called "lights on" transportation bill. It provides basic funding for roads, transit and highways but essentially no new spending.

A constitutional amendment dedicating motor vehicle sales tax revenue to transportation was approved by voters last year, and funds generated under the new funding scheme will begin to accrue on June 30, 2007. In light of the new funds, some legislators questioned why the Legislature needed to pass sizable increases in transportation funding. Proponents of a gas tax increase and other transportation taxes claim that more than $1 billion in new revenue per year is needed to keep pace with congestion. The amendment, when fully implemented in 2011, will raise $350 million a year for roads and transit.

Other Business Issues

• Good Faith Insurance—Several legislators tried unsuccessfully to pass a measure requiring insurance companies to act in "good faith" and allowing individuals to take action against insurance companies if they do not. Trial lawyers proposed this legislation and aggressively sought its passage. The insurance industry took a strong stand in opposition. Although the bill did not pass this year, proponents have pledged to push the measure next year.
  
• Recycling Electronics Waste—After years of debate and compromise, legislators passed a new law which creates a statewide system for electronics manufacturers to collect and recycle old televisions, computers and other electronics waste. In the first year of the program, manufacturers must collect an amount of "e-waste" equal to 60 percent of the actual weight of products sold during the previous year. In subsequent years, they must collect and recycle an amount equal to 80 percent of the previous year's sales. The bill was supported by a majority of counties, retailers and environmental groups. It was opposed by most manufacturers.

Winners and Losers

As in any legislative session, there were winners and losers. This year's winners include:

• Governor Pawlenty. There will be no state tax increases for the next two years, and his vetoes kept the increase in state spending to 10 percent.
  
• Legislators. They passed a budget without a special session and made modest gains on the DFL majority's priority issues of E-12 and higher education, health care and the environment. Minority Republicans can lay claim to preventing $5 billion in state tax increases.
  
• Clean Water. $53.7 million was approved to cleanup Minnesota's lakes and rivers.
  
• Home buyers. The new lending law protects consumers from predatory lenders. Mortgage agents who engage in fraud can face prison time.
  This year's losers include:
  
• Homeowners. Little new money for property tax relief, so taxes on homes are expected to increase 6.4 percent in 2008.
  
• Drivers and Transit Riders. There will be no new money to reduce congestion.

CONCLUSION

The new leadership of the House and Senate was able to appropriate the $34.7 billion needed to run state government without a special session. By liberally exercising his veto power, the governor prevented tax increases and restricted spending to slightly above his original proposal. Although the Legislature and governor did not succeed in all of their initiatives, they will have another opportunity to address budget, tax, policy and bonding bills when the Legislature reconvenes on February 12, 2008. All bills introduced this year are eligible to be considered in 2008.