Minnesota Legislative Update: 2008 Session Wrap-Up

Budget balanced for now, but tough work lies ahead

The 2007–2008 legislative session officially ended Sunday, May 18. Results of the session include passage of bills to balance the state budget, provide bonding for state projects, fund transportation initiatives and reform health care. The omnibus tax bill was also passed.

Required under the state constitution to balance the budget, the Legislature had to offset a projected $935 million shortfall for the 2008–2009 biennium, which ends June 30, 2009. This was largely accomplished by applying about $500 million in reserves to the deficit. The remaining gap was closed by cutting $355 million from state programs—primarily in health and human services—and closing a corporate tax "loophole."

Although the projected shortfall was solved for this biennium, a $1 billion deficit is projected for the 2010–2011 biennium. The deficit may increase if the economy worsens. Expect some difficult decisions next session.

Finally, a tax bill

A tax bill passed last year would have restricted use of foreign-operating-corporation tax deductions and provided business subsidies for Thomson West and the Mall of America. Gov. Tim Pawlenty vetoed the bill, opposing a provision requiring state budget forecasts to include inflation in expenditures.

This year's omnibus tax bill, signed by the governor on May 29, includes many of the provisions from last year's vetoed bill. In addition, it will cap property tax increases at 3.9 percent for the next three years. Homeowners will receive $46 million in property tax refunds. Offsetting the cap on local property taxes, the bill increases local government aid by $143 million over the next three years. The changes are expected to save property tax payers $78.5 million next year—and $460.5 million over the next three years.

A provision changing a foreign-operating-corporation tax law is intended to capture $109 million dollars in new revenues annually. This measure was instrumental in balancing the budget.

Also included in this bill are special funding provisions for the second phase of the Mall of America. The bill allows property transfers between tax increment financing districts in the mall area, which will result in a $21 million subsidy. The city of Bloomington is authorized to impose new sales, lodging, admissions, and food and beverage taxes to generate additional subsidy for phase two of the project.

The governor's Job Opportunity Building Zone program, which provides tax breaks to foster business growth in outstate Minnesota, was not expanded. However, efforts to eliminate it were defeated.

A one-year ban on reversing property tax exemptions for nonprofits goes into effect, allaying concerns raised by a recent Minnesota Supreme Court decision. Legislators must set criteria to define what is a "purely public charity" amid blurring lines between how nonprofit and for-profit organizations provide and charge for services.

Dedicated funding for transportation over the next 10 years

The transportation finance bill was the first major legislation passed this session. The governor vetoed the bill based on increases in the gas, sales tax and other taxes. The Legislature overrode the governor's veto and put in place the first new dedicated funding for transportation in decades. The law raises a projected $6.6 billion dollars—primarily through gas and sales tax increases—over the next 10 years.

The transportation bill provides a 2-cent gas-tax increase effective April 1 and another 3-cent increase at the beginning of October. Other provisions include an optional ¼ cent county sales tax, $20 excise tax on vehicles, and an increase in vehicle tab fees on new cars. Counties were authorized to impose a sales tax up to 0.25 percent in the metro area, and up to 0.50 percent in greater Minnesota, to fund transit expansion.

In other transportation action, Lt. Gov. Carol Molnau was stripped of her responsibilities as transportation commissioner when the Senate voted not to confirm her on February 28. The vote was along party lines—with 22 Republicans supporting her confirmation and 44 DFLers disapproving.

New Transportation Commissioner Tom Sorel will lead the department as road, light rail development and bridge rehabilitation projects funded this session move forward.

Two bonding bills passed

The first bonding bill, which included various capital investments statewide, passed during the early part of the legislative session. A number of provisions, including funding for the Central Corridor light rail line connecting the downtowns of Minneapolis and St. Paul, were line-item vetoed by the governor.

In the second bonding bill, Central Corridor funding was reinstated. The final bill also provides funding for creation of Lake Vermilion State Park in northern Minnesota and a nursing facility at the Minneapolis Veterans Home.

Approved bonding projects totaled $822.5 million.

Projects that did not receive funding—including early childhood facilities and planning for the Minnesota Orchestra—may lay the groundwork for a new bonding bill next year.

Health care bill sets stage for additional reform

A major health care reform bill passed after all-night negotiations between the governor and health care committee chairs Sen. Linda Berglin (DFL-Minneapolis) and Rep. Thomas Huntley (DFL-Duluth).

The reforms are designed to contain rising costs, enhance quality of care—and improve consumer access to health care cost and quality information. Under the bill, 12,000 more Minnesotans will have access to coverage through MinnesotaCare and private insurance programs. The bill is estimated to save up to 15 percent in health costs by 2015. Future legislative proposals will likely strive to build on this year's bill.

Increased funding for K–12

Adhering to a bipartisan agreement with the governor's office not to cut K–12 education spending, the Legislature approved additional funding of $51 per pupil—a 1 percent increase. It also authorized school districts to take an additional $51 per pupil from their operating capital levies.

Rep. Mindy Greiling (DFL-Roseville), House K-12 Education Finance Division chair, will hold statewide public hearings on her education finance reform bill over the interim. This bill intends to overhaul how education funding is handled in the state, specifically taking a closer look at education funding formulas.

With NWA-Delta merger moving forward, jobs are focus

Legislative leaders and the governor will continue to meet with airline executives in an effort to save jobs that could be eliminated in the event of a Delta-Northwest merger.

The state's primary bargaining chip is an agreement made last year between Northwest and other airlines and the Metropolitan Airports Commission. The agreement provided financial assistance to Northwest—through sharing of concession revenues and reduced lease payments—in exchange for maintaining a hub and headquarters in Minnesota and extension of airline leases until 2020. Without the agreement, Northwest could have walked away from the bonds and its lease through bankruptcy proceedings.

If the merged airline retains Delta's Atlanta headquarters, it will be liable for accelerated repayments of $250 billion in bonds and subject to loss of cost-saving benefits associated with the MAC agreement. The benefits are expected to range from $11 million to $18 million annually through 2020.

In addition to 1,000 jobs in the airline's headquarters, Northwest employs about 2,200 flight attendants, 1,000 aviation mechanics, as well as customer service and flight training personnel in Minnesota.

Constitutional amendment

A constitutional amendment on the ballot this fall would raise $276 million annually for outdoor and cultural resources and preservation efforts by increasing the state's sales tax by 3/8 of 1 percent for 25 years.

This money would provide $91.1 million to develop and improve fish and wildlife habitats, $91.1 million to protect and restore lakes and rivers, $39.3 million to support parks, and $54.5 to promote arts access and education and cultural heritage.

Other issues this session

• Cap and trade. A proposal for a Minnesota-only program to control greenhouse gas emissions was another hot issue this session. The governor's Legislative Greenhouse Gas Accord Advisory Group will issue a report January 15, 2009, on the economic impact and potential revenue from a regional cap and trade system.

• Consumer product bans and recycling. Consumer products containing bisphenol-A and other chemicals were the subject of much debate. A bill designed to create a pilot program to recycle unused paint was also proposed. In the end, each of these proposals was either vetoed by the governor or defeated in the legislative process. Expect continued attempts to ban products and encourage businesses to recycle products in the coming session.

• Minimum wage. Attempts were made to raise the minimum wage—making it higher than the federal minimum wage—this session. The bill passed both houses, but was vetoed by the governor.

• Mortgage foreclosures. Legislators saw multiple bills relating to prevention and handling of housing foreclosures, including a proposal to defer foreclosure of up to 12,000 homeowners' properties for one year. The governor vetoed the deferment bill. Continued fallout in the housing market will likely result in more bills next session.

• Nursing homes. Nursing home employees will receive a 2-percent cost-of-living boost—1 percent is permanent, the other 1 percent a one-time bonus.

Winners and losers from the 2008 session

Winners:

• Artistic fish. A proposed constitutional amendment passed at the beginning of session would provide funding for the environment, arts and cultural heritage. A majority of voters must now approve it in the general election this fall.
• Kids in school. Despite difficult budget times, Minnesota schools received new funding.
• Vietnam vets. March 29 is officially recognized as Vietnam Veterans Day in Minnesota.

Losers:

• Multi-taskers. A new law prohibits drivers from receiving and sending text messages while driving.
• St. Paul gorillas. Funding for new gorilla and polar bear homes at the Como Zoo didn't make it into the final bonding bill.
• Vikings fans. There was very little discussion of a new stadium for the Vikings. Approval for a study was sacked.

What to expect in 2009: Budget setting, education reform

With July 1, 2009, marking the beginning of a new fiscal biennium, the Legislature must create a budget for fiscal years 2010–2011 next session. Given the projected deficit of at least $1 billion for the next biennium, difficult fiscal decisions will likely dominate the session.

All 134 House members face reelection next year. A five-seat gain for the DFL will tip the House's 85-49 margin to a veto-proof majority—dramatically changing the dynamic at the Capitol. Eight of 10 retiring House members are Republican. The Senate already has a veto-proof majority. Senators and the governor are not up for reelection.

Besides budgetary debates, efforts to reform education finance and the tax code could come up. Lawmakers have indicated they want to build on this year's health care reform bill next year.

The next legislative session begins January 6, 2009.