There are, essentially, five pots of money, and somehow they need to fill a $2.3 billion hole.

No one argues that. They also agree that filling that hole is going to be hard, in part, because there's another hole – projected at $4.7 billion, but that's not written in stone – looming in the future.

"We are in a world of hurt," said Minnesota Rep. Greg Davids, R-Preston, the ranking Republican on the House Taxes Committee.

Davids ought to know. He was there the last time the state faced a major budget crisis, in 2011, fixing the deficit. This one, he said, is worse. And its impact won't be felt just in St. Paul. Every city, county, township and school district will feel the effects, likely with the current $2.3 billion deficit and certainly with the next deficit, whether it's $4.7 billion or more, or even less.

"If I was a mayor or school board member or a county commissioner, I’d be shaking in my boots," Davids said.

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Rep. Greg Davids
Rep. Greg Davids

A Balanced Budget, Really

Don't tell Myron Frans the budget isn't balanced.

The outgoing commissioner of the Minnesota Management and Budget office, Frans points to the deficit and the reserve and says the math means the budget is balanced. Currently, the remainder of the 2020-2021 biennium budget -- Minnesota's budgets cover two years at a time -- has a deficit of $2.3 billion. But the state's reserve fund sits at $2.377 billion. Essentially, Frans said, the state could write itself a check and cover the shortfall.

Of course, Frans admits that's not optimal because he knows, thanks to the economic impact of the COVID-19 pandemic, tax collection in Minnesota will fall short in the 2022-2023 biennium as well, and the state will need more money or there will need to be huge cuts.

Instead, he pointed to a few budget tricks that might start paying off the deficit that have nothing to do with the state's tax reserve. For example, the Premium Security Fund, maintained to provide secondary insurance for extraordinarily large health-related claims and help keep down premiums for primary health insurance, has $200 million in it. That money hasn't been allocated to be spent anywhere, though Frans cautions against moving it all to the budget deficit. There was also a reserve fund for the construction of U.S. Bank Stadium, the Minnesota Vikings' new home. That account has $66 million not doing anything.

Minnesota Management and Budget Commissioner Myron Frans.
Minnesota Management and Budget Commissioner Myron Frans.

The state also refinanced its bonds this month -- activity in the bond market that explains why it can't have a bonding bill until September, at the earliest -- which saves $100 million. All told, the state can probably find something less than half a billion dollars without directly touching any state programs or agencies.

The Real Hard Work

Davids said the real work to balance the budget will come not from finding money in accounts here and there, but from Gov. Tim Walz working with the Legislature to make hard decisions. But it's also going to take looking at the math. That means looking at the actual expenditure areas that have enough money to cover $2.3 billion.

"There are just four areas that have that kind of money," Davids said. "You’ll have to cut education, long-term care and social services, CPA, and LGA."

Those last two items -- county program aid and local government aid are funds paid from the state to counties and cities for programs mandated by the state -- represent $264 million and $564 million, respectively. But to make a real dent in the deficit, the Legislature would need to cut 10 percent to 20 percent from each, and that would throw a wrench into county and city budgets across the state.

While the state has already certified 2021 LGA and CPA payments to cities and counties, not everyone in local government is convinced the money will come through as stated.

Julie Ring, executive director of the Association of Minnesota Counties, said one of the biggest concerns she hears from county boards and administrators is the possibility that the counties will finalize their budgets and levies for 2021 in December, then in 2021, before the biennium ends, the Legislature will make cuts to CPA. That, she said, would require counties to make its own hard cuts to services.

One Problem Follows Another

No matter what cuts are made to balance the current biennium budget before it ends on June 30, 2021, lawmakers and others who watch the state budget know that the current problem is just a prelude to the next one.

"All we try to is project revenues and expenditures," Frans said. "For '22-'23, we looked at how revenues have fallen, and we see a revenue shortfall of $4.7 billion."

There are two ways to fix it, Frans said. Either budgets will need to be scaled back for 2022-2023 or taxes will need to be raised.

Moreover, Davids said, with Minnesota's tax base shrinking due to business closings and an expected wave of foreclosures, that means there will be fewer payers to cover costs.

Rep. Duane Quam, R-Byron, said getting out of the current budget deficit with the state reserve fund intact will go a long way to making the next biennium budget more easily manageable.

A couple of billion in cash flow and reserve accounts make it easier to balance the budget, Quam said. But since a deficit was declared as part of the state's emergency, the governor has the power to simply use the reserve balance in 2020-2021.

Rep. Duane Quam
Rep. Duane Quam

Frans talked about not just the reserve fund but making "structural changes" to the state's expenses in 2022-2023.

That's a phrase that concerns AMC's Ring if the Legislature makes those changes without consulting counties and cities first, making local government part of the team in developing the solution. Otherwise, cities, counties, townships and school districts could be looking at the typical cost shifts they see when the state needs to balance its budget.

"We’ve continued to pay an increasing percentage of running state programs," Ring said. "In these downturns, we tend to see more cost shifts. One of the ways they do that is to ask the counties to pay for more of the share."

A look at the deficit from the bottom of the financial food chain

Kasson City Administrator, Timothy Ibisch Tuesday, Aug. 18, 2020, in Kasson. (Joe Ahlquist / jahlquist@postbulletin.com)
Kasson City Administrator, Timothy Ibisch Tuesday, Aug. 18, 2020, in Kasson. (Joe Ahlquist / jahlquist@postbulletin.com)

Kasson City Administrator Tim Ibisch said he is already cutting about 20 percent in his mind.

That's how much money he estimates the state will take from what it's promised to pay Kasson in 2021 as the Legislature and governor work to close Minnesota's $2.3 billion budget deficit. It amounts to nearly a quarter-million dollars.

"We’re hoping it won’t be that high," Ibisch said.

In July, the state certified the amount of LGA in the 2021 budget, $564,398,012 to be distributed to all cities – the state also certified the county program aid (CPA), lump sum payments to counties, at $263,971,371 – and Kasson's piece of that amounts to $1,211,160.

But in building the city's budget for 2021, Ibisch told the city council last week that he expects the state could cut about $200,000 off that total.

For most cities, especially those that don't rely on lodging taxes or sales tax for a portion of their revenue, LGA often represents a major component of the city's annual revenues.

In Kasson's case, the city also has various levies which, if approved as recommended, would total nearly $3.57 million, meaning $1.2 million from the state is about a quarter of the budget, and $200,000 is not an insignificant sum. Every 1 % of Kasson's levy increase amounts to about $33,000.

And with preliminary levies due to be set by the end of September, not knowing what's really going to happen with LGA and CPA is unnerving. The preliminary levy figure represents the highest tax bill cities can charge next year. The uncertainty likely will prompt most cities to play it safe, Ibisch said.

It's Gotta Come From Somewhere

The state has money set aside in a "rainy day fund" to help at times like these, right?

Yes, and in fact the budget reserve just about matches the size of the projected deficit, $2.3 billion. But Rep. Greg Davids, R-Preston, the ranking Republican on the House Taxes Committee, said that while Gov. Tim Walz could order a check written to cover the shortfall, that's not how legislators hope to fix the budget. Spending the reserve down to zero would be unwise.

Instead, Davids said, the state will need to balance the budget by taking some combination of money from LGA, CPA, human services such as long-term care for seniors and social services, and education. While LGA and CPA combined don't have enough money to fix the deficit for the remainder of the current biennium, education and human services combined have more than an estimated $26 billion.

Taxpayers View Of The Budget

One thing that can't be part of the solution: raising tax. The state can't raise taxes for the current biennium, which ends next July. But projections for the 2022-2023 biennium already show a $4.7 billion revenue shortfall. Tax increases could be on the table then. Myron Frans, commissioner of the Minnesota Management and Budget office, said balancing the next biennial budget can be done either through cuts to programs, increasing taxes or some combination of the two.

Jason Baskin, who has served two years on the Austin City Council, said that as a taxpayer he would prefer the deficit be fixed with cuts that bring long-term savings.

"What we hear from our local residents is raising taxes is tough," Baskin said. "We have elderly people on fixed incomes. There are businesses struggling to stay open due to COVID-19 or seeing huge reductions in their income because of the economic shutdown."

Jason Baskin
Jason Baskin

Baskin said he'd start with cuts to Health and Human Services, which has been increasing far more quickly than other state programs over the past 20 years.

"HHS is important, but if we could keep it in the single digit growth, that would help," he said.

A Different Perspective

Winona County Administrator Ken Fritz is more confident in his county's ability to survive the economic downturn than other counties and cities. First, if the state does not cut CPA payments for 2021, Winona County should survive intact. The county has collected property taxes at basically the rate it expected before the pandemic hit. Second, Winona County has a fairly diverse tax base, meaning it doesn't rely on a single economic sector -- agriculture, tourism or health care -- as some areas do.

Furthermore, the CARES Act is helping the county make ends meet this year, he said.

Fritz's biggest concern is if the state starts messing with the formulas for how it pays for things like social services, which would mean the counties would have to pay for a bigger portion of essential services that are mandated from the state.

"Counties are basically outgrowths of the state, even more than municipalities," Fritz said. "When your revenues change, they don’t say, 'You don’t have to have courts anymore or you don’t have to have jails anymore.' You still have to meet all these obligations and you don’t have the money for it."

Local Government Just Wants To Help

Julie Ring, executive director of the Association of Minnesota Counties, echoed Fritz's concerns.

"We’ve continued to pay an increasing percentage of running those programs," she said, referring to HHS programs the state mandates for counties to administer. "In these downturns, we tend to see more cost shifts. One of the ways they do that is to ask the counties to pay for more of the share."

Now, Ring said, would be a good time for the Legislature to ask cities and counties for help to fix not just one or two years of funding shortfall, but to make structural changes in how programs are administered and who pays for them.

As a city council member in Austin, Baskin said he'd like to see progress on a bonding bill to fund needed programs, such as critical upgrades to Austin's wastewater treatment plant. But as a taxpayer, he simply wants the Legislature and the governor to do their jobs and fix the budget.

"I would love for the state government to engage with county and local governments to see what their pressures are," Baskin said. "After all, a situation that makes sense for Edina probably doesn’t make sense for Austin or Albert Lea. And either way, the time for games and bickering and scoring points was over months ago."

Holding out hope in Oronoco

"I think we should be in."

Ryland Eichhorst said whether it comes this fall or next spring, there will be a bonding bill for state capital improvement projects, and he's certain his city's wastewater treatment plant will be on the list.

At this point, Eichhorst has to be optimistic.

"We were on the current (Minnesota) House bonding bill that was for $1.3 billion," the mayor said. "We had a lot of support on the Senate side as well."

But with a projected $2.3 billion deficit for the current two-year budget cycle that ends next July, there's no certainty the Legislature will pass a bonding bill.

Oronoco Mayor Ryland Eichhorst points out the future site of a wastewater treatment plant on Friday, August 14, 2020, in Oronoco. (Traci Westcott / twestcott@postbulletin.com)
Oronoco Mayor Ryland Eichhorst points out the future site of a wastewater treatment plant on Friday, August 14, 2020, in Oronoco. (Traci Westcott / twestcott@postbulletin.com)

Rep. Greg Davids, R-Preston, the ranking GOP member of the House Taxes Committee, said he's not sure how the state would pay for a long list of capital projects, but would be willing to try to find a way.

"I can pencil out a $1.1 billion bill if we have upswing in future bienniums," he said, adding that the failure to pass the $1.3 billion bonding bill this summer could come back to haunt the state as a missed opportunity because of favorable bond rates.

Minnesota Rep. Duane Quam, R-Byron, said the project in Oronoco should be a priority if a bonding bill can be done. He noted that the Minnesota Pollution Control Agency has ordered the city to fix the environmental mess that caused by its aging septic systems. Oronoco is the largest city in Minnesota without a sewage infrastructure including a wastewater treatment plant. Building one will be a huge investment.

"When government forces a local entity to do something, that should be more of a priority in a bonding bill than the Christmas ornaments that get added on," said Quam, whose House district represents Oronoco in the Legislature.

Quam said the project in Oronoco is a perfect example of what should be funded. The project protects the environment, improves water quality, brings jobs to the region and has a regional component. A wastewater treatment plant in Oronoco could also handle sewage from far north Rochester as Rochester expands, or even Pine Island, if that city develops to the south.

Plus, Eichhorst said, without a sewer system the city cannot attract development of multi-unit housing or any businesses that require large water usage and wastewater treatment capacity.

The project would cost the state about $20 million. The rest would come from a combination of a $7 million point-source implementation grant and $7 million from the city. The state has already invested $3 million in a needs study, and Eichhorst said some of that money is being used for engineering plans as well.

Quam said getting a bonding bill could be crucial to the region, not only for Oronoco but for projects in other cities. He pointed to the runway project at Rochester International Airport that is on the bonding bill list.

"That runway has regional economic benefits spread across decades," he said.

Eichhorst, though, simply wants to see his city's designation as "the largest unsewered city in Minnesota" get passed on to whatever town is next.

Time is ticking away. The MPCA has signed a memorandum of understanding with the city saying Oronoco must have a functioning wastewater treatment plant online by September 2025 or face enforcement action. Eichhorst said as long as the city gets bonding money by next spring, they can stay on the timetable that gets the job done.

And while he remains optimistic, Eichhorst sees the state deficit and knows he has no control over funding for Oronoco's plant.

"I know it’s up to the Legislature and the governor," he said.