Pl022

.· seal Constraints 6cs · ·· n Minnesota- <(} Impacts and Policies

cu■a Economic Conditions and Changing Government Policies

Coauthors:

Thomas R. Peek and Douglas S. Wilson

Center for Urban and Regional Affairs January 1983 A publication of the Center for Urban and Regional Affairs, 313 Walter Library, 117 Pleasant St. S.E., University of Minnesota, Minneapolis, Minnesota 55455.

The content of this report is the responsibility of the authors and is not necessarily endorsed by CURA.

1983

Publication No. CURA 83-1

This report is not copyrighted. Permission is granted for reproduction of all or part of the material, except that reprinted with perm1ss1on from other sources. Acknowledgement would, however, be appreciated and CURA would like to receive two copies of any material thus reproduced.

Edited by Susan M. Mundale

Cover design by Phil Lundberg CONTENTS

Page LIST OF TABLES iv LIST OF FIGURES V FORWARD vii ACKNOWLEDGEMENTS xi INTRODUCTION: MINNESOTA'S GOVERNMENTAL SYSTEM CHALLENGED BY NEW FISCAL CONSTRAINTS 1

CHAPTER I. MINNESOTA FACES REVENUE SHORTFALLS 5 THE STATE REVENUE LAG 7 The Slowdown in National and State Economies 8 Our Overcommitted State Budget 9 Over-Ambitious Indexing 9 Problems With Forecasting State Revenues 10 THE STATE'S RESPONSE TO REVENUE SHORTFALLS 10 The April 1981 Budget Projection 11 The November 1981 Budget Projection 12 The March 1982 Budget Projection 15 The November 1982 Budget Projection 17 Cumulative Effect of Budget Responses 19 PAST ACTIONS PRESENT DILEMMAS FOR THE NEXT LEGISLATURE 21 Temporary Tax Increases 21 Revenue and Expenditure Shifts 22 Other Legislative Actions 26 THE 1983 LEGISLATIVE SESSION--DIFFICUL T DECISIONS AHEAD 26 MINNESOTA NOT ALONE IN FACING NEW FISCAL CONSTRAINTS 27

CHAPTER II. WEAKENING A DECADE-LONG COMMITMENT TO MINNESOTA'S LOCAL JURISDICTIONS 33 SCHOOL FINANCE: WHAT HAPPENED TO STATE FUNDING AND EXPENDITURE EQUALIZATION? 33 Development of the "Minnesota Miracle" 34 Components of the School Aid System 36 Increasing the Role of Local Taxation 38 OTHER ST ATE/LOCAL RELATIONS IN FLUX 47 State Responses to Rising Property Taxes 47 New Uncertainties in State/Local Relations 49

-i- Page CHAPTER III. A NEW DIRECTION FOR THE FEDERAL GOVERNMENT 51 THE ECONOMIC RECOVERY PROGRAM 55 BUDGET CUTS--A REALIGNMENT OF FEDERAL PRIORITIES 56 What the Federal Budget Actions Mean for Minnesota 61 CHANGES IN FEDERAL TAXES 68 What the Changes in Federal Tax Laws Mean for Minnesota 72 "REGULATORY VENTILATION" FOR BUSINESS 74 What Deregulation Means for Minnesota 7 5 FIGHTING INFLATION WITH MONETARY POLICY 76 What the Current Monetary Policy Means for Minnesota 77 REORGANIZATION OF GOVERNMENT--DEVOLUTION OF RESPONSIBILITY 78 BLOCK GRANTS 79 What the Block Grants Mean for Minnesota 84 , ATTACKING RED TAPE--EASING FEDERAL REGULATION OF STATE AND LOCAL GOVERNMENT 89 What Easing Regulations for State and Local Governments Means for Minnesota 90 THE "NEW FEDERALISM" PROPOSAL 91 What "New Federalism" Means for !\11innesota 92

CHAPTER IV. LOCAL GOVERNMENT RESPONDS 95 IMPORTANT FACTORS OF LOCAL GOVERNMENT RESPONSE 96 HOW LOCAL GOVERNMENT RESPONDED 98 Key Findings 105

CHAPTER V. 107 EXECUTIVE SUMMARY 107 CHAPTER I. MINNESOTA FACES REVENUE SHORTFALLS 107 CHAPTER II. WEAKENING A DECADE-LONG COMMITMENT TO MINNESOTA'S LOCAL JURISDICTIONS 108 CHAPTER III. A NEW DIRECTION FOR THE FEDERAL GOVERNMENT 109 CHAPTER IV. LOCAL GOVERNMENT RESPONDS 112 CONCLUSION 114 NEW FISCAL CONSTRAINTS AND RECENT ST A TE ACTIONS MEAN TOUGH PROBLEMS AHEAD 114

-ii- APPENDICES A Division of State General Fund Appropriations by Expenditure Category 117 B Summary of Changes in the Tax Law by the 1981 Tax Act 119 C Reagan Administration Efforts to Ease Regulation on Business and Industry 120 D The Administration's 1982 Block Grant Proposal 123 E Sixty-One Turnback Programs 125 F Participants in Workshops and Outstate Interviews 126

BIBLIOGRAPHY 133

-iii- LIST OF TABLES

Page 1 Special Session I - June 1981 13 2 Special Session III - December 1981 14 3 Regular 1982 Session 16 4 Special Session VI - 1982 18 5 General Fund Appropriations for 1979-81 and 1981-83 Bienniums 20 6 Revenue and Expenditure Shifts During the 1981 and 1982 Legislature 25 7 Ending Fund Balances as a Percentage of Expenditures for all States 28 8 Recent Budget Actions Taken by Selected States 30 9 Minnesota Education Funding Responsibility 1971-72 to 1982-83 42 10 State and Local Operating Costs Per Pupil Unit, State Totals and , 5th and 9 5th Percentiles, 1970-71 Through 1980-81 45 11 State Funding of General Purpose Local Governments 48 12 Actual FFY 1981 Outlay and Proposed FFY 1986 Outlays by Major Federal Budget Categories 57 13 Federal Budget Authority 59 14 Selected Programs of the FFY 1982 Federal Budget 60 15 Impacts on Minnesota of Federal Actions 62 16 Effects on Federal Revenues of the 1981 Federal Tax Changes 68 17 Net Effect of the Combined Tax and Budget Reductions by Income Group 69 18 1982 Tax Bill 71 19 Combined Impact on Minnesota Taxpayers of 1981 Federal Tax Cut, Social Security Tax Changes and State and Local Tax Increases For 1982 73 Impact on Minneapolis Taxpayer with Income of $25,000 73 20 1981 Block Grant Action 81 21 Fiscal Impact of the New Federalism (January 1982) Proposal 93 22 Federal Funds Required to be Passed Through to Local Governments Under the "New Federalism" Proposal 94 23 Local Government Revenue 100 24 Local Government Expenditures 101 25 Flexibility of Local Government Operations 102 26 Alternatives to Traditional Public Service Provisions 103 27 Expanding Private Sector Service Delivery 104

-iv- - LIST OF FIGURES

Page 1 Shares of State General Fund Appropriation by Expenditure Category 6 2 Minnesota Education Funding Responsibility 43 3 Minnesota's Attempt to Equalize Eduation Expenditures 46 4 Federal Aid to State and Local Government 54

-v- FORWARD

THE CURA PROJECT TO EXAMINE IMPACTS AND EXPLORE POLICIES REGARDING NEW FISCAL CONSTRAINTS IN MINNESOTA

Minnesota is now experiencing new fiscal constraints brought on by the current economic situation and a changing relationship between the federal government and the state. Budgetary, tax regulatory and intergovernmental policies promulgated by the state and federal governments have greatly affected intergovernmental relations in Minnesota and dramatically altered government programs that serve many Minnesotans. The purpose of current CURA work in this area, which began in the Spring of 1981, is to construct an accurate picture of the current situation in Minnesota and to explore constructive policy alternatives in response to the problems the state faces. This CURA report contains a discussion of Minnesota's fiscal problems as they began to emerge in the summer of 1980. It reviews how the governor and state legislature responded to those problems in 1980, 1981 and 1982 with a series of budgetary, tax and intergovernmental policies. The impact of those policies on Minnesota's state/local governmental system is analyzed. The report also summarizes the budgetary, tax, regulatory and intergovernmental policies enacted by the United States Congress in 1981 and 1982 and contains a discussion of how these changes are affecting Minnesota, particularly the state's governmental finances. The initial responses of schools, counties and cities to the new fiscal constraints and state and federal actions are also outlined. Finally, the report identifies some of the difficult decisions now faced by the Minnesota Legislature as a result of the state's fiscal predicament and its previous actions in response to that situation. A second report by the authors of this report will soon be published by CURA. It will explore a number of state policy issues emerging out of this analysis. Alternatives identified in the second report relate to state policies regarding Minnesota's revenue system and state/local relations. These two reports were prepared in conjunction with several other components of the CURA project: o A series of informal workshops conducted at the CURA Outreach Office during the Winter of 1982 to assess the impact on Minnesota of the new fiscal constraints and recent government policies. Participants included state, county, city and school district officials and representatives of Minnesota's business and industry and non-profit organizations as well as faculty and others from the University. A similar set of workshops is planned for 1983.

-vii- o Interviews with officials of state government and counties, cities and school districts across Minnesota to assess regional variations in the impact of the recent developments and the policy responses to them. o An on-going inventory of monitoring and other research efforts that enables CURA to serve as a clearinghouse for information on the effects of recent budgetary, tax, regulatory and intergovernmental policies promulgated by the state and federal governments. • A report describing the impact of budget cuts on environmental regulation and monitoring in Minnesota which will be ready for publication in early 1983. In addition to conducting its own examination, CURA is attempting to tie together a number of related projects and activities both inside and outside the University and to bring together a comprehensive examination of the current situation. CURA work being conducted in cooperation with others includes: • Minnesota County and City Surveys: Survey work is being carried out in cooperation with the Association of- Minnesota Counties, the Minnesota Department of Energy, Planning and Development, the Hubert H. Humphrey Institute of Public Affairs, and the League of Minnesota Cities to determine the exact budget changes occurring in Minnesota local government as a result of state and federal changes. • AFDC Recipient Survey: A longitudinal study carried out during 1982 and 1983 of AFDC recipients whose benefits have been either terminated or reduced as a result of recent federal and state policies associated with budget reductions. This study is being conducted in cooperation with Hennepin County, additional outstate counties and the Minnesota Department of Energy, Planning and Development. The purpose of this work is to determine the impact of those policies on individual recipients. This work is being done as a joint project with the Center for Health Services Research, School of Public Health, University of Minnesota. • Emergency Services Survey: CURA is providing technical assistance to Catholic Charities in its ongoing survey of individuals and families using the emergency services of Branch I, II, III, the Dorothy Day Center and the emergency shelter referral office. Demographic characteristics of users of these services, changes in their situations over the past year and the reasons for those changes are being collected to provide additional information on the effects human service reductions and economic conditions are having on these people.

-viii- o General Assistance Survey: With CURA's help, the Minnesota Chapter of the National Association of Social Workers is conducting a survey of former General Assistance recipients who were cut from the program as of July 1, 1981, in Ramsey and St. Louis counties. o Action for Human Services: CURA is providing a half-time staff organizer for Action for Human Services. This new coalition of human service providers, advocacy groups, and funding organizations monitors and circulates information on the impacts of the government funding cuts on the human services in order to educate member organizations and the broader public concerning these impacts and to provide a mechanism for joint action by member organizations on specific issues. This CURA project is being conducted with involvement of faculty from a variety of disciplines within the University who have research or teaching interest in the topic, including the Hubert H. Humphrey Institute of Public Affairs, the Schools of Social Work and Public Health and the Departments of Economics, Geography, Political Science, and Agricultural and Applied Economics.

Project Manager Thomas L. Anding Associate Director, CURA Director, CURA Outreach Office

-ix- ACKNOWLEDGEMENTS

Many people have generously contributed their time, effort, ideas or advice to the authors during the preparation of this report. They include:

Arthur Naftalin, Hubert H. Humphrey Institute of Public Affairs, University of Minnesota, who, in addition to reviewing the various drafts and chapter outlines, was an ongoing source of ideas and editorial guidance for the authors.

Those who reviewed the various drafts of the report and provided valuable substantive and editorial comments and suggestions: o Thomas Anding, Center for Urban and Regional Affairs, University of Minnesota. o Francis Boddy, Department of Economics, University of Minnesota. o William Craig, Center for Urban and Regional Affairs, University of Minnesota. o Steve Cramer, Urban Coalition of Minneapolis. o James Jernberg, Hubert H. Humphrey Institute of Public Affairs, University of Minnesota. o Joyce Krupey, Minnesota Senate Research. o Lee Munnich, Jr., Minnesota House of Representatives, DFL Caucus Research. o David Rodbourne, Urban Coalition of Minneapolis. o Thomas Scott, Center for Urban and Regional Affairs, University of Minnesota. o Fred Smith, Center for Urban and Regional Affairs, University of Minnesota. o Esther Wattenberg, School of Social Work, University of Minnesota.

Those who, through interviews, conversations or correspondence, provided valuable information and ideas: o Karen Baker, Minnesota House of Representatives Research. o John Brandl, Minnesota House of Representatives, Hubert H. Humphrey Institute of Public Affairs. o Karen James, Minnesota House of Representatives, Local and Urban Affairs Committee Staff. o Hal Lofgren, Minnesota Department of Finance. e Norman Maguire, Minnesota Association of School Administrators. o Arthur Roemer, Minnesota Department of Revenue. o Ellen Sampson, Minnesota House of Representatives, Appropriations Committee Staff. o Gordon Voss, Minnesota House of Representatives.

The numerous participants in the CURA workshops and the county, city and school district officials interviewed by the authors during the winter of 1982 (See Appendix F for a complete listing).

-xi- Susan Mundale, who edited the final draft of the report and provided editorial advice on prior drafts.

-- Phil Lundberg, whose art works appears in the report and on its cover.

CURA professional and support staff whose quality work and efficiency was of great assistance to the authors. They include: • Pat Kane, who provided staff support in a multitude of ways. • Naree Anderson, Carol Christianson and Debra Salaam who, along with Pat, typed hundreds of pages of draft. • Chris McKee, who was responsible for word processing the final draft for publication. • Penelope Burke and Charla Hutkins, who prepared the report's bibliography. • Judy Weir, who handled the final production of the report. • Many others too numerous to list, who assisted the authors in a variety of ways. Their contributions are appreciated.

-xii- INTRODUCTION MINNESOTA'S GOVERNMENTAL SYSTEM CHALLENGED BY NEW FISCAL CONSTRAINTS

If the first two years of the decade are any indication, the 1980s will be a watershed period for Minnesota. This state, like many others, is experiencing new fiscal pressures as the nation's economic, polical and intergovernmental conditions change. In response to those pressures, Minnesota has altered its spending and tax policies and the way in which it funds its schools, counties, cities and other local jurisdictions that provide the majority of government services to Minnesotans. Along with the rest of the nation, Minnesota is experiencing a prolonged recession. Economists are increasingly concerned that full recovery will not occur in the near future because of fundamental changes in the state and national economies. They cite increasing costs of energy and other natural resources, diminishing United States competitiveness in some world markets and a changing industrial base. With the recession comes significant contraction in the revenue base for Minnesota state and local governments. This is due in part to the structure of the state's tax system and the effect of slowed economic growth. When combined with inflation in the costs of doing government business, the revenue contraction makes it difficult for state government to continue the tax and expenditure policies of the past decade. But despite the resulting budget predicament, Minnesotans do not seem to have diminished their demand for the government services to which they have become accustomed. Minnesota is also experiencing some of the political upheaval that has been developing across the nation. A tax revolt and expenditure limitation movement has emerged in the country in recent years with some apparent success. It reflects public anxiety over the current economic situation and concern about unemployment, interest rates, inflation, welfare, industrial plant closings, small business failures, farm foreclosures and corporate mergers. It also reflects a growing lack of public confidence in government itself. A 1980 national poll indicated that 64 percent of Americans believe "the government as now organized and operated is incapable of dealing with crucial problems." (Yankelovich, Skelly, and White, survey prepared for American Council of Life Insurance, April/May 1980, cited in "Opinion Roundup," Public Opinion, American Enterprise Institute, June 1981). The national mood is evident in Minnesota as well. The tax revolt and expenditure limitation movement has had some influenc·e on the political debate in Minnesota, particularly about such issues as "business climate," taxes, welfare spending, government efficiency and alternative public service delivery. All of this is happening in Minnesota at a time when the federal government is reducing its domestic expenditures in anticipation that states will take up some of the

-1- funding, implementation and regulatory responsibilities once assumed at the federal level. The majority of these federal spending reductions directly affect the fiscal situations of states and localities, who implement federal entitlement and grant-in-aid programs. These actions, reflecting a new administration and a more conservative Congress, are designed to reduce domestic spending and taxation as well as diminish the federal role in the affairs of state and local governments and the private sector. Minnesota is vitally affected by these economic, political and intergovernmental circumstances that are creating new fiscal constraints on the state's governance system. For a decade, Minnesota pursued a strategy of progressive state taxation (based on individuals' ability to pay) to fund human services and other programs and through which it met its financial commitment to school districts, counties, cities and other local jurisdictions. During the 1970s Minnesota developed a state/local governmental finance system which became recognized nationally as the "Minnesota Miracle." State tax and spending policies were designed to reduce the traditional dependence of local jurisdictions on property taxes for their funding and to minimize disparities in local tax burden and public service levels among those local jurisdictions. The result has been a state/local governmental system in which local jurisdictions conduct most of state government's business and, while funded heavily by the state, enjoy a relatively high degree of local discretion. Indeed, in typical years significantly more than half of the state's General Fund goes to local jurisdictions. According to the Advisory Commission on Intergovernmental Relations, Minnesota has been well above the national average in the percentage of the total it provides for functions it shares with its local jurisdictions. At the same time Minnesota rates seventeenth among states in the degree to which it permits local jurisdictions to have discretionary authority free from state interference. (John Herbers, "Shift to Block Grants Raising Issue of States' Competence," New York Times, 27 September 1981, p. 1.) The current state/local system is one whose economic viability and political feasibility have depended on the sustained capability of state government to adequately fund those jurisdictions and the programs they administer. The economic slowdown and associated state revenue shortfalls, the changing political climate, which makes tax increases difficult, and federal budget cutbacks to Minnesota have severely strained the state's finances. For the first time in many years state officials face diminishing resources rather than ever-expanding revenue fueled by economic growth. The levels of economic growth that enabled Minnesota to establish innovative and generous programs and to put in place the tax and spending policies of the "Minnesota Miracle" have diminished. Those commitments have become increasingly difficult to meet in a new era of fiscal constraint.

-2- Faced with immediate financial difficulties, the state in 1981 and 1982 imposed temporary tax increases, reduced spending and shifted other spending commitments and some revenue between bienniums. Because the state made up the revenue shortfalls in part through spending cuts, it is not surprising that one of its most significant responses to the predicament was a reduction of the state's financial commitments to its local jurisdictions. Through spending, tax and intergovernmental policy changes the state accelerated a trend, begun earlier, away from the established state/local governmental finance system.

-3-

CHAPTER I. MINNESOTA FACES REVENUE SHORTFALLS

During the past two years, Minnesota state government has experienced the worst fiscal crisis in recent history. A series of revenue shortfalls beginning in the summer of 1980 left state leaders with the responsibility of finding solutions to a cumulative budget shortfall in excess of $2 billion over two bienniums. By 1982, Minnesota, which was once thought to be immune to downturns in the national economy, had become one of the two states with the most severe budget problems, according to an official of the National Association of State Budget Officers ("In the Worst Shape." St. Paul Pioneer Press/Dispatch, 7 November 1981, p. 10). In order to balance its budget, which is required by the Minnesota Constitution, the state sharply reduced spending in certain areas, including education and local government, delayed many expenditures until the next biennium, transferred revenue collections into this biennium and increased taxes. The actions that the state took had a direct impact on Minnesota's local jurisdictions. Since a large share of the state's budget is distributed to local governments in the form of aids and property tax relief, any budget reduction at the state level almost certainly means a cut in local units' revenue. Over the past 15 years, Minnesota state government has played an increasing role in funding the services that local government provides in Minnesota. Beginning in 1967, a three percent sales tax was enacted to fund a Homestead Credit program that provided relief to property taxpayers. The increased revenue collected by the state was paid to local jurisdictions to prevent substantial property tax increases. But property taxes continued to rise and in 1971 the legislature and newly-elected Governor Wendell Anderson felt they had to respond to complaints of property taxpayers. The result was a program which placed more responsibility for educational funding on state government, provided the framework for more equalized funding for school districts (the Foundation Aid Program) and other local governments (Local Government Aid), and placed limits on the revenue-raising activities of local jurisdictions. All of this activity, referred to as the "Minnesota Miracle," was funded by increasing income taxes on both individuals and corporations, a one percent general sales tax increase, enactment of a four percent motor vehicle excise tax, and increases in minor taxes. Tax relief was granted through increased income tax credits and an expansion of the Homestead Credit program.

-5- In 1979, partially in reaction to a nationwide tax revolt, additional tax relief was provided in two programs. Homestead Credit was again increased, and the individual income tax was indexed to prevent taxpayers from moving into higher brackets because of inflation. The increased reliance of local governments on state-generated funds, which gave Minnesota national prominence, also gave the legislature and governor power to decide how much revenue local governments could expect. This relationship, which was based on growth of both revenues and expenditures, worked successfully until the fiscal crisis occurred in a period when lagging growth in revenues meant a decrease in expenditures. Components of the state budget including state support of local governments and school districts in Minnesota is illustrated in Figure 1. School aids, mining apportionment and aids and credits are direct funding sources for local jurisdictions.

FIGURE 1 SHARES OF ST ATE GENERAL FUND APPROPRIATION BY EXPENDITURE CATEGORY 1 STATE FISCAL YEARS 1982 and 1983 2

20.1 %-Health, Welfare 10.5%-Department of Education/ and Corrections Higher Education 5.6%-State Departments

1.8%-Transportation/ Semi-State Departments

.5.0%-Retirement Contributions

.5.3%-Other

24.6%- Education Aids Paid to School Districts 23.0%-Local Government Aids and Credits

Total General Fund $ 7,813,359,400

I. Appendix A details the departments and types of expenditures for each category above.

2. State fiscal years I 982 and 1983 represent the I 981- I 983 Biennium (July 1981 - June I 983).

SOURCE: Minnesota Department of Finance, "General Fund Balance Analysis," June 26, 1981.

-6- THE ST ATE REVENUE LAG

A key element in the fiscal crisis is the current economic predicament in Minnesota. The state is experiencing a stagnant economy, high interest and unemployment rates and greatly slowed revenue growth. One result of this economic predicament has been a "revenue lag" calculated in late 1981 at $2.2 billion for the past and current bienniums. This "revenue lag" is defined by Representative John Tomlinson as the difference between the actual tax revenue and the amount that would have been collected if revenues had grown at the same rate as Minnesota's non-farm personal income. Tomlinson's data showed that for the four state fiscal years included in the two bienniums FY 1980 through FY 1983, Minnesota's non-farm personal income grew approximately 50 · percent while General Fund revenue grew approximately 30 percent (John D. Tomlinson, Representative, "Tax Letter No. 3, Minnesota Tax Collections Relative to Personal Income Fiscal Years 1979-1983," Minnesota House of Representatives, St. Paul, Minn., 3 December 1981). The difference represents the $2.2 billion "revenue lag." The sustained economic stagnation in the last year and the budget shortfall projections released late in 1982 for the remaining portion of FY 1983 and the upcoming biennium (FY 1984 and 1985) indicate that the $2.2 billion figure is probably an underestimation. This "revenue lag" led to a series of shortfall crises beginning in August 1980, when a revenue forecast showed a $195 million deficit for the 1979-81 biennium. In order to balance that biennium's budget, Governor Quie responded by using his executive authority to institute the first major round of budget cuts. Further revenue problems were recognized by Governor Quie's administration in January 1981, and a later revenue forecast in April indicated a $503 million shortfall in the 1981-83 biennium. A November 1981 forecast indicated a shortfall of another $7 68 million, and a March 1982 revenue forecast showed an additional $229.5 million shortfall for the 1981-83 biennium. Finally, the November 1982 revenue forecast projected that the biennium was still $312 million out of balance. State officials responded to these revenue shor.tfalls with further budget cuts, tax increases (some of them temporary), and budget shifts in both revenues and expenditures. Four major causes of the revenue shortfalls have been identified. These are: 1) a slowdown in the national and state economies, 2) previous commitments for state spending, 3) over-indexing and 4) the inability of the Finance Department to correctly forecast the state's revenues. Each of these causes is examined in the following pages.

-7- The Slowdown in National and State Economies The nation's economic conditions have had a profound effect on state revenues in three interrelated ways. First, the recession has brought stagnation in national and state economic growth, high unemployment, and a decrease in the revenues of the state's major taxes. Second, it has also increased demand for the state's human service programs. Finally, the recession has also had an impact on revenue projections, which take into account economic growth, interest rates and employment data in projecting the flow of state revenues. The inability of• the national and state economies to come out of the current recession has diminished expected state revenue growth. In previous economic downturns, it was thought that the agricultural and high technology sectors of Minnesota would protect the state from serious economic problems. During this recession, however, these sectors have also been adversely affected. The combination of high interest rates and low commodities prices is leading some observers to label the downturn in the agricultural sector the worse since the 1930s. However, it is not totally clear how great an impact the recession has had on prices since a surplus of commodities has driven their prices down significantly. In addition, some experts believe that Minnesota's above-average growth in durable goods manufacturing and the increasing dependence of the state's economy on national and world markets contribute to the "cyclical sensitivity" of the state's economy (Wilbur R. Maki, "Minnesota State Revenue Trends and Forecasts: Implications for State Fiscal and Economic Growth Planning in the 1980s," Staff Papers Series, University of Minnesota, Institute of Agriculture, Forestry and Home Economics, Department of Agricultural and Applied Economics, St. Paul, Minn., August 1981, p. ii). Other factors that may have contributed to the state's slowed economy are increasing energy costs and the state's vulnerability to energy shortfalls, increased international competition for some products, and high interest rates, which have hurt the auto and construction industries on which northeastern Minnesota's taconite and timber industries depend. This economic slowdown has led to a decrease in revenues for the three major taxes of the state. Income tax collections have fallen because farmers' income has fallen and because fewer people in general are working. Sales tax collections have been reduced since they depend on the ability of consumers to spend income on large items such as appliances. Finally, corporate income tax collections are reduced because people are not purchasing business products. This in turn reduces the taxable profits of corporations.

-8- Our Overcommitted State Budget New programs, changes in existing programs and changes in the tax code can lead to revenue problems because of the state's limited ability to forecast the effect of those programs on future state budgets. This was the case when the 1979 and 1980 legislative sessions granted tax relief totaling $792 million for the 1979-1981 biennium and even a greater amount for this current biennium (Albert H. Quie, (Governor, Minnesota), "Budget in Brief, 1981-83," prepared for 72nd State Legislature, January 1981, p. 5). These changes included increasing Homestead Credit property tax relief, indexing the individual income tax (see below), elimination of the highest income tax bracket (17 percent) and replacement of the railroad gross earnings tax with the property tax. Significant spending commitments were also made, including increased Local Government Aid (LGA), increased state participation in welfare programs and growth in the state's commitment to education (Minnesota House Research, Department of Finance, Department of Revenue, and Senate Research, "Final Cost of 1979 Omnibus Tax Bill, May 1979," (Laws in Minnesota 1979, Chapter 303) Minnesota House of Representatives, House Research, St. Paul, Minn.). In recent years, the state has also found that spending for some programs it funds is beyond its control, particularly programs such as Aid to Families with Dependent Children (AFDC) and Medical Assistance, which are affected by the nation's economy and are beyond the total control of state government.

Over-Ambitious Indexing Income tax indexing, one of the major changes made in 1979 in reaction to the post­ Proposition 13 tax revolt, protects taxpayers from moving into higher tax brackets by expanding the brackets through broadening the annual income levels or placing new limits on incomes subject to a specific tax rate. Although the intent was to protect taxpayers from increases due to inflation, it is now recognized that the brackets had been "over­ indexed." The optimal result of indexing should have been to equalize the rate of change in income tax collections and personal income growth. Unfortunately, the adjustments made in 1979 overcompensated for inflation, and a significantly larger share of revenue was lost due to indexing than was expected for the four-year period FY 1980 to FY 1983 (Tomlinson, Tax Letter No. 3, p. 3). This "over-indexing" may actually have pushed some taxpayers into lower tax brackets because the tax brackets had been over-expanded (Minnesota Department of Revenue, "Income Tax Indexing," research report No. 128 prepared for Governor and Minnesota Legislature by Minnesota Department of Revenue, Research Office, St. Paul, Minn., May 1982, p. 54). The legislature did take actions to correct "over-indexing," but the effect remains since each year's adjustment is based on the previous year's brackets.

-9- Problems With Forecasting State Revenues Because of the revenue shortfalls, questions arose about the state's ability to forecast its revenues. Charges of fiscal mismanagement and the inability of the revenue forecasting models to anticipate continued economic stagnation, high unemployment and interest rates and lagging income and sales tax revenues led the governor to reevaluate the state's forecasting methods. In response to the charges of fiscal mismanagement, Governor Quie accepted his finance commissioner's resignation and appointed a task force to examine the state's forecasting methods. While the task force found that no major changes were required in the technical procedure the state uses to forecast revenues, it did suggest changes to improve the state's fiscal management. The task force's recommendations included: 1) the appointment of an advisory committee to assist in forecasting, 2) longer forecasting periods, 3) a reserve fund to be built over a number of years and 4) a contingency plan for expenditure reductions (Edward Foster to Albert H. Quie (Governor, Minnesota), report of Task Force on State Finances, 10 December 1981).

THE STATE'S RESPONSE TO REVENUE SHORTFALLS

The process for determining the 1981-83 biennial budget made the 1981 and 1982 legislative sessions the longest and most discouraging in recent memory. It took the legislature and the governor two regular sessions, six special sessions and many difficult political decisions to solve the problems that developed because of budget shortfalls. The shortfalls were discovered in a series of revenue projections based on national, regional and state data supplied by Data Resources Incorporated (ORI) of Massachusetts. The projected budget shortfalls (listed below) totaled more than $2 billion.

Month of Amount of Biennium Revenue Forecast Budget Shortfall Affected

August 1980 $195 million 1979-81 April 1981 $503 million 1981-83 November 1981 $768 million 1981-83 March 1982 $230 million 1981-83 November 1982 $312 million 1981-83

-10- In reaction to these shortfalls, the legislature and governor struggled to create solutions acceptable to both parties. They included: 1. Cuts in virtually all areas of the state's budget, including health, welfare, transportation, corrections and other state departments. 2. Substantial reductions in aid to counties, cities, towns and special districts along with reductions in property tax relief programs. 3. Substantial reductions in aid to education including property tax relief as well as a continued trend toward lifting restrictions on local revenue raising by school districts. 4. Tax increases, including temporary increases in the income and sales taxes. 5. Shifts of revenue collections into the current biennium and a transfer of expenditures into the next biennium. For both the governor and the legislature, the actions taken during this period were politically difficult. Governor Quie, along with a number of other Midwestern governors, decided not to seek reelection, while many legislators also retired after the 1982 legislative session. Whether this movement out of state government reflects an exhausted spirit after a difficult two-year period, a realistic view of the personal political liabilities acccumulated during a period of tax increases and budget cuts, an unwillingness to deal with some very difficult finance issues in the near future or other reasons including reapportionment, the fact remains that actions taken during the past two years have changed the way state government works. Beginning in 1980, when Governor Quie used executive authority rather than calling a special session to cut $195 million out of the state budget, the actions taken by state leaders have affected every Minnesotan.

The April 1981 Budget Projection Two months into the 1981-83 biennium budget process, when a $503 million shortfall was forecast, new estimates had to be determined for the biennium's spending plans even though no appropriations bill had been passed. By the end of the 1981 regular session the appropriations bill with budget reductions proposed by the governor--including the closing of one state institution and the combining of four state agencies--had been passed. The tax bill for making up the remaining share of the shortfall was vetoed by the governor, who then called a special session to deal with the tax question. The result of the special session was new revenues, including a one percent temporary increase in the general sales tax (scheduled to "sunset" in June 1983), a change in the indexing system and a $290 million shift of expenditures from the 1981-83 biennium into the next biennium. In addition, the DFL leadership was successful in passing a Supplemental Appropriation Bill to replace funds for specific programs that were reduced

-11- during the regular session and to provide tax relief for citizens experiencing excessive property tax increases or saving money to buy a new home. The June 1981 revenue measures and additional expenditures are found in Table 1. Because of new provisions in Minnesota law passed by the legislature during the regular session, the revenue generated by the special session's actions was greater than the shortfall of $503 million.

The November 1981 Budget Projection During the summer and fall of 1981, monthly collections of revenue continued to fall below projected estimates. A second special session of the legislature was called in July to deal with the cash-flow problem. As problems continued to mount, the governor called for another revenue forecast, which revealed a $768 million shortfall due to decreased revenues from all major taxes and increased expenditures for welfare and education. A third special session was called. Again, a mix of tax increases, payment shifts and expenditure reductions was 'enacted. Major tax increases included a seven percent temporary surcharge on the individual income tax (scheduled to "sunset" in June 1983), a lifting of the exemption of cigarettes from the sales tax and the creation of a unitary corporate income tax. Reductions in the state budget totalled $360 million and hit almost every major category. The only major program that was protected was property tax relief (except for renter's credit). In addition to tax increases and budget cuts, $263 million of the shortfall was eliminated by shifting property tax collections for schools into the current biennium, (for explanation see shift section), delaying compliance with the new federal depreciation schedules and putting off the recognition of what was then an approximately $50 million deficiency in the welfare budget. Through these changes, the state had a net revenue gain of $895 million and a projected fund balance at the end of the biennium of $127 million. The taxes, budget cuts and payment shifts passed by the legislature in the third special session are outlined in Table 2.

-12- TABLE 1. SPECIAL SESSION I - JUNE 1981 (Millions of Dollars)

REVENUE GAINS

Tax Changes Indexing $ 91.8

Sales tax includes a 1% increase, due to expire 6/30/83) 416.0

Medical deduction 74.6

Estate tax 2.6

Delinquent tax interest charge 5.0

TOTAL $590.0

Expenditure Reductions Net decreased transportation aid 2.6

Rent credit for nursing home change 16.3

Property tax classification change 3.6

TOTAL 22.5

Payment and Revenue Shifts Includes shifts in Taconite Homestead Credit, Local Government Aid, rent credit and DNR payments in lieu of taxes and the acceleration of tele- phone gross earnings tax payments 290.1

TOTAL REVENUE GAINS 902.6

ADDITIONAL EXPENDITURES AND REVENUE LOSSES

Education expenditures 41.7 Higher education student aid 6.8 Nursing home care 29.4 Property tax targeting 14.2 Individual housing accounts 7.7 TOTAL ADDITIONAL EXPENDITURES 99.8

NET REVENUE GAIN FOR SPECIAL SESSION I 802.8

SOURCES: Minnesota House Majority Research, "The Supplemental Appropriations Bill," Minnesota House of Representatives, House Majority Research, St. Paul, Minn., 30 June 1981; Minnesota Taxpayers Association, "Summary of 1981 Omnibus Tax Bill: House File I - Special Session - June 6, 1981," Legislative Bulletin, 25 June 1981.

-13- TABLE 2. SPECIAL SESSION III - DECEMBER 1981 (Millions of Dollars)

REVENUE GAINS

Tax Changes

Individual income tax (includes 7 percent temporary tax surcharge and federal updates on commodity stradles, dividends and interest exclusions and capitol gains) $218.5

Sales tax (includes lifting the exemption on cigarettes and an increased tax on vending sale) 64.6

Corporate income tax (includes unitary tax and tax relief for small business and adjusted compliance to federal depreciation schedules) 110. 7

Miscellaneous taxes and receipts 3.5

TOTAL $397.3

Expenditure Reductions

Department of Education and Higher Education 39.6

Health, Welfare and Corrections 26.6

State and semi-state departments 72 .1

Local government aid 32.0

Renters credit 8 .1

School aids 168.5

Other reductions 12.8

Expenditure additions (includes increased short-term borrowing costs) (46.5)

TOTAL 313.2

Deferred Actions and Payment Shifts

Includes the def erred welfare deficiency and the early recognition of school property taxes 184.0

NET REVENUE GAIN FOR SPECIAL SESSION III 894.5

SOURCE: Minnesota Department of Finance, "Fund Balance Revisions: 1981 Regular Session - 1982 Regular Session ($ in Millions)," Minnesota Department of Finance, St. Paul, Minn., 12 April 1982.

-14- The March 1982 Budget Projection Another budget shortfall was forecast near the end of the 1982 regular session, this time totaling $230 million. To overcome this shortfall, the legislature and governor increased taxes by $69 million, decreased expenditures by $60 million and shifted $103 million worth of payments into the 1983-85 biennium. Almost $35 million in interest payments associated with short-term borrowing to deal with cash flow problems had to be added to the budget. Taxes were increased by delaying for six months the establishment of state conformity to federal capital gains standards, expanding the sales tax to candy and soft drinks and placing an additional five percent sales tax on "on sale" liquor. Half of the budget reductions came from reduced Homestead Credit payments to local governments. Almost all other major categories of the state's general fund, except for school aids, were also reduced. Rent credit and circuit breaker payments for senior citizens and disabled persons and the Homestead Credit payments for school districts were delayed into the next biennium. These budget reductions, revenue increases, and payment shifts are outlined in Table 3. While the net impact of these actions was a $230 million gain, a projected $57 million welfare deficit still remained. This was expected to be covered by a $127.5 million fund balance proposed for June 30, 1983.

-15- TABLE 3. REGULAR 1982 SESSION (Millions of Dollars)

REVENUE GAINS

Tax Changes

Individual income tax (delay of federal conformity on capital gains) $ 14.0

Sales tax (includes expanding sales tax on candy, pop and cable TV and an additional 5 percent tax on liquor by the drink) 55.0

Miscellaneous revenue adjustments 10.2

Increased investment income 22.9

TOTAL 102.1

Expenditure Reductions

Department of Education and Higher Education 2.2

Health, Welfare and Corrections 8.6 State and semi-state departments 5.4 Homestead credit payments 30.0

Other expenditure reductions 13.8

Expenditure additions and legislative changes (34.8)

TOTAL 25.2

Payment Shifts Into Next Biennium

Includes shifts of rent credits and circuit breaker for senior citizens and disabled persons, and Homestead Credit for school districts 102.9 NET REVENUE GAIN FOR REGULAR 1982 SESSION 230.2

SOURCES: Minnesota House Appropriations Committee, Article I of H.F. 2190, Chapter 641, Laws of 1982. State Agency Appropriation Reductions, Minnesota House Appropriations Committee, St. Paul, Minn., 18 March 1982; Minnesota Department of Finance, "Fund Balance Revisions."

-16- The November 1982 Budget Projection Further problems developed for the state in November 1982 when another revenue forecast projected that the 1981-83 biennium would end on June 30, 1983, with a deficit unless further actions were taken. This latest projection showed that individual income tax collections would be $140 million less than expected, the sales tax $108 million less and the corporate income tax $85 million less. All other state revenue sources were projected to yield $82 million less than planned. The total revenue shortfall expected by the end of the biennium was projected at $416 million. After factoring in the $127.7 million expected fund balance that existed before the revenue projection, the deficits accumulated in state accounts during FY 1983 (most notably the welfare deficit, which by then accounted for nearly $69 million) and a number of other transfers, cancellations and appropriations that were carried forward, the deficit on June 30, 1983, was projected to be $312.5 million (Minnesota Department of Finance, "Forecast Revision FY 1983," Minnesota Department of Finance, St. Paul, Minn., 18 November 1982). While previous shortfalls had been larger, this one proved to be very difficult to solve. Even though many expenditures had already been reduced during earlier sessions and only seven months remained in the biennium, over $144 million in budget cuts was promulgated by the legislature in the sixth special session. Increases in employee contributions to pension plans accounted for $61.8 million of the expenditure reductions (a provision that public employees challenged in court), while further cuts to school districts, local governments, state departments (including cuts in human service programs) and higher education, along with the option of payless holidays for state employees, made up the balance. Increases in the sales tax, the individual income tax surcharge and corporate income taxes contributed another $100.2 million in filling the revenue gap. Finally, another $100 million was gained by the early recognition of school district property tax revenue, a method already utilized during the third special session. The total net revenue gain in this budget balancing bill was $344.6 million, which allowed a cushion of $32.1 million to prevent any further budget shortfalls in the remaining months of the biennium-­ a distinct possibility, according to Governor Quie and some legislators. The actions taken by the legislature and the governor to balance the budget at the end of 1982 are outlined in Table 4.

-17- TABLE 4. SPECIAL SESSION VI - 1982 (Millions of Dollars)

REVENUE GAINS

Tax Changes Individual income tax (3 percent temporary tax surcharge between January 1, 1983 and June 30, 1983) $ 27.0

Sales tax (a one percentage point increase in the general sales tax rate except for motor vehicles) 69.0

Corporate income tax (accelerated update to conform to federal tax law) 3.8

Tax on long distance pay phone calls (6 percent tax) .4

TOTAL 100.2

Expenditure Reductions Department of Education and Higher Education 8.1

Health, Welfare and Corrections 26.9

State and semi-state departments 12.0

Pension fund revision (requires public employees to pay an additional 2 percent of their sal- aries into their pension plans--this means an average monthly pay reduction of $33 for public employees). 61.8

Voluntary unpaid leave of absence for state employees 4.5

School aids 17.0

Local government aid 14.l

TOTAL 144.4

Payment Shift Into Next Biennium Early recognition of school district property taxes 100.0

NET REVENUE GAINS 344.6

SOURCES: Betty Wilson and Dan Oberdorfer, "Legislators Pass Budget-Balancing Bill," Minneapolis Star and Tribune, 11 December 1982, p. l A; Bill Salisbury and Ann Kahn, "Budget Bail-Out Squeaks Past," St. Paul Pioneer Press/Dispatch, 11 December )982, p. lA; Minnesota House of Representatives, H.F. 4, Special Session, 19 December 1982.

-18- Cumulative Effect of Budget Responses Actions taken by the governor and the legislature during 1981 and 1982 have significantly changed the funding and implementation of programs by both the state and local governments. While it is too early to fully identify all the impacts of these state actions, some observations can be made. The 1982 regular session and the six special legislative sessions during 1981 and 1982 resulted in tax revenue increases of approximately $1. 1 billion, net expenditure reductions of $405 million and shifts of payments into the next biennium, shifts of revenue into this biennium or deferred actions of $7 56 million. (Actions were taken during the 1981 regular session which also increased revenues, altered expenditures and created shifts of both revenues and expenditures. These are not reflected in the numbers above.) Services were reduced at the local level because a large share of the state's General Fund is passed on to counties, cities, school districts or other units of local government. When the state reduced its financial commitment to local governments in reaction to the 1981 and 1982 budget shortfalls, the state's financial problems reverberated throughout the entire Minnesota intergovernmental system. In 1982, local property taxes were increased by an average of 24 percent, making the state's crisis a local government problem (John L. Palmer and Isabel v. Sawhill, eds., The Reagan Experiment, Washington D.C.: Urban Institute Press, 1980, p. 194). State spending reductions to local jurisdictions (along with additional cuts to them by the federal government) and the subsequent local actions to replace that revenue with local revenue have significantly increased reliance on local property taxes to fund government in Minnesota. This change will affect the progressivity of Minnesota's overall tax system and increase disparities in tax rates, revenues and expenditures among school districts, counties, cities and towns. This represents continuation of an erosion of the "Minnesota Miracle" goal of reducing the role of local tax sources--particularly the property tax--in funding local jurisdictions and the effort to equalize tax burdens and expenditures for those jurisdictions, particularly school districts. In this current biennium, Minnesota state government spending has continued to grow but at a slower rate. General Fund appropriations for the 1981-83 biennium, as calculated at the end of the 1982 session, had grown only seven percent over the 1979-81 biennium General Fund spending (estimated at the end of the 1980 session). When inflation is accounted for, the 1981-83 spending level actually fell 13.3 percent. The difference in spending levels for the 13 expenditure categories in the General Fund for the two bienniums is shown in Table 5.

-19- TABLE 5. GENERAL FUND APPROPRIATIONS FOR 1979-81 AND 1981-83 BIENNIUMS

% Change % Change Between Expenditure 1 1979-812 1981 3 Between Bienniums 4 Category Biennium Biennium Bienniums Reflecting Inflation

School aids $1,991,572,300 $1,918,280,600 - 3.7 - 22.0

Education/higher education 801,309,100 821,225,300 + 2.5 - 17.0

Health, welfare & corrections 1,321,239,400 1,573,266,800 + 19 .1 3.6

Transportation/ semi-states 184,953,400 137,162,200 - 25.8 - 40.0

State departments 484,428,900 437,274,200 - 9.7 - 26.9

Salary supplement & COLA 105,042,200 184,066,900 + 75.2 + 41. 9

'Debt service 183,789,800 218,131;400 + 18. 7 - 3.9

Interest short-term debt 0 117,486,000 N.A. N.A.

Retirement contri­ butions 324,484,600 388,176,500 + 19. 6 - 3.1

Aid and credits 1,702,355,500 1,795,177,900 + 5.5 - 14.6

Mining apportion­ ment 110,850,800 106,511,300 - 3.9 - 22.2

Transfer/open & standing 66,697,900 75,106,700 + 12.6 - 8.8

Appropriations carried forward 24,245,000 41,493,600 + 71.1 + 38.6

TOTAL $7,300,968,900 $7,813,359,400 + 7.0 - 13.3

1. See Appendix A for explanation of expenditure categories. 2. This spending estimate of the 1979-81 biennium was taken at the end of the 1980 legislative session. 3. This spending estimate of the 1981-83 biennium was taken in April 1982, the end of the 1982 legislative session. Further spending reductions were made in December of 1982 and not reflected in this table. 4. Based on differences between April 1980 and April 1982 Mpls.-St. Paul Consumer Price Index.

SOURCE: Minnesota House Appropriations Committee, "General Fund Appropriations: Biennial Comparison: Estimates at End of Legislative Sessions by Major Expenditure Categories," Minnesota House Appropriations Committee, St. Paul, Minn., 29 April 1982, verified by Minnesota Department of Finance.

-20- PAST ACTIONS PRESENT DILEMMAS FOR THE NEXT LEGISLATURE

In an attempt to balance the 1981-83 biennial budget, the legislature took a number of actions involving shifts of expenditures and revenues, payment rescheduling and sunset provisions, which will result in less revenue being available for the state's budget in the next biennium. Added to this are the possibilities of continuing economic problems in Minnesota and further decline in federal aid as the federal government transfers additional funding responsibilities to state and local governments. These developments mean difficult decisions for the 1983 legislature.

Temporary Tax Increases One of the crucial decisions the new legislature and governor will have to make in next session's budget process is whether or not to continue the temporary taxes imposed during the 1981-83 biennial budget process. A ten percent surcharge on the individual income tax and a one percent increase in the general sales tax are scheduled to "sunset" on June 30, 1983, the end of the current biennium. In addition, the state is committed to increasing the transfer of revenues of the motor vehicle excise tax from the General Fund to the Trunk Highway Fund. If these two taxes are allowed to sunset and the transfer to take place, a significant amount of revenue will not be available to the state in the next biennium. For this reason, Finance Commissioner Rudell, in a July 1982 memo to state department heads regarding the 1983-85 biennial budget guidelines, recommended that: 1) the termination date for the seven percent surcharge be extended to June 30, 1985, 2) the transfer of motor vehicle excise tax revenue be delayed to June 30, 1987, and 3) the five percent general sales tax rate be made permanent. The alternative, Rudell asserted, is the continuation of the fiscal management problems faced by the state over the past two years (Allan L. Rudell, "Biennial Budget Guidelines," Memorandum, Minnesota Department of Finance, 16 July 1982). The first seven percent of the income tax surcharge generated $199 million for the 1981-83 biennium when it was enacted during the third special session. If this portion of the surcharge were extended it would create $370 million for the 1983-85 biennial budget (Karen Baker (Legislative Analyst, Minnesota House Research), Conversation with Doug Wilson (CURA), 9 September 1982). Another $27 million was raised by an additional three percent surcharge enacted in December 1982. The increase in the general sales tax rate to five percent, which also includes a one percent increase in the motor vehicle excise tax, was enacted during the first special session and generated an additional $416 million for the biennium. If this sales tax increase is allowed to "sunset" on June 30, 1983, $428.8

-21- million will not be available next biennium. A further increase of one percentage point in the general sales tax rate, which will yield $69 million for the remainder of the biennium, was passed in the December 1982 special session, but this tax increase is permanent in nature. If the transfer of motor vehicle excise tax revenues is allowed to continue as is scheduled after June 30, 1983, the revenue loss for the General Fund for the 1983-85 biennium may be at least $66.5 million, the amount that was raised in this current biennium by delaying the transfer (Association of Minnesota Counties, "AMC's 1982 Legislative Summary," Minnesota Counties, 16 April 1982, p. 16). The amount of revenue collected by these temporary actions totaled over $640 million for the 1981-83 biennium. The possible revenue loss for the 1983-85 biennium if the temporary actions are not extended is at least $87 5 million.

Revenue and Expenditure Shifts In order to balance the 1981-83 biennial budget, the legislature, with the support of the governor, financed a large portion of the state's General Fund with revenue shifts into this biennium and expenditure transfers out of the current biennium into the next. These shifts, while providing "windfall revenues" in the 1981-83 biennium, are permanent shifts signed into law by the governor. They include accelerated revenue collections from businesses, adjustments in the way school aid is paid and rescheduling of many payments that the state makes to local governments and individuals. This practice of increasing revenue without raising taxes or cutting the budget without reducing expenditures is not new. Arthur Roemer, the new Commissioner of the Department of Revenue, has stated that "this isn't a Quie administration idea, this started way back in the LeVander days." For example, he identified payment dates for school and local government aids that used to fall on June 15th. Those dates, even during those times not characterized as being "fiscal crunches," were then moved to July 15th, a date in the next biennium. The problem, Roemer has pointed out, is that there are very few shifts remaining for future administrations to use. The shifts themselves will cause problems for the next legislature and governor. While they are permanent and will not affect the next biennium's budget as "liabilities," they provided revenue in the 1981-83 biennium that will not be available for the 1983-85 biennial budget (Minnesota Taxpayers Association, MT A Newsletter, March 1982, p. 2). To continue the current level of spending, the legislature and governor must find additional resources. Such resources could come from a larger tax base fueled by economic growth, from further increased taxes or additional shifts. The 1981 and 1982 revenue and expenditure shifts are listed in Table 6 and outlined below. The net revenue gain for the 1981-83 biennium as a result of these shifts is estimated at $680 million.

-22- o Accelerated Revenue Collections. This technique provides a one-time revenue windfall for the budget by requiring corporations, merchants and employers to speed up payment of their taxes. This same type of shift was used by Governor Quie in his attempt to balance the 1979-81 biennium budget when he required large employers to step up their transfer of income tax withholding funds. o School Aid Adjustments. Among numerous changes in school finance, two shifts in school aid were made. The first, made during the 1981 regular session, adjusted the state's payment schedule by loading more of the total payment into the final installment, which not coincidently is in the next fiscal year. For example, in the Foundation Aid program, the largest state-aided program, the final payment is due in October following the end of the school year (June 30). Prior to the present school year, 10 percent of total foundation aid was due in the October payment. The legislature increased this share to 15 percent, thereby transferring a significant amount of this biennium's school aid into the next biennium. The legislature also increased the number of programs that receive a final payment in the next biennium. The second adjustment in school aid that the legislature and governor formulated was the early recognition of school districts' property tax revenue. Property tax payments to school districts, which are paid by individual and business property owners, are made in two installments--the first payment by May 31 and the second payment by the end of November. Prior to the change, the May property tax payment to school districts was to be used in the school year that followed--beginning on the first of July. The legislature, in its effort to balance the budget during the third special session, required that one-third of the May property tax payment (one-sixth of the year's total property tax payment) be used in the school year in which the payment was made. In June 1983, one-third of that May payment will be for the school year ending June 30, 1983, and two-thirds of the payment will be for the school year beginning on July 1, 1983. This change provided a one-time windfall for the state, since it increased the local share of revenue for the 1982-83 school year and thereby enabled the state to decrease school aids by an additional $134- million. The same type of adjustment was enacted in the December 1982 special session when the amount of the shift was increased (from one-sixth of the total annual property tax payment to 32 percent of that payment) to generate an additional $100 million windfall for the 1981-83 biennial budget. While the amount of total funds available to school districts doesn't change, some districts will be hurt by this adjustment, and those with low fund balances may have cash flow problems

-23- while waiting for that June property tax payment. These districts are able to borrow from a $70 million interest-free state loan fund, but these borrowed funds must be paid back before June 30, 1983. e Payment Date Rescheduling. A large amount of state expenditures were transferred from the current biennium into the 1983-85 biennium by rescheduling payment dates on a series of state aids and programs. While these shifts are permanent, they provided a one-time-only revenue windfall for the state in the current biennium. Many of these payment shifts affect counties, cities and school districts and they may cause cash flow problems and lost interest income.

-24- TABLE 6. REVENUE AND EXPENDITURE SHIFTS DURING THE 1981 AND 1982 LEGISLATURE

Net Revenue Gain for -Shift 1981-83 Biennium* Accelerated Revenue Collections Telephone and telegraph gross earnings $37,000,000 Insurance gross premiums 11,200,000 Sales tax 31,000,000 School Aid Adjustments Percentage changes in amount due in final payment 62,400,000 Early recognition of property taxes December 1981 134,000,000 December 1982 100,000,000 Payment Date Rescheduling Rescheduling of school district homestead credit payments 37,600,000 Renters credit 121,000,000 Renters credit for senior citizens and disabled 30,200,000 Circuit breaker (property tax refund) for senior citizens and disabled 35,100,000 Local government aids (LGA) 67,400,000 DNR in lieu of property tax payments 4,500,000 Taconite homestead credit payments 7,800,000

TOT AL SHIFTS $679,200,000

;Net revenue gain is the amount by which each shift has increased the available revenue b~r t~e 1981-83 biennial budget, either in the _fori:n o~ tr~nsfer of revenue into _this e_nnium or the transfer of expenditures out of this biennium mto the next. These shifts, W~lle permanent, will only provide "windfall" revenue gains for the 1981-83 biennium and will provide no revenue gains for future bienniums.

SOURCES: Minnesota Taxpayers Association, MTA Newsletter, March 1982; Association of Minnesota Counties, "AMC's 1982 Legislative Summary."

-25- Other Legislative Actions Other components of the 1981-83 biennial budget process could affect the 1983-85 budget. The first is the change made by the legislature and the governor in the individual income tax that switched deduction of federal income tax from the cash method to the accrual method of accounting. The result was a $51.7 million gain in current biennium revenue. Unfortunately, the change also means a $20.8 million loss of revenue from the individual income tax for the 1983-85 biennium (Minnesota Taxpayers Association, MT A Newsletter, March 1982, p. 2). The second is the estimated welfare deficit of approximately $69.0 million. This welfare deficit may continue to grow before final action on the 1981-83 budget is taken by the legislature in the spring of 1983. Before the November 1982 revenue forecast, the projected $127.7 million end-of-biennium fund balance was to be used to cover the welfare deficit. Now that the budget has proved to be once more out of balance, the welfare deficit may be one of the many contributing factors to the state's budget shortfall problems. Finally, several of the expenditure reductions made during the 1981-83 biennial budget process were one-time reductions in the state's General Fund. An example of this was the $61.8 million pension fund provision which reduced the state's pension payments for this biennium only. These one-time reductions are similar to payment shifts--they will have to be made up in the next biennium.

THE 1983 LEGISLATIVE SESSION--DIFFICUL T DECISIONS AHEAD

The shifts, sunset taxes and other actions taken in the 1981 and 1982 legislative sessions will have a great impact on the 1983 legislature as it begins to struggle with the next state budget. The actions described above represent more than $1.5 billion in revenue and shifts that were available for the 1981-83 biennial budget but will not be available for the 1983-85 budget unless the legislature decides to continue the temporary taxes or make further shifts, where possible, in either revenue or expenditures. In addition, the November 1982 revenue projection forecasts that while the economy on the national level is expected to turn around in 1983, Minnesota's recovery will lag behind. As a result, the new legislature and governor must deal with the results of continued economic stagnation, increasing costs of government services and public pressure to review the intergovernmental system in Minnesota. In the view of Finance Commissioner Rudell, "Minnesota's budgetary and cash flow problems are not merely the result of lagging revenues; equal or greater weight must be given to the extent to which individuals and units of local government have become dependent upon state transfer payments" (Rudell, "Biennial Budget," p. 1).

-26- The legislature will need to consider the following aspects of the state's current economic difficulty in any policy development: o The impact of the national economic slowdown, including the recession in the state's timber and mining operations that reflects the nation's troubled construction, steel and automobile industries. Minnesota's agricultural sector is also experiencing difficulties because of high interest rates and low commodities prices. o Concerns expressed by some that parts of Minnesota's economy are in a period of long-term transition paralleling changes in the national economy--from an industrial and manufacturing base to high-technology information and service industries. An additional aspect of this transition is the economic effect of increasing oil and natural gas prices on energy-dependent states like Minnesota. o There is what some call the "perception" of a "bad business climate" in Minnesota, which inhibits new business from establishing their operations in the state and encourages established businesses to leave Minnesota. This "perception" is created by, among other things, relatively high personal and corporate income tax rates and a generous but relatively expensive workers' compensation program.

MINNESOTA NOT ALONE IN FACING NEW FISCAL CONSTRAINTS

Many other states also faced unsettling shortfalls as their budgets were affected by the current recession and declining federal aid, by increased cost of government and past actions that reduced revenues or increased expenditures. The Urban Institute identified seven states in poor fiscal condition (defined as ending FY 1982 in deficit or having to make drastic adjustments to avoid a deficit). This group included Minnesota, Michigan, Nebraska, Ohio, Oregon, Washington and Wisconsin. Every state in the group, except Nebraska and Minnesota, faces high statewide unemployment conditions. (Both Nebraska and Minnesota have faced tough economic conditions, including a depressed agricultural sector, but their statewide unemployment figures fall below the national average.) Six states that the study characterized as being in good budget condition either have relatively low unemployment rates (Hawaii, Kansas or Oklahoma) or rely on severance taxes from mineral or energy sources for a significant share of their budgets. With only one exception, all states that completed FY 1981 with general fund balances over 15 percent of general fund expenditures relied heavily on severance taxes (John L. Palmer and Isabel V. Sawhill, eds., The Reagan Experiment, Washington D.C.: Urban Institute Press, 1980, pp. 189-191).

-27- The estimated total of fund balances for all 50 states has fallen sharply over the past few years, which indicates both increased tax relief and economic stress on state budgets. (Table 7 illustrates this by listing the ending fund balances as a percentage of expenditures for the years since 1977 .) Individual states have also shown this pattern. For example, California had an ending fund balance of 31.0 percent of total general fund expenditures in 1978. With the passage of Proposition 13 and other factors, including the depressed economy, this fund balance estimate has fallen to 1.7 percent in 1981 and is expected to drop to 0 percent for 1982. New Hampshire follows a similar pattern. In 1978, New Hampshire's fund balance was 11.3 percent of total general fund expenditures. This figure had fallen to 3.9 in 1980 and for both 1981 and 1982 it was expected to have a negative value. In this same study, Minnesota's fund balance which was 9.7 percent of expenditures in 1979, fell to 3.4 percent in 1980 and had negative values in 1981 and 1982.

TABLE 7. ENDING FUND BALANCES AS A PERCENTAGE OF EXPENDITURES FOR ALL ST ATES

Fund Balance as Percent Year of Expenditures

1977 5.9 1978 8.6 1979 8.7 1980 9.0 1981 4.5 1982 1.5* 1983 1.1*

*Estimate

Source: "As Things Get Tighter, The States Think Bigger," New York Times, 15 August 1982.

In reaction to their budget shortfalls, many states made adjustments similar to those made by Minnesota. Tax relief by state government, a trend that many states had followed in the late 1970s and 1980, often became impossible. Many states had to increase their major taxes--income and sales--as a last resort, and those tax increases, many of which were temporary in 1981 and 1982, began to offset tax relief efforts of ear lier years.

-28- Like Minnesota, many states chose to defer budget problems. Some states deferred, skipped or decreased their contributions to state pension funds, while others postponed income tax refunds. Many states accelerated withholding payments or deferred expenditures into the next budget period. Most states attempted to protect their welfare and education expenditures, but with varying success. Some other expenditures had to be increased significantly, most notably those that were corrections-related. This increase in prison-related costs was a function of court-ordered reform in many states and the correlation between hard economic times and the crime rate. Table 8 lists the type of actions taken by a selection of states including those seven with the worst problems. Many of the changes, such as deferment of payments or surcharges in sales and income taxes, were meant to be temporary. At the time these changes were made, it was hoped by state leaders across the country that the economy would improve. But as the recession lingers on, these temporary solutions may become larger problems as shortfalls in state budgets continue. This borrowing against a future budget is very similar to short term borrowing in that it jeopardizes future budget stability (Palmer and Sawhill, eds., The Reagan Experiment, p. 193).

f

-29- TABLE 8. RECENT BUDGET ACTIONS TAKEN BY SELECTED ST ATES

State Budget Tax Other

Michigan o Cut $559 million from FY o Six month temporary in­ o Higher education had 1982 budget crease in income tax of largest share of o FY 1983 budget shows 1% budget cuts 3.4% spending increase o Revenue increases for FY o Reduced state aid for 1982 amounted to $339 education million o Protected welfare o Increased cigarette tax programs from 11¢ to 21¢

Nebraska o Reduced FY 1982 budget o State raised its income, o Nearly exhausted its by 3%. 1983 budget corporate income, gener­ $100 million fund less than originally al sales and cigarette balance in FY 1982 proposed FY 1982 budget taxes

-Ohio o Reduced FY 1982 budget o Since July 1981 the o Most cuts have protected by approx. $500 million state has: human service programs to balance it --increased gas tax • Basic education aid has o Also made several de­ --made the temporary been partially protected ferrals of payments to 1¢ sales tax per­ balance budget manent --enacted surcharge on income tax (25% for 1982 and 12. 5% for 1983) --repealed soft drink tax

Oregon o For FY 1983 budget the o Increased taxes for FY • Greatest reductions state cuts its appro­ 1983 by $154 million have been made in welfare priations by $205 o Accelerated tax col­ programs since 1980 million lections by $69 million o Principal of property o Deferred the indexing tax relief without of income tax exemption income limit is raising • Increased cigarette tax questions

Wisconsin o For FY 1982 - 2% across­ o Increased taxes for bi­ o School aid and property the-board cuts except ennial budget by $416 tax relief maintain their local aid, property tax million priority status relief, state hospitals, o Increased sales tax by l ¢ and prisons o Place l 0% surcharge on corporate income tax for 1982 & 1983 o Increased cigarette tax • Extended sales tax to some services • Eliminated preferential treatment of capital gains

-30- State Budget Tax Other

Washington o State spending reduc- o Increased taxes $797 o School aids receive tions of $631 million million since 12/81 by: protection and minimal were made--came from all --increased sales tax by reductions areas of the budget 1¢ o Large reductions made o Additional cuts were --expanded sales tax to by deferring salary made in June 1982 include food increases --placed surcharge on o Initiated a state lottery all General Fund taxes

Idaho o To balance FY 1982 bud- o Increased gas tax ear- o Largest reductions made get imposed 4-day work marked for highways in human services programs week for state employees o Accelerated tax collec- tions

Florida o Made small pro-rata cuts o Increase sales tax by 1¢ • Half of sales tax goes to balance budget for FY which yielded $7 60 mil- to state and other half 1982 lion for first year is for local government o Postponed a scheduled severance tax reduction

Indiana o Froze state employee o Accelerated tax with- o Released freeze on salaries and delayed the holding payments and de- property tax levies final paychecks for layed tax refunds state employees into • May have to raise income next fiscal year taxes next year o Increase supplemental corporate income tax

Kentucky o To balance the FY 1982 0 Increased alcohol tax o State has 4% limit on 1982 budget, the Gover- 0 Put in place new truck local property tax levy nor without the legis- tax to finance highway growth lature reduced the bud- program get 10% or by $236 million

Oklahoma o Last budget had $294 o Increased the personal • Priorities for state million surplus income tax exemption at funding are highway o Fund balance at end of a cost.of $37.2 million and other capital funding FY 1982 was 25.2% of and education General Fund expenditures

SOURCES: Ibid.; Steven Gold, "State Fiscal Conditions and Trends," National Conference of State Legislatures, Washington D.C., 13 September 1982.

-31-

CHAPTER II. WEAKENING A DECADE-LONG COMMITMENT TO MINNESOTA'S LOCAL JURISDICTIONS

Because of certain policies instituted in Minnesota during the late 1960s and early 1970s, this state has enjoyed national recognition for the way it has financed its local jurisdictions, particularly its school districts. The state/local fiscal system, developed during those years, became known as the "Minnesota Miracle" and reflected what is considered to be one of the most innovative legislative periods in the recent history of the state. While interpretations vary regarding the political impetus for the "miracle" and the relative importance of its various components, there seems to be general agreement that what Minnesota attempted was a significant departure from the conventional systems of state/local financing in Minnesota and in other states. The reform enacted during those years had two basic parts: 1) a shift from the dependence of school districts, counties, cities and towns on local property taxes to fund their operations to an increasing reliance on state-appropriated aids and property tax relief funded through state revenue sources and 2) an attempt to equalize--through an elaborate set of formulas and local revenue-raising limitations--local tax burden, educa­ tional opportunity, and public services across jurisdictions regardless of their local fiscal capacity. Those reforms have been significantly modified in the intervening years, usually in ways that have undermined aspects of the "miracle." But the greatest departure from that basic approach so far may be the result of actions taken during the 1981 and 1982 legislative sessions in response to the state's revenue problems.

SCHOOL FINANCE: WHAT HAPPENED TO ST A TE FUNDING AND EXPENDITURE EQUALIZATION?

As part of its effort to cope with Minnesota's revenue shortfall, the state legislature, in addition to delaying aid payments in fiscal year 1981 and cutting state aid to school districts in fiscal year 1982, enacted significant changes in the structure of school finance. To compensate for the state aid cuts, the legislature shifted additional revenue-raising authority to Minnesota's 436 local school districts by authorizing districts to raise additional general operating funds through local property tax levies.

-33- Many local school officials have gladly accepted this additional authority because in the short term it provides them with another avenue for raising the operating funds needed to maintain current programs--funds the state had provided in the past. At the same time, some officials, while relieved to have the additional discretion during tough financial times, recognize that those changes undermine Minnesota's previous commitments to minimizing the role of local property taxes in funding education and the goal of equalized educational services across school districts. Those previous commitments--part of the "Minnesota Miracle"--have for a decade been reflected in a school finance system funded primarily through state sources and designed to minimize inequities in educational opportunity for children throughout Minnesota regardless of the wealth or poverty of the school districts in which they live. School officials seem to agree that the changes enacted by the Legislature in 1981 and 1982 represent the greatest erosion of the "miracle" to date, despite other significant modifications made since its , establishment in 1971. But they disagree about whether the 1981-82 modifications and those which preceded them are good or bad.

Development of the "Minnesota Miracle" To appreciate the nature of the changes made in 1981-82 it is necessary to understand Minnesota's system of financing education and the history of its development. Until the turn of the century, Minnesota schools were funded primarily through local property taxes levied by individual school boards, with the state providing flat grants derived from interest income earned by the Permanent School Fund. Beginning in 1915, the state supplemented the flat grants with additional aid to districts that had relatively less property wealth per pupil. Between 1915 and 1957 efforts were made to allocate a greater portion of state aids on the basis of district property wealth, with greater funding per pupil to "poorer" school districts. In 1957 the Legislature went further by establishing a minimum spending level for school districts--viewed as adequate for meeting "basic" educational needs--which was funded largely through local taxes. Districts were compensated for variations in their wealth through adjustments in the foundation aid from the state. But increases in pupil enrollments during the 1960s and inflation in the cost of providing education placed additional pressure on local property tax levies, despite the continuing role of the state in funding a portion of those costs. The school districts were not the only local jurisdictions pushing up property taxes, and by the late 1960s widespread public concern had developed over increasing property taxes. Despite major property tax relief legislation in 1967, those taxes continued to climb so that by 1970 public concern about the problem had taken the political form of a "tax revolt."

-34- At the same time some state and local officials and citizens had grown concerned about wide differences among school districts in per-pupil expenditures and local property tax rates. In 1971 a constitutional court challenge of Minnesota's school finance system, Yan Dusartz v. Priest, reinforced the belief that reliance on local property wealth for funding public schools was creating unequal educational opportunities for children in Minnesota. As a result of these concerns, property tax relief and reform of Minnesota's school finance system became major issues in the 1970 gubernatorial election. After the election, Governor Wendell Anderson's administration initiated major reform that ultimately led to enactment by the legislature of the Omnibus Tax Bill in October 1971. That legislation substantially shifted responsibility and authority for funding educa­ tion from local school districts and their property tax bases to the state and its more progressive tax sources. The 1971 reform called for increasing the state's contribution to district revenue by substantially raising the foundation aid level and placing a limitation on the tax rate which a district could levy against real property. Additional property tax relief was also provided through the agricultural and homestead credits. However, the major provisions of the governor's 1971 proposal designed to equalize per-pupil revenues and expenditures across school districts were substantially lost during compromises to obtain passage of the overall package. In 1973 the legislature returned to that issue and enacted a law which was to reduce the authorized levy for high-spending districts by 2.5 percent per year over a 40 year period beginning with the school year 197 5-76. The authorized levy for those districts was reduced, but political pressure developed from some districts suffering from declining enrollments. So in 197 5 the legislature not only replaced the 2.5 percent reduction in levy authority but cancelled the reduction for the following two years. The reduction for the high-spending districts was to begin again in school year 1978-79 but in 1976 the legislature scrapped the plan. Instead, since 1971 a "grandfather" or "hold harmless" clause has been in force. This clause recognizes traditional spending patterns of districts in the establishment of levy authority. It allows the 179 districts which in 1970-71 had an adjusted maintenance cost greater than the state average to levy additional local taxes enabling them to continue their traditional expenditure levels. Beginning in school year 1980-81, "grandfather aid" is Paid to those high-spending districts with property valuations below a statewide district average. During the decade of the 1970s the legislature, responding to problems derived from declining enrollment and the special needs of certain categories of children, attempted a number of strategies to assist districts. They expanded categorical aid for disadvantaged students and created supplemental and special aids for districts suffering from declining enrollment, small size or isolation. -35- Beyond modification of the foundation aid formula and the growth of categorical and other special aids, the legislature enacted major property tax relief programs between 1967 and 1979. School districts have been among those local units that depend on relief measures to keep local property taxes far below what they would otherwise be. That relief has had the effect of maintaining a greater reliance on the state for funding education in Minnesota. (The above history was drawn from the following sources: Tim L. Mazzoni, "State Policy Making for the Schools of Minnesota," April 1974, pp. 42-76; Minnesota House Research, "Minnesota School Finance, A Guide for Legislators," Minnesota House of Representatives, House Research, St. Paul, Minn., October 1981, pp. 1-3; Minnesota Department of Education, "The ABCs of Minnesota School Finance, "Minnesota Department of Education, Education Statistics Section and State Aids Section, St. Paul, Minn., June 1980, pp. 4-6; Betsy Levin and Thomas Muller, "The Financing of Schools in , Minnesota, "Urban Institute, Washington D.C., April 1973, pp. 4-8; Minnesota Department of Education, "Description and Evaluation of the Effects of the Grandfather and Replacement Levy Limitations and Aids," Minnesota Department of Education, February 1982, p. 5; Norman McGuire (Executive Director, Minnesota Association of School Administrators), interview by Tom Peek and Doug Wilson (CURA), 8 April 1982; Arthur Roemer (Deputy Commissioner, Minnesota Department of Revenue), interview by Tom Peek (CURA), 17 August 1982.)

Components of the School Aid System These developments led to a finance system based on the following major components, all of which were modified by the 1981-82 Legislature. l. Foundation Formula. The largest source of funds to school districts, the foundation formula provides districts with general operating funds. The state determines the appropriate dollar level per pupil suitable for maintenance of a "basic" education system. This level is funded through a combination of state aid and local property taxes. The appropriate mix of state and authorized local levy is based on a "basic" formula which takes into account the pupil enrollment (weighted by grade level) and the relative assessed property values of the individual districts. Authorized local mill rates reflect this formula, which includes a "basic maintenance levy," set by the state each year, that all districts on the formula must levy. In general, the dollar level per pupil under the formula cannot be exceeded through additional local property tax levies. However, a number of additional factors designed to recognize differences in the costs and

-36- preferences of districts enter into the determination of this level and the mix of state and local funding to meet it. These include: o Grandfather levy and aid providing additional levy authority and/or equalized aid* to districts which historically had spent more than the state average in 1970-71 (179 districts have the grandfather levy authority, while 60 districts received grandfather aid). o Replacement levy and aid providing additional levy authority and/or equalized aid to districts which once received special aid based on expanding or declining enrollments or enrollment sparcity. o Discretionary levy and aid providing districts with additional levy authority (subject to voter override), equalized with state aid to bring their total revenue up to a statutorily guaranteed amount per pupil unit. o AFDC aid providing additional aid to districts based on the number of district children whose families receive AFDC (Aid to Families with Dependent Children). o Minimum aid ensuring that heavily agricultural districts receive a specified minimum amount per pupil unit from the state. o Foundation aid for shared-time pupils providing aid to districts that offer education to non-public school pupils. o Summer school levy and aid providing additional levy authority and/or aid for summer school programs. o Referendum levies providing operating funds solely through additional local levies in any amount, subject to a referendum election. 2. Categorical Aid and Grant Programs. A number of programs have been established to provide aid beyond foundation aid for districts that have particular special needs. Almost two dozen aid programs currently exist for purposes such as special education for the handicapped, education for pupils with limited proficiency in English, community and adult education, secondary and post-secondary vocational and technical education, non-public school supplies and programs, American Indian programs and basic skills, gifted and talented student programs and programs providing funds for capital expenditures for low valuation districts. 3. Transportation Funding. The state authorizes transportation levies and provides aid for specified services, including transport to and from school for

*_The state guarantees a certain amount of revenue for a given mill levy, so school districts with lower valuation per pupil unit receive some state aid to bring their total revenue up to the guaranteed amount.

-37- public and non-public pupils living specified distances from school. A supplemental levy is allowed for particular purposes. 4. Capital Finance for Construction. Several aid programs and levy authorizations exist through which districts finance capital projects such as the construction of new schools. Because the local property tax is viewed as a legitimate source of funding for capital improvements, state aid programs in this area are limited to provision of funds or loans to extremely low-wealth districts. 5. Tax Relief Aids. The state provides homestead credit and state school agricultural credit against the tax bills of homestead property owners and agricultural and seasonal property owners, respectively, to pay a portion of their property taxes levied for school purposes. In effect, the state pays to the districts a portion of the local taxpayers' bills. 6. In Lieu Aids. The state provides aid to school districts to compensate for particular types of property in the districts that are not locally taxable or which are taxed in some way by the state. Several of these aids are deducted from foundation aid and local levies to keep revenues within the amount provided by the foundation formula. (Minnesota House Research, "Minnesota School Finance;" Minnesota Depart­ ment of Education, "Grandfather and Replacement Levy Limitations and Aids," pp. 1-8; Joyce Krupey (Senate Researcher, Minnesota Senate), interview by Tom Peek and Doug Wilson (CURA), 11 October 1982; Joyce Krupey, phone conversation with Tom Peek, 13 October 1982.

Increasing the Role of Local Taxation Even at the outset of the 1971 reforms in school finance, the state legislature began to provide tools to increase the role of local taxation in financing education. In 1971, school boards were granted authority to levy taxes through a referendum election. With such a referendum levy they could raise unlimited revenue for general operating funds, if the district's voters approved. Then in 1979 the legislature established a limited discretionary levy of .5 mills, with which districts could locally raise additional revenues (subject to voter override) for their general operating funds beginning in school year 1980- 81. The maximum allowable level of this levy was later doubled to 1.0 mill for the 1981- 82 school year. State discretionary aid is paid according to a formula that attempts to fully equalize the discretionary taxing ability of school districts. Then, as part of its response to state revenue shortfalls, the state legislature in 1981 and 1982 enacted several further changes in the school finance system that accelerated the trend back to local revenue-raising responsibility. These actions included: -38- 1. Major spending reductions in the various state aid programs to school districts totaling $185.5 million, as well as delays in state payments for property tax relief programs. Appropriations for foundation aid to districts decreased for the first time in a decade. 2. Increase in the "basic maintenance levy" set by the state to be levied by local districts as part of the foundation formula from 21 to 24 mills. 3. Increase in the allowable discretionary levy to 2.5 mills (and respective increase in its appropriation) for school year 1983-84 (FY 1983) and the allowance amount to $153.65 per pupil unit (to be reduced, however, if a district's operating fund balance exceeds $500 per pupil unit, by the amount of that surplus). 4. Authorization for districts with operating fund balances of less than $316 per pupil unit to levy an additional discretionary amount of up to $60 per pupil, partially equalized with state aid. 5. Authorization for districts to transfer up to $50 per pupil from their capital expenditure fund (raised from local property taxes) to their general operation fund. 6. Withdrawal of state aid for transporting students in grades 7-12 living less than two miles from school (rather than the previous one-mile limitation). Instead, districts were authorized to levy against local property for the cost of transporting those students the additional mile. 7. Removal (for the 1983-84 school year only) of the limitation of only one referendum attempt per school year. 8. Elimination of state aid for summer school programs, retaining local revenue­ raising authority to fund these programs. (The above material gathered from: John T. Feda, "1982 Omnibus Education Aids Bill," memorandum, Minnesota State Department of Education, 29 March 1982; Minnesota Department of Education," Grandfather and Re­ placement Levy Limitations and Aids," pp. 2-8; Minnesota House Research, "1982 Omnibus School Aids. Bill Summary," (H.F. 1555 As Agreed on by Conference Committee & S.F. 1502), Minnesota House of Representatives, House Research, St. Paul, Minn., 18 March 1982; Minnesota House Majority Research, "Focus on Significant Legislation Passed 1981, "Minnesota House of Representatives, House Majority Research, St. Paul, Minn., 1 June 1981, pp. 7-

9; Minnesota House of Representatives, 11 1982 Legislative Session, Session Summary," Minnesota House of Representatives, Public Information Office, St. Paul, Minn., March 1982, p. 38; Minnesota House Education Committee,

-39- "Financing Education; Minnesota 1982-83," Minnesota House of Representa­ tives, Education Committee, St. Paul, Minn., p. 41; Krupey, interview, 11 October 1982.) Some local school officials believe that the 1981-82 legislative actions are part of a trend which began "almost before the ink was dry" on the 1971 legislation. They criticize not only the granting of expanded authority to raise revenues through local property taxes, but also the legislature's earlier establishment of the grandfather, referendum and other special levies and categorical aids. And some officials--whether supporters or opponents of the "miracle's" equalization concept--believe that those changes have created not an equitable system but, as one district superintendent called it, the "Minnesota Myth." Another superintendent has suggested that the "patchwork" changes since 1971 "constitute a retreat from the 'Minnesota Miracle' ... but not by grand design." Pius Lacher, superintendent of the Mora School District fl 332 and the 1982 President of the Minnesota Assocation of School Administrators, is among the administrators who believe that, with the latest legislative changes, Minnesota may now be vulnerable to a constitutional challenge of its school finance system. How much difference have the changes actually made in this system once designed to minimize school district reliance on local property tax levies? Between school years 1980-81 and 1981-82 the use of the referendum and discretionary levies increased significantly, in part reflecting increasing costs for districts beyond what state aid could accommodate. During that period the number of districts with successful referendums increased from 107 to 126, and referendum revenues increased from $14.3 million to $26.7 million. The number of districts participating in the discretionary levy increctsed from 175 to 234, increasing revenue through this levy from $15.1 million to $42.3 million. This trend accelerated during the following year, reflecting the aid reductions and other changes enacted by the legislature in 1981 and 1982. Between the 1981-82 school year and the 1982-83 school year another 44 districts used the referendum levy, increasing revenue from that source an additional $46 million, the single greatest increase in use since the levy was authorized a decade ago. Similarly, the number of districts participating in the discretionary levy had increased by 80 to 314 districts, expanding discretionary revenues from $42.3 million to $104.9 million for 1982-83 (Minnesota Department of Education, "Grandfather and Replacement Levy Limitations and Aids," pp. 12-13). The changes made by the 1981-82 legislature and the corresponding increase in the local use of the referendum and discretionary levies (largely in response to state aid reductions) have dramatically increased reliance on the local property tax for funding education and have decreased reliance on state support (see Table 9 and Figure 2). In

-40- school year 1981-82, the state provided 73.1 percent of state/local funding for Minnesota schools, while local districts provided 26.9 percent. One year later, in the current school Year O982-83), the state share dropped to 63.3 percent while the local share rose to 36. 7 percent, the highest level since the 1971-72 school year. These changes are actually of greater magnitude when reductions in state aid f~r the property tax shift are included in the calculation of state aid reductions. Based on that calculation, the state portion was in fact reduced to 57 .2 percent of state/local funding (Joyce Krupey (Senate Researcher, Minnesota Senate), memorandum 25 May 1982). (Federal aids, not reflected in the above percentages, accounted for 6.2 percent of the total revenue of Minnesota school districts in school year 1980-81 (Lee w. Munnich, Jr. (Economist, Minnesota House of Representatives), Minnesota's State - Local Fiscal System," 1982). What has happened to the effort toward revenue and expenditure equalization? Beyond documenting these recent levy developments, the State Department of Education has examined the impact on equalization of the major components of foundation aid-­ AFDC aid, grandfather levy and aid, replacement levy and aid, discretionary levy and aid, and the referendum levy. That study found that Minnesota school districts' foundation revenues have become less equal since school year 1979-80, primarily because of the growing use of the referendum and discretionary levies and a corresponding decrease in the relative importance of the equalized basic revenue (basic foundation aid from the state). The study notes that in 1979-80, 72 percent of the districts were clustered within $100 of the median value ($1,314 per weighted pupil unit*) while in 1981-82 only 51 Percent of the districts were within $100 of the median ($1,562) (Minnesota Department of Education, "Grandfather and Replacement Levy Limitations and Aids," p. 18). The study also confirms some school officials' belief that the grandfather and replacement revenues also contribute to inequalities among districts but notes that "they have not contributed significantly to the growth in inequality since 1979-80" (Ibid., p. 21).

-::---- * Resident WADM (actual pupil units) -- for any school district, the average daily membership (ADM) of all students who are district residents, weighted as follows: ADM of nonhandicapped kindergarten at 0.5; prekindergarten and kindergarten handicapped students at 1.0; grades 1-6 at 1.0; and grades 7-12 at 1.4. This figure includes data for residents who attend school in their home district, plus residents for whom the home district pays tuition for attendance at another district or school. ADM is the average number of pupils in membership (i.e., currently enrolled in the district), measured over the entire school year.

-41- TABLE 9. MINNESOTA EDUCATION FUNDING RESPONSIBILITY 1971-72 to 1982-83

Percent Local School Percent Property Year Total Revenue Total State Aid State Net Levy Tax

1971-72 $1,181,007,264 $ 651,145,937 55.1 $529,861,327 44.9 1972-73 1,222,295,820 776,702,804 63.5 445,593,016 36.5 1973-74 1,302,255,879 844,246,401 64.8 458,009,478 35.2

1974-7 5 1,435,800,823 973,068,968 67.8 462,731,855 32.2

,197 5-76 1,542,355,144 1,024,214,129 66.4 518,141,015 33.6 1976-77 1,656,823,978 1,120,685,029 67.6 536,138,949 32.4

1977-78 1,782,291,241 1,150,625,027 64.6 631,666,214 35.4

1978-79 1,877,477,021 1,241,841,173 66.1 635,605,848 33.9 1979-80 1,961,658,420 1,294,239,990 66.0 667,418,430 34.0

1980-81 2,085,939,596 1,427,331,210 68.4 658,608,386 31.6 1981-82 2,235,707,355 1,633,543,740 73.1 602,163,615 26.9

1982-83 2,265,939,792 1,434,122,710 63.3 831,817,082 36.7 1982-83* 2,265,939,792 1,296,522,710 57.2 969,417,082 42.8

*after property tax shift

SOURCE: Joyce Krupey, Senate Researcher, Minnesota Senate.

-42- FIGURE 2. MINNESOTA EDUCATION FUNDING RESPONSIBILITY 1971-72 TO 1982-83 ST ATE AND LOCAL SHARES IN DOLLARS

TOTAL STATE/LOCAL 2.0 REVENUE

STATE SHARE "' 1.5 <( "'..., 0 Cl u. 0 "'z !2 1.0 ..., o'i

LOCAL PROPERTY rAX REVENUE

0.5 LOCAL SHARE

~ "'° ~ ~ ,,,~ ✓"" 'V""' o/ "'"' .;-"{ .;- .. .;- f .....;- f f " ...... "' .....;- .... SCHOOL YEARS

ST ATE AND LOCAL SHARES AS A PERCENT AGE

100

90

80 CJ az z 70 STATE :, SHARE u...., <( u 60 0 -::'. ....UJ ....<( 50 "'..., ....<( ....0 40 u. 0 .... z 30 PERCENT LOCAL UJ u PROPERTY TAX "'UJ a. 20 LOCAL SHARE

10

,...., -0' ,...~ ~ ,\' "-"' ,,,~ 'V o/ .,,"-'° Id r:-." ""'

SOURCE: Joyce Krupey, Minnesota Senate Research.

-43- After examining the distribution of revenues from the various components of foundation aid, the study concludes that:

(D)istricts with historically high property valuations may historically have spent higher than average amounts on their schools. As a result, such districts may be more likely to have authority for a grandfather levy, and they may be more likely to choose participation in the discretionary aid and levy program ••. In fact, there seems to be a positive relationship between property valuation and all of the individual components of foundation revenue except for WADM basic revenue. The strongest relationships are with the grandfather revenue and referendum revenue... wealthier districts also received higher than average amounts of AFDC basic revenue, discretionary revenue, and replacement revenue (Ibid., p. 30).

The differences among districts discovered in the study are significant: o Minnesota's 84 "poorest" school districts in 1981-82 received from foundation revenue $1,479 per weighted pupil unit, while the 86 "wealthiest" districts received $1,878 per weighted pupil unit (Ibid.). o The "poorest" school districts received in 1981-82 $16 per weighted pupil unit from grandfather revenue while the "wealthiest" districts received $109 per weighted pupil unit from the same source (Ibid.). o The "poorest" school districts received in 1981-82 only $3 per weighted pupil unit from referendum revenue while the "wealthiest" districts received $83 per weighted pupil unit (Ibid.). Given the revenue disparities engendered by modifications in Minnesota's school finance system, it is not surprising that a high degree of variation exists among school districts in the amount they spend for a child's education. In fact, comparisons of the operating costs per pupil unit among high and low spending districts over the past decade indicate that the disparities among those districts have remained virtually what they were at the outset of the Minnesota Miracle (see Table 10 and Figure 3). The dollar difference in per-pupil costs between the high and low spending districts has more than doubled during the decade, paralleling the general increase in costs per pupil during this period. What difference do these wide disparities in revenues and expenditures make in students' education? The Department of Education study examined the relationship between the distribution of revenues among districts and several factors considered to be important in overall educational quality. It concluded: "When all school districts are examined together, high-revenue districts have, on average, lower pupil-staff ratios, higher average salaries, more experienced staff and more highly educated staff than low­ revenue districts" (Ibid., p. 47).

-44- TABLE 10. ST ATE AND LOCAL OPERA TING COSTS PER PUPIL UNIT, STATE TOTALS AND 5th AND 95th PERCENTILES, 1970-71 THROUGH 1980-81

Ratio of School State 5th 95th 95th to 5th Year Average Percentile Percentile Percentile 1970-71 $ 702 $ 503 $ 822 1.63 1971-72 746 556 860 1.55 1972-73 804 600 929 1.55 1973-74 859 645 996 1.54

1974-7 5 961 739 1. 147 1.55

1975-76 1,059 843 1,256 1.49 1976-77 1,160 923 1,384 1.50 1977-78 1,243 994 1,457 1.47 1978-79 1,363 1,106 1,587 1.43

1979-80 1,525 1,261 1,812 1.44 1980-81 1,710 1,401 2,087 1.49

SOURCE: Minnesota Department of Education.

-45- FIGURE 3. MINNESOTA'S ATTEMPT TO EQUALIZE EDUCATION EXPENDITURES

2200

ST A TE AND LOCAL OPERA TING COSTS PER PUPIL UNIT 2000 5th and 95th percentile districts 1970-71 through 1980-81 1800

1600

1400 9 5th PERCENTILE

V) 0:: 1200 < ....) ....) 0 Cl 1000

800 5th PERCENTILE

600

400

200

Ratio of 95th to 5th percentile 2.0------.

0 i---...... - 1.5• < 0::

1.0 , , , , , ' I I I cs I\~ ~ I\~ l\lo ~ Co o;-- ~I ~ ~ cy "'{ ~I Id I\' cy "" t\...... , "V ~ t\ o.f ...... ,~ ...... ,~ °'' ~ ...... ,~ ~ ...... ,~ ...... ,~ ...... ,~ ~ ...... ,~ ...... ,~ ...... , SCHOOL YEARS SOURCE: Minnesota Departrnent of Education, Education Statistics Division.

-46- OTHER ST ATE/LOCAL RELATIONS IN FLUX

A major portion of the budget of the State of Minnesota is earmarked for general­ purpose local governments--counties, cities and towns. These expenditures, consisting of funding for locally administered state programs, direct aid to local governments and property tax relief programs (see Table 11), reflect the degree to which the business of Minnesota government is handled at the local level. In typical years state government has provided about 49 percent of the revenue of counties, 29 percent of cities' revenue and 38 percent of the revenue for towns (Munnich, "Minnesota's State - Local Fiscal System"). It is not surprising, then, that the state, in response to major revenue shortfalls, significantly reduced its financial commitment to these local governments. Faced with the need to establish a budget of contracting rather than expanding dimensions--the first such need in recent history--the state pulled back the more than decade-long trend toward an ever-increasing financial commitment to its counties, cities and towns. The state share of revenue to these jurisdictions is substantially lower in FY 1"983 because of aid reductions, payment shifts and increased local property taxes (Hackett, conversation, 8 December 1982).

~ate Responses to Rising Property Taxes In 1967 the legislature took action to respond to growing concern among state and local officials and citizens about the continuing increases in local property taxes used to fund local general-purpose governments as well as school districts. Many were concerned that property taxes were regressive in that they imposed a disproportionate tax and Political burden on "poorer" local units with less property wealth against which taxes could be levied. At that time, the property tax accounted for 45.5 percent of county revenues, 46 percent of city revenues and 90 percent of the revenues of towns. In the mid-1960s Minnesotans paid the fifth highest property tax in the country (Minnesota Department of Revenue, "The Levy Limit: Time for a Decision," Minnesota Department of Revenue, Local Government Aids and Analysis Division, St. Paul, Minn., January 1982, p.1). In response, the legislature began shifting responsibility for funding counties, cities and towns from the local level to the state. It expanded state revenue-raising capability by establishing a three percent sales tax, increasing the corporate income tax rate and doubling the real estate deed transfer tax. Those new revenues were then transferred, by Various means including property tax relief, to these local governments. In subsequent Years property tax relief was expanded and in 1971, in response to continued property tax increases, the legislature imposed limitations on increases in local property tax levies

-47- (levy limits). These reforms, along with their later modifications, have been associated with the "Minnesota Miracle," the term usually identified with Minnesota's education system. Since 1971, property tax relief for local governments has been expanded and the Local Government Aid formula has been modified several times in an effort to more equitably distribute the state funds to these jurisdictions. Yet despite these reforms, local effort has continued to play a central role in funding Minnesota's general purpose government. Recent figures indicate that counties now raise about 44 percent of their

TABLE 11. STATE FUNDING OF GENERAL PURPOSE LOCAL GOVERNMENTS

1. Funding for Programs Administered Locally (joint funding with local and/or federal dollars). Major program areas include: o human services o health services o transportation e corrections 2. Local Government Aids (LGA). This direct aid supports the general operation of counties, cities and towns and is distributed through a formula which accounts, to some degree, for variation in local property valuation among units. 3. Property Tax Relief Programs. These programs provide state dollars to local governments as payment of a portion of taxpayers' local property tax bills. Major programs include: e Homestead Credit Aid: Counties, cities and towns are reimbursed for tax relief provided on homesteads. e Taconite Homestead Credit Aid: Local governments within "taconite relief areas" are reimbursed for tax credit provided on homestead property. e Attached Machinery Aid: Local governments are reimbursed for lost revenue due to property tax exemption of "ponderous" machinery and equipment. 4. Miscellaneous Other Aids. These include the Wetlands and Native Prairie Credit and Reimbursements programs, Minnesota Department of Natural Resources payments in lieu of taxes, and aid programs associated with the taconite production tax.

SOURCE: Minnesota Department of Revenue, Minnesota Tax Handbook: A Profile of State and Local Taxes in Minnesota, 1980-81 ed., St. Paul, Minn.: Minnesota Department of Revenue, Research Office, January 1981, pp. 49-50.

-48- revenue from local sources, primarily the property tax, while cities raise 59 percent of their revenues locally. Towns are the only jurisdictions which contribute a significantly smaller share--54 percent--to their revenues than they did in 1967 (Munnich, "Minnesota's State - Local Fiscal System").

New Uncertainties in State/Local Relations Because of actions taken by the legislature in 1981 and 1982 which significantly reduced state funding of counties, cities and towns in the 1982-83 biennium, the future character of state/local relations is uncertain. Those actions include: o Local Government Aid reductions (to counties, cities, towns and special service districts) of $46 million. o Homestead Credit Aid payment reductions of $30 million. o Potential further reductions due to a cap placed on total 1982-83 appropriations for aid payments to local governments from the Homestead Credit and other property tax credits. o Reductions associated with cuts to specific state programs administered locally (such as human services) and particular grant programs. (Minnesota Department of Finance, "Fund Balance Revisions;" Minnesota House Appropriations Committee, Article I of H.F. 2190; Minnesota Taxpayers Association, "1982 Tax Legislation, MTA Newsletter, 1 April 1982; Betty Wilson and Dan Oberdorfer, "Legislators Pass Budget-Balancing Bill," Minneapolis Star and Tribune, 11 December 1982, p. 1 A; Association of Minnesota Counties, "AMC's 1981 Legislative Summary: A Comprehensive Look at Actions Relevant to Counties," Assocation of Minnesota Counties, St. Paul, Minn., 1981, pp. 6-8; Association of Minnesota Counties, "AMC Legislative Report (1982)," Association of Minnesota Counties, St. Paul, Minn., 25 March 1982, pp. 34-39; Gordon Voss (Representative), Lee w. Munnich, Jr., and Karen James, interview by Tom Peek and Doug Wilson (CURA), 19 July 1982.) In 1981 the legislature also modified the levy limits for counties, cities and towns for FY 1982. Previously, these governments were authorized to increase local property tax levies only to levels that would make the annual increases in their combined revenues from LGA payments and local property taxes not more than 8 percent. The modification made in 1981 applies that basic limit only to increases in local property tax levies (with numerous exceptions for special levies and an 18 percent limit on levies for public assistance and social service budgets). LGA revenues were no longer a factor in the levy limit formula. Proponents of the change assumed that LGA payments would increase (or at least remain stable) in subsequent years as they had in the past. So they believed the

-49- change would enable local governments to increase the local portion of their revenues up to the 8 percent limit despite expected increases in LGA revenues. That would have the ef feet of increasing their combined revenues from the two sources. However, when the legislature reduced LGA payments local governments had difficulty compensating for the state reductions because, despite the reduction in LGA payments, local governments were restricted from increasing their local levies (except for the special levies) beyond 8 percent. Ironically, Minnesota's counties, cities and towns would have been better able to pick up the slack left by the state's reduction in LGA payments had the old levy limits remained in place. Under the former law, property tax levies could have increased beyond 8 percent since any reduction in LGA--figured into the limit formula--could be offset by additional increases in property taxes. In addition, the new limit was unequal in impact among these governments because those that rely most heavily on LGA revenue were hardest hit by the reductions as well as had relatively lower ,levy limits and so faced a double limitation on revenues. (Lee W. Munnich, Jr. (Economist, Minnesota House of Representatives), conversation with Tom Peek (CURA), 17 November 1982; Karen Baker (Legislative Analyst, Minnesota House Research), conversation with Tom Peek (CURA), 23 November 1982). While the reduction in state aids to school districts involved an explicit transfer of revenue-raising authority to the local districts, other governmental units did not receive comparable local discretion when their aids were reduced and were faced with the more restrictive revenue-raising limitations (however, those limits applied to towns only in 1982). Thus, while school districts experienced an explicit transfer of responsibility, other local governments were often required to reduce services as well as raise additional local revenues (within the levy limitations) as a result of decisions made in 1981 and 1982. Given the state's budget reductions to general-purpose local governments as well as schools and the difficulties some jurisdictions are having with state limitations on local revenue-raising, pressure is growing, particularly from local officials, for reform of the LGA formula and school finance system as well as the levy limits. In 1982 Governor Quie established a Local Government Task Force, composed of legislators and state and local officials, to examine Minnesota's current system of state/local finance and formulate recommendations for reform. It is anticipated that these recommendations will be issued to the legislature during its 1983 session and will likely include: 1) suggestions for replacing the LGA with a new formula, 2) reduction in school district reliance on local property taxes, 3) a slowing of local property taxes by shifting additional funding responsibility for local jurisdictions to the state (at a possible cost of $350 million) and 4) an easing of the levy limits on those jurisdictions which can better afford to raise additional local revenue.

-50- CHAPTER III. A NEW DIRECTION FOR THE FEDERAL GOVERNMENT

In 1980, while Minnesota and other states struggled with mounting fiscal problems, the federal government began a series of initiatives which directly and indirectly added to the difficulties the states faced. These initiatives reflect proposals made early in his term of office by President Ronald Reagan that were largely supported by the conservative Congress elected the same year. The centerpiece of the Reagan Administration's initiatives is the President's Economic Recovery Program, proposed in January 1982. This program is based on major reductions in domestic spending, large cuts in corporate and individual income taxes, deregulation of business and industry and a monetary policy designed to inhibit inflation. While the Economic Recovery Program was not expressly designed to shift responsibility back to the states, its components, especially spending reductions and tax changes, have had a significant effect on the fiscal and regulatory circumstances of states. Other federal initiatives have also had profound effects on states. The Administration proposed consolidation and deregulation of federal grant-in-aid programs administered by state and local governments, as well as major spending reductions in those programs. Major reductions in other federal programs administered by states and localities were planned, and federal regulation of state and local governments was eased so that those units of governments could take on new responsibilities. These proposals Were designed to diminish the fiscal and regulatory role of the federal government which developed during the New Deal, Fair Deal and Great Society eras· of the 1930s, 1940s, 1960s and early 1970s. The Reagan Administration believes that devolution of certain federal responsibilities will enhance state and local self-reliance, increase government efficiency, reduce the costs of public services and improve government accountability to citizens. The Administration was not able to obtain Congressional approval of all proposals intended to stimulate the economy and reorganize government. But it did achieve considerable success, resulting in significant impact on all states. In order to appreciate the effect of changes in federal policies on Minnesota, those Policies must be examined in relation to the state's budget and to actions taken by the Minnesota Legislature to cope with the state's revenue problems. However, there are a number of barriers to accurate comparisons of the relative impact of the federal and state actions on Minnesota. It is difficult to make dollar comparisons of budget reductions for several reasons. First, the time periods in which Congressional and state legislative actions occur and the budget cycles affected by those actions are different. Second, it is difficult to distinguish between nominal cuts to programs budgets and

-51- reductions that hamper the ability of programs to maintain service at existing levels. It is also difficult to assess the relative significance of these two types of budget reductions. Third, because federal dollars flow into Minnesota through a complex network of funding channels--including various state-government agencies, local jurisdictions, individuals and private-sector organizations--it is difficult to track all federal sources and all Minnesota recipients of federal dollars. Finally, some of the federal reductions and many of the state cuts have been offset by local property tax increases so that the extent of reductions in specific programs may not be fully apparent. This is true of the state reductions as well but to a lesser degree. There are a number of ways to measure the impact on Minnesota of federal and state budgetary reductions. Reductions in federally funded programs can be measured by the number of clients no longer served by a particular program, the number of dollars no longer available to certain programs or the number of federally funded capital improvement projects, such as waste-water treatment facilities, that are delayed as a result of aid reductions. In contrast, state reductions are less specific and affect the overall capability of local jurisdictions, which conduct much of the state's business. To measure the impact of reductions in state funds requires examination of reductions in overall expenditures and personnel in counties, cities, towns, school districts and other special districts, changes in the fund balance in these jurisdictions and increases in local property taxes. Less direct measures might include student/teacher ratios for schools, response time for local police, fire and emergency-health services or the number of capital improvement projects delayed. It is also difficult to compare the impact of recent federal and state actions because the results of many federal initiatives will not be immediately discernible. This is particularly true of federal tax cuts and monetary policies as they af feet the national economy. Similarly, the significance of federal deregulation of both state and local governments and the private sector may also not be fully understood for some years to come. Despite these difficulties, some general observations and some limited comparisons can be made. First, the federal actions were largely the result of a philosophical commitment on the part of the Reagan Administration and, to a lesser degree, Congress. A major tenet of that philosophy is the belief that the federal government has grown too large, too bureaucratic and unresponsive, and that it intrudes into matters better handled by state and local governments and the private sector. This view is apparent in the entire range of budgetary, tax, regulatory and intergovernmental policies, not only those related to the federal budget. In contrast, the state actions reflect efforts by the governor and legislators of both parties to cope with the immediate and severe budget crisis. These

-52- efforts were primarily related to expenditures and/or the tax structure as well as various types of shifts. When devolution and deregulation occurred, those effects were the by­ product of efforts to attack budget problems. Second, while federal budgetary reductions most severely affect certain groups, the state reductions broadly affect all Minnesotans. However, the impact of state actions on individuals or particular populations is less severe. Because of changes in the eligibility requirements for income assistance (AFDC and Food Stamps), employment programs ( CET A and Job Corps) and housing programs, Minnesota's poor, especially the working poor, are most severely hit by reductions in federal funds. In contrast, virtually all Minnesotans are affected by state budgetary reductions, though in most cases with less individual hardship (with the notable exception of cuts in the General Assistance program). State reductions, particularly in school and local government aids and property tax relief, constitute an overall retrenchment and devolution of responsibility within Minnesota's state/local government system. Which reductions, state or federal, have the greater impact? The state reductions are likely to have the greatest impact on typical Minnesotans, especially if they represent the beginning of a trend in state/local government finance. But members of specific groups may feel the effects of federal reductions more profoundly. It is also important to recognize that the budget reductions associated with consolidation of federal grant-in-aid programs will add to the retrenchment of Minnesota's state and local governmental systems unless Minnesota makes up funding for those reductions. Figure 4 illustrates the national trend in federal grant-in-aid funding. Beyond the changes which have already been made in grant-in-aid programs, the Reagan Administration has proposed a phase-out of federal involvement in virtually all of these Programs. If all that has been proposed by the Administration thus far were actually enacted, federal grants-in-aid, which in 1980 constituted about 25 percent of state/local expenditures, would be reduced to 3 to 4 percent by 1991 (Palmer and Sawhill, eds., The .B._eagan Experiment, p. 159).

-53- FIGURE 4 FEDERAL AID TO ST ATE AND -LOCAL GOVERNMENTS Federal grants-in-aid as a percentage of state and local governments' own source revenue 1

....•..•..••...... •.••••....•.1972 Level

1961/ '66 '68 '70 '72 '7'1 '76 '7& '80 '82

I. Own source revenue includes revenue frorn sources to state and local governments except federal grdnts-in-a,d. *estimates

Adapted from the Advisory Commission on Intergovernmental Relations,

-54- THE ECONOMIC RECOVERY PROGRAM

The goal of this Administration is to nurture the strength and vitality of the American people by reducing the burdensome, intrusiye role of the federal government; by lowering tax rates and cutting spending; and by providing incentives to work, to save and to invest. It is our basic belief that only by reducing the growth of government can we increase the growth of the economy.

Ronald Reagan, "America's New Beginning: A Program for Economic Recovery," address to joint session of Congress on program for economic recovery, Washington D.C.: U.S. Government Printing Office, 18 February 1981, p. 1.

On November 2, 1980, with the election of Ronald Reagan and the increase in the number of conservative members of Congress, the American people created a political situation conducive to a major change in the way the federal government operates. Even though former President Carter's Federal Fiscal Year 1982 (FFY 1982) budget addressed many traditional Republican issues such as a balanced budget, increased military spending and business tax relief, it was not conservative enough for the new administration and the new Congress (Timothy B. Clark, "Carter's Last Budget--Conservative, But Not Nearly Enough to Suit Reagan," National Journal, 17 January 1981, p. 102). Consequently, President Reagan initiated an entirely new program for economic recovery. It is a four­ Part attack on low productivity, high taxes, excessive regulation and high interest rates along with a major realignment of responsibilities between the federal government and state and local governments. The President's economic package is based on three theories (Palmer and Sawhill, eds., The Reagan Experiment, pp. 37-38): 1) Supply Side Economics. A theory that emphasizes the importance of relative prices in promoting incentives for economic activity. The purpose of the 1981 individual income tax cut (a reduction in the marginal tax rate) was to provide incentive for individuals to work harder and longer, since marginal tax rates have declined, and to save more because the tax rate on interest income is lower. In the same manner, the business tax cuts were incentives for greater business investment. 2) Monetarist Economics. A view held by many traditional Republican economists in which the slowing of money supply growth is seen as the best means of reducing the rate of inflation. Traditionally, most believe that this policy results in an interim period of slow growth and high unemployment.

-55- 3) Rational Expectations. After the general population and the business community are persuaded that future economic conditions are changing for the better, wage demands will moderate and business will limit price increases. The persuasion effect depends on the assurance that government will "stay the course" by reducing both taxes and spending. So far, the results of this economic package are mixed. Even though inflation has decreased significantly--a result of the monetary component of the package--the economic growth promised through the supply side component has yet to materialize. Even the rational expectations portion was jeopardized when federal taxes were increased during 1982. Furthermore, talk of increasing government spending, mainly in defense, continues. The next few pages contain a discussion of the four components of the President's Economic Recovery Program--budget policy, tax reductions, deregulation and monetary policy.

BUDGET CUTS--A REALIGNMENT OF FEDERAL PRIORITIES

The first component of the Economic Recovery Program was intended to reduce the growth of the federal government through budget cuts. President Reagan believed that federal spending had become so extensive that it contributed to the economic problems it was designed to cure (Reagan, "America's New Beginning"). The Reagan Administration developed a budget proposal based on two principles: 1) everyone except the "truly" needy will be expected to aid or contribute to controlling spending and 2) national defense must be strengthened through increased military spending. National defense spending has increased significantly, but whether or not the truly needy are protected is the subject of controversy. A third principle originally stated by the President--a balanced budget in FFY 1984--was abandoned after the Administration realized it was unattainable in light of increased defense spending and growing deficits. President Reagan's plans for attacking federal spending and increasing the country's military capabilities are evident in his long-term budget proposals. The proposed FFY 1986 spending levels*, outlined in Table 12, show a very large increase in defense expenditures (annual real growth of 8.7 percent) with significant cuts in low income assistance, grants to state and local governments and other federal operations.

*Each budget presented by a President includes estimates of the immediate fiscal years spending and also the spending plans of future years.

-56- TABLE 12. ACTUAL FFY 1981 OUTLAY ANO PROPOSED FFY 1986 OUTLAYS BY MAJOR FEDERAL BUDGET CATEGORIES

FFY 1986 Outlays FFY 1981 Reagan's FFY 1983 Actual Budget Billions of Budget Billions of Budget §_udget Category Dollars Share Dollars Share

National Defense $159.8 24.3% $331.7 35.8%

Low Income Benefits to Individuals 67.4 10.3 71.3 7.7

Social Insurance Benefits to Individuals (includes Social Security) 249.2 37.9 363.6 39.2

Other Grants to State and Local Governments 54.8 8.3 40.3 4.3

Net Interest Payments 68.7 10.5 99.3 10.7

Other Federal Operations; 73.9 11.2 54.0 5.8

Off setting Receipts (16.5) (2.5) (33.0) (3. 6)

Total Expenditures $657.3 100.0 $927.2 100.0

SOURCE: Palmer and Sawhill, eds., The Reagan Experiment, p. 74.

With the help of a coalition of Republicans and conservative Democrats in Congress, the President achieved many of his first year's goals in the Omnibus Reconciliation Act of August 1981. This piece of legislation, which outlined the FFY 1982 budget, resulted in a slowing of federal spending increases to 7 percent annually from an average annual rate of 14 percent for the three preceding fiscal years. The Reconciliation Act cut $35 billion from the previous administration's budget for FFY 1982, and an additional $95 billion was reduced for FFY 1983 and FFY 1984 budgets through changes in statutes. In response to rising deficit estimates, the President requested further spending reductions in September of 1981. Although President Reagan proposed spending reductions of $13 billion (including defense cuts of $2 billion) and tax increases of $3 billion, Congress passed spending reductions of only $10 billion. The President's proposed FFy 1983 budget, submitted in January 1982, was rejected by Congress because of

-57- further significant cuts to many entitlement programs and the high deficit estimates. Taking the budget process into its own hands, Congress passed a First Budget Resolution in June 1982 which called for less defense spending than the President had proposed but increased both domestic spending and taxes. Table 13 demonstrates these spending level trends by showing Budget Authority figures for FFY 1981, FFY 1982 and FFY 1983. Although the reductions made in President Reagan's first two years did slow the growth of the federal budget, further reductions will be much more difficult. Political pressures have already slowed the President's plan, as demonstrated by the FFY 1983 budget process. The next few years could prove even more difficult because the 1982 elections jeopardized the President's working majority of Republicans and conservative Democrats in Congress. Another problem in making further significant reductions in federal spending is the structure of the budget. Table 14 outlines the Budget Authority for some of the major programs of the FFY 1982 budget. The two largest programs of the federal budget, defense and Social Security, which together account for 48 percent of the budget, have been politically off limits to any significant cuts. Interest payments, accounting for 13 percent of the budget, are based on interest rates and the size of the deficit and therefore cannot be reduced directly by Congress or the President. These three items represent over 60 percent of the entire budget. All cuts will have to be made in the remaining 40 percent of the budget. The common misconception that a large portion of the federal budget is directed toward lower-income groups is not true. Programs associated with low-income groups-­ Medicaid, housing assistance, Food Stamps, nutrition programs, AFDC, Supplemental Social Security (SSI), social services, training and employment programs--account for only approximately 10 percent of the total budget. This percentage is not large when compared to defense, social security or interest on the federal debt.

-58- TABLE 13. FEDERAL BUDGET AUTHORITY (Billions of Dollars)

1981 1983 Percent Change Actual 1982 First in 1981 Actual Budget Latest Budget Spending & 1982 Authority Estimate Resolution Latest Estimate

National defense 182.4 218.2 253.6 19.63

International affairs 24.8 16.7 15.9 -32. 66

General science, space & technology 6.5 7.0 7.8 7.69

Energy 6.8 4.8 4.8 -29.41

Natural resources & environment 11. 1 10.3 9.5 -7. 21

Agriculture 6.6 9.9 6.7 50.00

Commerce & housing credit 6.5 9.5 7. 1 46.15

Transportation 24.9 20.8 21.5 -16.47

Community & regional development 8 .1 7.0 6.9 -13.58

Education, jobs & social services 30.6 25.4 26.8 -16.99

Health 68.9 78.5 79.6 13.93

Income security 249.9 256.8 274.8 2.79

Veterans benefits & services 23.2 24.8 24.6 6.90

Administration of justice 4.3 4.5 4.5 4.65

General government 5 .1 5.2 4.8 1.96

General purpose fiscal assistance 6.3 6.4 6.5 1.59 Interest 82.5 100.7 113.2 22.06

Allowances 2.8 (3.0)

Undistributed offsetting receipts (30.3) (31.7) (43.1) 4.62

TOTAL 718.4 777. 7 822.4 8.28

SOURCES: "Federal Spending Through 1984: An Upward Curve," National Journal, 13 February 1982, p. 270; Cohen, Richard E., "Congress's 'House of Cards' Budget May be Constructed on Quicksand," National Journal, 26 June 1982, p. 1126.

-59- TABLE 14. SELECTED PROGRAMS OF THE FFY 1982 FEDERAL BUDGET (millions) Percent of FFY 1982 Total FFY 1982 Program or Program Area Budget Authority Budget Authority

National Defense $218,865 28.60 Social Security (does not include dis- ability payments) 150,128 19.63 Interest on Federal Debt 99,094 12.94 Federal Employee Retirement and Disability 33,567 4.38 Veterans Benefits (includes Veterans Health Care) 24,789 3.24 Medicare 52,007 6.79 Medicaid 21,948 2.86 Unemployment Compensation 21,006 2.75 Housing Assistance 6,649 .86 Food Stamps and Nutrition Programs 15,785 2.07 Aid to Families with Dependent Children (AFDC) 6,102 .79 Supplemental Social Security (SSI) 7,777 1.01 Education Programs (elementary, secondary and higher education) 13,018 1.70 Social Services 5,989 .78 Training and Employment Programs 3,945 .51 Other Federal Programs 84,831 11.09

Total FFY 1982 Budget Authority $765,500 100.00

Source: U.S. Office of Management and Budget, "Budget of the U.S. Government, Fiscal Year 1983," Washington D.C.

-60- What the Federal Budget Actions Mean for Minnesota The federal budget actions have affected Minnesota in two ways. First, they have reduced payments to individuals through programs such as AFDC, housing assistance and Food Stamps. Second, they have affected the relationship that state and local governments have with the federal government. Significant reductions in federal grants­ in-aid for services provided by state and local governments mean that officials must decide whether or not to continue the services, which may result in state and local tax increases, or to reduce and in some cases eliminate those services. Whatever the decision, the final impact is felt by the Minnesota citizen in the form of increased taxes or lower levels of services. Many programs, particularly human services programs, are jointly funded by the federal, state and local governments. When eligibility criteria for entitlement programs are reduced at the federal level, as they were in 1981 and 1982, expenditures may also be reduced at the state and local level. While those actions may yield savings, others create additional expenditures for state and local governments, who must increase their funding of a program to maintain the same amount of service. While it would be difficult to provide information on the effects of changes in every federal program that affects Minnesota, Table 15 surveys the major changes at the federal level and the impact these changes have on some of the major programs. The actions taken by the "lame duck" Congress during December 1982 are not reflected in this table. Generally, funding for FFY 1983 programs will remain at FFY 1982 levels.

-61- TABLE 15. IMPACTS ON MINNESOTA OF FEDERAL ACTIONS

Major Changes at Programs Federal Level Impact on Minnesota

WASTEWATER o Funding has fallen from $4.2 bil­ o It is estimated that $44.2 million TREATMENT lion in FFY 1981 to $2.4 billion in will be received by Minnesota communities CONSTRUCTION FFY 1982 and FFY 1983. in FFY 1982 compared to $78.5 million PROGRAM o Categories eligible for funding are in FFY 1980. For FFY 1983, Minnesota's (this program reduced after October 1984. share is expected to fall to $33 requires match­ o Planning funds reimbursed after million. ing funds: 15% construction grant rewarded. from the state o Federal share reduced from 75 to 55 and l 0% local) percent after October 1984.

WEATHERIZATION o Only $144 million or approximately o Initially 10,000 homes, or one-half PROGRAM one-half of the FFY 1981 funding of the FFY 1981 number, were to is available for FFY 1982 and FFY be weatherized. After the transfer 1983. of funds to the program from Low Income Energy Assistance, this number was increased for FFY 1982.

LOW INCOME o Funding for FFY 1982 and FFY 1983 o Even though more people are eligible ENERGY is set at $1.87 5 billion, approxi­ and fuel prices have increased, funding ASSISTANCE mately the same amount as FFY 1981. for Minnesota has remained approximately o Became a block grant starting in the same; fewer people will be served FFY 1982. and the average grant will decrease.

FEDERAL • Federal share of the non-interstate • US/DOT funds appropriated for Minnesota HIGHWAY programs will decline to 63.3% in will decrease from $191.6 million PROGRAMS FFY 1982 from 7 3.8% in FFY 1981. in FFY 1981 to $161.2 million in o The construction portion of the FFY 1982 and FFY 1983. The construction interstate highway program has been funds for the interstate programs redefined to limit the number of available in FFY 1982 is $53.5 million projects while the interstate re­ while maintenance funds will be surfacing, restoration and $15 million. rehabilitation programs have been expanded.

-62- Major Changes at Programs Federal Level Impact on Minnesota

MASS TRANSIT o Section 5 Urban Area Formula o Section 5 Urban Area Grants and Section PROGRAMS Transit Grants were reduced from 18 Non-Urban Area Grants will be cut (These programs $1.455 billion in FFY 1981 to from $16.2 million in FFY 1981 to $15.0 generally require $1.366 billion in FFY 1982 and million in FFY 1982 and further reduced local matching $1.015 in FFY 1983. to $13 million in FFY 1983. When funds) o The Section 18 Non-Urban Transit added to the state's reduction for the Grant was cut by 5.5% from FFY Metropolitan Transit Commission, the 1981 funding to $65.5 million for Section 3 Grants will mean further FFY 1982 and FFY 1983. cuts when funds are reduced from $9.5 o Section 3 Discretionary Grants million in FFY 1981 to $7 million in were reduced by 26% in FFY 1982 FFY 1982 and $7 .5 million in FFY but increased by 8% for FFY 1983. 1983.

LOW INCOME o Section 8 Public Housing will fund o The estimated number of Section 8 units HOUSING 153,000 units for FFY 1982, com­ in Minnesota is 425. pared to approximately 260,000 o Total Section 312 funding for the state units in previous years. was $3.3 million in FFY 1980 and o Section 312 Rehabilitation has been $476,000 in FFY 1982. There will be terminated after FFY 1982. no funds for FFY 1983. It is unclear o The First Budget Resolution for FFY what amount of funding will be 1983 set a spending level of $10.4 available for Section 8 in FFY 1983 billion for low income housing, but at this time. that amount may not be appropriated. o Eligibility criteria have been tight­ ened so 95% of the units will go to those who earn less than 50% of median income. o The administration supports a plan calling for housing vouchers in the near future.

ECONOMIC AND o The Economic Development Adminis­ o EDA funding of Minnesota programs for REGIONAL tration (EDA) was to be eliminated FFY 1982 and FFY 1983 is expected to DEVELOPMENT by the President's FFY 1982 budget be less than 50% of FFY 1980 funding. (Many of the plan but Congress retained EDA with Services by the Upper Great Lakes Economic Develop­ 42% less funding. Funding for many Regional Commission (A Title V pro­ rnent Administra­ of EDA's programs will remain at gram) will no longer be available to tion's programs FFY 1982 levels for FFY 1983. Minnesota state and local governments. require both o Title V Regional Planning Commissions state and local were totally eliminated. rnatching funds)

-63- Major Changes at Programs Federal Level Impact on Minnesota

COMMUNITY o Community Development Block Grant o The greatest impact of these DEVELOPMENT (CDBG) funding was reduced from reductions will be in cities who utilize $3.695 billion in FFY 1981 to these programs most--Minneapolis and $3.456 billion in FFY 1982. (Two St. Paul. The effect of these programs were also added to CDBG.) reductions is still unclear, but the o Twenty-five percent of CDBG fund­ result will be increased competition ing must be used for small cities for funds. Secretary Pierce (HUD) and rural areas. maintains that these funds will be o Urban Development Action Grants most useful for commercial and (UDAG) funding was reduced by 35% industrial development. for FFY 1982 and FFY 1983 to $440 million.

EDUCATION o The Education Block Grant combined o Educational aid to the disadvantaged PROGRAMS 33 programs, including many pro­ was reduced to $37 .3 million in FFY grams from the Elementary and 1982 and FFY 1983 from $39.1 million Secondary Education Act (ESEA). in FFY 1981. Since federal aid for o Funding for Aid to Disadvantaged handicapped education represents (Title I of ESEA) was reducedd from only 10% of total handicapped funds $2.9 billion in FFY 1981 to $2.7 spent in Minnesota, reductions may billion in FFY 1982 and FFY 1983. mean only larger classes. The o Handicapped education funding for reduction in child nutrition programs FFY 1982 and FFY 1983 was increased means the elimination of the special less than 1 % from FFY 1981 levels. milk and summer school food pro­ o Funding for child nutrition (many grams. Federal vocational education of these programs are provided by aid is expected to be $11.2 million for schools) has fallen 21 % to $2.7 FFY 1982 and FFY 1983, compared to billion for FFY 1982, and further $11. 9 million in FFY 1981. Significant reductions for FFY 1983 are anti­ cuts were also made in the Indian, cipated. adult and bilingual educational o Federal vocational education aid programs. Because of the significant for FFY 1982 and FFY 1983 was cuts in education from the state, reduced 4%. most school districts will be o Pell Grants authorization was unable to maintain the same level reduced 15% for FFY 1982, while of support for these programs. campus-based student assistance programs were reduced 8%. Further reductions are anticipated for FFY 1983.

-64- Major Changes at Programs Federal Level Impact on Minnesota

EMPLOYMENT o Funding for Comprehensive Employ­ o Funds for the Balance of State CET A PROGRAMS ment and Training Act (CET A) was prime sponsor (administered by the reduced by over 50% for FFY 1982. state) were reduced by 49% in FFY As a result: 1982. CETA cuts in Minneapolis were o The Public Service Employment anticipated to cause 2,675 fewer jobs program was eliminated. for adults and 800 fewer jobs for youth. o Programs for youth employment Job Service reductions meant staff cuts were severely cut or eliminated. of 330 positions, which reduced client o Training for elderly, migrants, services. The effect for FFY 1983 and welfare recipients and other the transition to the new program is special populations was cut 64%. unclear at this time. o A replacement for CET A, the Job Training Partnership Act, has recently been passed by Congress. It will strengthen the role of the private sector and the states. FFY 1983 will be a transition year between CE TA and the new program. o Job service cuts of 50% will have a great impact on placement services.

SOCIAL o Three block grants were created in o It is unclear how the block grant actions SERVICES the area of social services: Alco- will affect the state since the governor (State and local hol, Drug Abuse and Mental Health and the legislature must take action to governments also Block Grant, Social Service Block implement the programs. The reduction provide signifi­ Grant and the Community Services in funding will mean that recipients and cant funding for Block Grant. Funding for the block services will be cut. Further discussion these programs) grants is less than it was for the of these block grants can be found in the programs that were combined to form Block Grant Section of this chapter. them. Refugee Assistance funding is expected to decrease 60% for FFY 1982. o Legal Services was cut from $321 million in FFY 1981 to $120 million in FFY 1982.

-65- Major Changes at Programs Federal Level Impact on Minnesota

MEDICAID o Spending was $16.4 billion in FFY o Expected federal funding for 1982 (Medical Assist­ 1981 and $17.8 billion in FFY was estimated to be $8.l million ance in Minnesota) 1982. For FFY 1983, $27 5 million less than expected, putting more was cut from what the program pressure on the state's budget. (The state also would have cost under FFY 1982 law. While there is no great problem provides a sig­ o A limit above which costs cannot in providing the service now, nificant share increase in a state was established. large problems may arise in the of funding for If increase is larger, states would future. Bills will be introduced this program) pay a penalty in reduced federal in the 1983 Legislature to conform funding (3% reduction for FFY 82). to federal law changes made for o States have more flexibility in the FFY 1983. operation of programs. o States may now charge recipients nominal co-payments between $.50 and $3.00. o Home care for some individuals is now eligible under Medicaid.

AIQ TO FAMILIES o Funding for FFY 1982 was limited o In February 1982 the total caseload WITH DEPENDENT to $7 .8 billion, compared to $8.1 in Minnesota was estimated at 53,000. CHILDREN (AFDC) billion in FFY 1981. Further The changes forced 6,200 working reductions of $85 million are fore­ families off the program; another (State and local cast for FFY 1983. 5,500 had benefits reduced. governments con­ o The amount of earned income that o 5,000 families cut from the program tribute to the can be disregarded in determining may have quit work and become to­ funding of this benefits was limited. tally reliant on AFDC to retain program) o Step-parent income was included in medical coverage. determining benefit levels. • A bill passed by the legislature in e The way the first month's benefits 1982 provided incentives for working are calculated was changed. recipients to remain employed. o States can now require recipients • The FFY 1983 changes will most likely to do community work. have a much smaller impact than • Benefits will be rounded down to those changes made for FFY 1982. the lower whole dollar. o Benefits for the first month will be prorated from date of application. • States may now require applicants to participate in job search programs before receiving benefits.

-66- Major Changes at Programs Federal Level Impact on Minnesota

FOOD STAMPS o Actual federal spending in FFY 1981 o Because of changes made for FFY was approximately $10.3 billion but 1982 approximately 3,100 families in FFY 1982 the spending limit was have become ineligible in the state. set at $11.3 billion and projected The remaining 77,000 families will to be $12.9 billion in FFY 1983. have reduced benefits. The average o For FFY 1982 the following major monthly grant will fall from $101 to changes were made: to $81 and will not increase until o Income ceiling for family of four mid-1983. Total reduction of food dropped from $13,500 to $10,985 stamp dollars spent in state is annually. around 15%. o The way the first month's o The impact of the FFY 1983 changes benefits are calculated was have not been determined. changed. o Base eligibility is now the previous month's income. o For FFY 1983 the following major changes were made: o Benefits will be rounded down to meet lower whole dollar. o Applicants may have to complete job search before receiving benefits. o Families with gross incomes more than 30% above poverty line are no longer eligible unless they include elderly or disabled members. o The next inflation adjustment for standard reduction was delayed from 7/1/83 to 10/1/83.

SOURCES: Luanne Nyberg and Steve Cramer, "Federal Budget Information Sheet: Energy," Urban Coalition of Minneapolis, Minneapolis, Minn., April 1982; Minnesota Department of Energy, Planning and Development, report prepared by Governor's Task Force on Federal Budget Reductions, Fiscal Year 1982, Minnesota Department of Energy, Planning and Development, St. Paul, Minn., 11 February 1982; The White House, "Fact Sheet: Omnibus Reconciliation Act," The White House, Office of the Press Secretary, Washington D.C., 13 August 1981; Brian A. Rusche (Hubert H. Humphrey Institute of Public Affairs, University of Minnesota), "An Inventory of Government Funding Reductions in the Twin Cities," report prepared for Minneapolis and St. Paul Foundations, December 1981.

-67- CHANGES IN FEDERAL TAXES

The second component of the administration's Economic Recovery Program was a reduction in personal and business taxes which, in the President's words, would provide "incentive to increase productivity for both workers and industry" (Reagan, America's New Beginning, p. 6). This tax policy, which was passed as the Economic Recovery Act of 1981, has its roots in two sources: the Kemp Roth Plan of 1977, which called for reductions in personal income taxes of 33 percent over three years, and the Accelerated Cost Recovery System (ACRS), which completely revised the accelerated depreciation system for American business. The President requested only these two components in his original tax bill, but a "bidding war" developed between congressional Republicans and Democrats that resulted in a bill which included over 50 changes in existing tax laws that reduced federal revenue by $747 billion over five years. The costs of the tax package passed by Congress in 1981 are summarized in Table 16. Appendix B lists the major provisions of the 1981 tax bill.

TABLE 16. EFFECTS ON FEDERAL REVENUES OF THE 1981 FEDERAL TAX CHANGES (billions)

Federal Fiscal Year/Revenue Change Category 1982 1983 1984 1985 1986

Individual Income Taxes -26,929 -71, 098 -114,684 -148,237 -196,143

Business Tax Cuts -10,657 -18,599 -28,275 -39,269 -54,468

Energy Taxes -1,320 -1,742 -2,242 -2,837 -3,619

Savings Incentives -247 -1,797 -4,208 -5,740 -8,375

Estate and Gift Taxes -204 -2, 114 -3,218 -4,248 -5,568

Other Changes 1,701 2,618 2,664 1,020 546

Total -37,656 -92,732 -14,9963 -199,311 -267,627

SOURCE: Fessler, Pamela, "Reagan Tax Plan Ready for Economic Test," Congressional Quarterly Weekly Reeort, 8 August 1981.

-68- The Congressional Budget Office (CBO) estimates that the loss in federal revenues due to the 1981 tax bill will be more than $1 trillion, which greatly exceeds the President's intent. The revenue loss will grow from 1.2 percent of the country's Gross National Product (GNP) in 1982 to 5.4 percent in 1986, according to CBO--an amount greater than the 4.1 percent of GNP in 1986 the President had originally proposed (Palmer and Sawhill, eds., The Reagan Experiment, p. 77). The estimated $557 billion income tax reduction will represent an across-the-board tax cut for all income groups, but with substantial tax cuts for individuals with higher incomes and small tax cuts for those with lower incomes. More responsibility will shift to lower- and middle-income groups, reducing the progressivity of the federal tax system (Robert J. Samuelson, "For the Economy, Unanswered Questions," National Journal, 8 August 1981, p. 140 5). Because of the added effect of the federal budget cuts, lower income households, especially those with incomes of less than $10,000, will be worse off as a result of actions taken during 1981. Table 17 demonstrates the combined effects of the budget and tax cuts for the years 1982 and 1983 by income group.

TABLE 17. NET EFFECT OF THE COMBINED TAX AND BUDGET REDUCTIONS BY INCOME GROUP (1982 dollars)

Household Income All Less House- Than $10,000- $20,000- $40,000- $80,000- Holds $10,000 $20,000 $40,000 $80,000 over

1982

Cash Benefits -110 -210 -100 -70 -60 -110

In-kind Benefits -50 -60 -60 -40 -40 -40

Taxes 450 70 220 450 750 8,430 I I Net Effect 290 -200 60 340 650 8,280

1983

Cash Benefits -140 -270 -140 -90 -70 -70

In-kind Benefits -60 -90 -80 -50 -60 -50

Taxes 940 120 440 950 1,830 15,250

Net Effect 740 -240 220 810 1,700 15,130

SOURCE: U.S. Congress, Budget Office, "Effects of Tax and Benefit Reductions Enacted in 1981 for Households in Different Income Categories."

-69- Many taxpayers will actually see no tax cuts, due to increased social security taxes, the effects of inflation and expected increases in state and local taxes. A study that examined the impact of the income tax cuts in nine states after local and state taxes had been factored in found that households with annual incomes of $25,000 will face net ~ increases of between $177 and $325. For households earning more than $200,000, the net tax decrease will range from $16,094 to $17,770. The study's authors contend that the tax bill was not a tax cut but a tax shift from high-income households to lower- and middle-income households (AFL-CIO, Public Employee Dept., "The Republican '82 Tax Cut: Reagan's Hoax on Working Americans," AFL-CIO, Washington D.C., p. 1). The cuts in business taxes, represented mainly by changes in depreciation laws, reflect the administration's hope for expanded economic activity. Administration officials expect business investment to increase from 11 to 14.8 percent of the Gross National Product (a post-World War II record) between 1980 and 1985. The changes in the tax laws would shift the tax burden from corporations to individuals (Robert J. Samuelson, "Business Tax Cuts--Needed Stimulant or Poorly Conceived Boondoggle?" National Journal, 4 April 1981, p. 556). Two decades ago corporate or business taxes represented 23 percent of total federal tax revenues. As a result of the 1981 tax bill, by the end of this decade corporate taxes will represent only 5 percent of the total revenues (Bob Kuttner, ed., "Growth With Equity," Working Papers, September/October, 1981, p. 33). Through the tax-leasing provision, even those businesses that are unable to take advantage of the new business tax cuts can sell them to those businesses that must pay taxes in a given year. In response to increasing concern about the size of the federal deficit and the poor performance of the economy during the first half of 1982, President Reagan pressed for the passage of a $98.3 billion tax increase bill. The Tax Equity and Fiscal Responsibility Act of 1982, the official title of the bill, provided new revenue for the federal government by increasing or reforming taxes on individuals and businesses, withholding taxes on interest and dividends, increasing specific excise taxes and furthering the enforcement efforts of the Internal Revenue Service (IRS). A summary of the fiscal impact and a list of some of the major provisions of the bill are found in Table 18.

-70- t TABLE 18. 1982 TAX BILL :I (millions)

{

REVENUE IMPACT FFY FFY FFY MAJOR PROVISIONS 1983 1981/- 1985

Individual 0 Alternative minimum tax $ 272 $ 3,113 $ 3,106 Income Tax 0 Medical deduction

Business 0 Tax credit leasing restrictions 5,l/-22 13,292 16,1/-97 Taxes 0 Changes in the 1981 accelerated depreciation laws o Limits on mergers and acquisitions o Targeted job credits o Accelerated corporate tax payments

Compliance o Withholding of interest & dividends 3,365 8,869 8,660

Pension, o Restrictions on life insurance 2,136 2,935 3,790 Life Insur- companies tax breaks ance and Annuities

Employment o Federal employee tax provisions 1, 901/- 3,083 3,577 Tax

Excise Tax o Telephone tax 2,798 l/-,009 l/-, 702 o Cigarette tax

Miscellaneous -38 -37 -31/-

Increased IRS 2,100 2,l/-00 2,l/-00 Enforcement

TOT AL (all provisions) $17,959 $37,661/- $1/-2,698

SOURCE: Dale Tate; Elizabeth Wehr; and Judy Sarasohn, "Congress Clears $98.3 Billion Tax Increase," Congressional Quarterly, 21 August 1982, p. 201/-1.

-71- What the Changes in Federal Tax Laws Mean for Minnesota In an attempt to simplify their tax codes, many states conform their tax laws for both individuals and corporations to the corresponding federal tax provisions. For this reason, changes in the federal tax code, such as those made in both 1981 and 1982, can have a significant impact on a state's revenue. Some of the changes at the federal level have resulted in decreases in state tax collections, while others have produced increases for some states. The changes made by the Economic Recovery Act of 1981 provided Minnesota with some additional revenue. It is estimated that the state could increase its collection of individual income taxes by more than $18 7 million for the 1981-83 biennium by not changing its tax code to conform to the federal code. The largest share of that increase-­ $156 million--would be the result of reductions in federal tax rates. Because federal income taxes are deductible in Minnesota, the amount of income taxable by the state would increase. In addition, changes made in the rate of federal taxes on investment income, the deduction on two-earner married couples and the elimination of individual tax brackets in excess of 50 percent in the federal income tax code could also increase taxable income in Minnesota. However, some provisions of the Minnesota tax code for individuals have been changed to conform to the federal code; consequently the increase in Minnesota revenue collections will be somewhat less than the $187 million originally estimated. When state and local taxes are factored in, the 1981 tax law did not actually cut taxes for the majority of Minnesota taxpayers. Table 19 outlines the impact of the reduction in individual income tax rates, the increase in Social Security taxes and the effect of inflation on "bracket creep." It also demonstrates the effects of local tax and user fee increases on a "typical" family in Minneapolis earning $25,000. In taxes on corporations and businesses, depreciation reform in the Accelerated Cost Recovery System (ACRS) of the 1981 Economic Recovery Act would have decreased Minnesota's revenues in the 1981-83 biennium by an estimated $7 5 million 'if state taxes had conformed to federal changes. Actions taken by the state legislature, however, have reduced that estimated lost revenue to approximately $64 million (Daniel A. Salomone, "Impact on Minnesota of the Economic Recovery Act of 1981," memorandum, Minnesota Department of Revenue, 19 August 1981). Minnesota is not alone in realizing revenue losses because of changes in corporate and business tax codes at the federal level. It has been estimated that if all the states which follow the federal depreciation guidelines were to conform to the new ACRS guidelines, those states together would lose more than $27 billion in the next six years (Barbara A. Pope, "States Act to Cut Losses Caused by Reagan Tax Cuts," Ways and Means, 5 (1982): 1). -72- TABLE 19. COMBINED IMPACT ON MINNESOTA TAXPAYERS OF 1981 FEDERAL TAX CUT, SOCIAL SECURITY TAX CHANGES AND ST ATE AND LOCAL TAX INCREASES FOR 1982

Bracket Creep Net Tax and Social Increase(+) Reagan Security Tax State Tax or Income Tax Cut Increases Increases* Decrease (-)

$ 5,000 $ 0 $ 28 $ 43 $ +71 10,000 52 154 53 +155 15,000 151 239 79 +167 20,000 228 336 131 +239 25,000 305 444 186 +325 30,000 405 576 234 +405 40,000 639 957 324 +642 50,000 1,000 1,383 421 +804 100,000 2,846 2,673 816 +643 200,000 22,091 4,067 1,632 -16,392 & over

IMPACT ON MINNEAPOLIS T Ax.PAYER WITH INCOME OF $25,000

Federal tax cut $ -305 Bracket creep and Social Security tax increase +444 State tax increase +186 Local tax and user fee increases +106 NET TAX INCREASE $ +431

* State tax increases include the temporary income ('77 surcharge) and sales tax (5% rate) increases along with the expansion of the sales tax to include cigarettes, liquor and other items.

SOURCE: AFL-CIO, "The Republican 182 Tax Cut," pp. 9, 19.

-73- The Federal Tax Equity and Fiscal Responsibility Act of 1982 provided the state with further revenue gains for the 1983-84 biennium. Again, if no legislative action is taken to conform Minnesota's tax code to the federal changes, the state could realize a net gain of $39.3 million. Most of that gain is the result of new provisions requiring withholding of dividends and interest, changes in accounting methods for long-term contracts, and the withholding of a percentage of tips earned by restaurant and similar workers. A loss in state revenue could result from changes in the minimum tax, deductions of medical and dental expenses and the excise tax on cigarettes. However, if the legislature and the governor decide to conform to all of the federal changes in the 1982 Act, the net result could be an estimated $160 million increase in state revenues during the 1983-85 biennium (Daniel A. Salomone, "Analysis of Federal Tax Equity and Fiscal Responsibility Act of 1982 (1982 Federal Tax Bill)," memorandum, Minnesota Department of Revenue, 24 September 1982).

"REGULATORY VENTILATION" FOR BUSINESS

The Reagan Administration has viewed the early and mid-l 970s as a period when "excessive" regulations were passed through Congress with little thought to policy standards, cost effectiveness, the drag on the economy or comparative risk analysis, President Reagan has asserted that if the private sector is to generate the economic activity needed for recovery, not only will business taxes have to be cut but many regulations placed on business activity must also be lifted. Easing of regulation is the third component of President Reagan's Program for Economic Recovery. In January 1981, the President established the Presidential Task Force on Regulatory Relief, chaired by Vice President George Bush. President Reagan also issued executive orders regarding deregulation, one of which imposed a 60-day freeze on regulations established in the final weeks of the Carter Administration. The administration also set forth three guidelines for review of existing and future regulations. They are: • Individuals should have maximum opportunity for personal choice. • Regulation should take place at the appropriate level of government. • Wherever possible, the government should provide incentives rather than directives. Since then, the Bush task force, the executive branch efforts of the Office of Management and Budget (0MB) and the federal agencies themselves have targeted hundreds of regulations for possible deferral, revision or recision. Many regulations have

-74- already been withdrawn or revised where legal· authority exists within the executive branch. In other cases, statutory changes in Congress are being sought by the Administration and its agencies. Agencies overseeing the most unpopular rules include the Environmental Protection Agency; the Departments of Labor, Energy, Health and Human Services, and the Nuclear Regulatory Agency ("White House Survey Lists 'Terrible 20• Federal Rules," St. Paul Pioneer Press, 4 August 1981, p. 33). Deregulation efforts appear to focus primarily on environmental and consumer protection and occupational safety. A sampling of the Administration's efforts in this regard are included in Appendix C. The Administration also seeks to ease regulation through large cuts in the budgets of the key regulatory agencies. Targeted for major reduction in the FFY 1982 and 1983 budgets are the Environmental Protection Agency, particularly its research program; the Department of the Interior; the Occupational Health and Safety Administration; the Consumer Product Safety Commission; the Equal Employment Opportunities Commission; the Federal Trade Commission; the Economic Regulatory Administration, and the Office of Federal Contract Compliance Programs. In part, these changes continue a trend (begun with the Carter Administration's deregulation of the trucking, airline, communications and oil industries) toward an increased reliance on voluntary compliance with federal regulations and state and local regulation as well as an overall easing of government standards for business and industry. The Administration argues that these changes will help the economy recover and Ultimately run more efficiently. At the end of 1981, the Bush task force claimed that the Administration's first year of deregulation "saved" private groups and local governments $2.8 billion to $4.8 billion in capital expenditures and as much as $2 billion annually in recurring costs (Christopher Conte, "Reagan Administration Rates Itself High on Cutting Regulations; Analysts Differ," Wall Street Journal, 31 December 1981, p. 6).

,!hat Deregulation Means for Minnesota The impact on Minnesota of the Administration's efforts to ease regulation will not be fully apparent for some years. Minnesotans, like all Americans, will be affected by changes in the quality and safety of consumer products and services, working conditions in business and industry, economic competitiveness and productivity, and environmental quality. However, these efforts will directly affect Minnesota's own regulatory system in the near future. Like other aspects of Minnesota's intergovernmental system, state and local regulatory efforts have reflected a federal presence both financially and with respect to enforcement and research efforts. As this presence is diminished, the state, and in some

-75- cases its localities, will have to pick up the additional financial and other burdens if current levels of regulation are to be maintained.

FIGHTING INFLATION WITH MONETARY POLICY

Monetary policy represents. the fourth component of the President's Progam for Economic Recovery. The President stated that the Economic Recovery Program required a "national monetary policy which does not allow money growth to increase consistently faster than the growth of goods and services" (Reagan, "America's New Beginning," p. 8). In October 1979, before President Reagan started his bid for the Presidency, the Federal Reserve Board (Fed) initiated a policy designed to slow the growth of the money supply-­ instead of merely controlling interest rates--in an effort to bring inflation under control. The costs of this effort to reduce inflation, however, have been higher unemployment and higher interest rates. In fact, during the present recession, the unemployment rate and the real rate of interest (adjusted for inflation) have reached post-World War II highs (Palmer and Sawhill, eds., The Reagan Experiment, p. 45). Those factors, along with the increased numbers of bankruptcies and low levels of private investment, have led to suggestions that the Fed concentrate on controlling interest rates--a policy abandoned in 1979. Many economists believe that as long as the Fed maintains its tight money supply policy, high interest rates will restrict the recovery of the economy. Furthermore, there are signs that despite the Fed's efforts, the money supply has been increasing steadily for the past year. One measure of money supply used in the computation of the Commerce Department's Index of Leading Indicators has shown an increase since the end of 1981 (Alfred L. Malabre, Jr., "While Analysts Ponder Fed Policy, Key Gauge of Money Supply Shows Sharp, Sustained Climb," Wall Street Journal, 21 October 1982, p. 50). Although interest rates have decreased in recent months, the prospect of high deficits in future years causes many to express concern about possible rising interest rates in the near future. When a recovery does occur, interest rates may also be forced upward by increased borrowing resulting from rising business investment. Greater demand from the private sector coupled with a high level of government borrowing to finance the federal deficit could push interest rates to high levels again. Why, then, have the interest rates maintained a relatively high level? Economists have identified several other factors that contribute to high interest rates, including high current and projected federal deficits, increased business mergers and the "proliferation" of new borrowing techniques (Minneapolis Tribune, 6/13/82, p. 1D).

-76- What the Current Monetary Policy Means for Minnesota The effect of a reduced inflation rate is generally the same on Minnesota as on other states. Higher interest rates, however, may have a greater effect on Minnesota than on some other states. The sustained high interest rates have adversely affected the construction and durable goods industries. As the demand for building materials falls, the timber industry suffers. The slack demand for automobiles and other products that utilize large amounts of steel has a profound impact on taconite production. Since both the timber and the taconite industries are located in northeastern Minnesota, the higher interest rates have contributed to one of the highest regional unemployment rates in the country. Other sectors of the state's economy have also been adversely affected, most notably agriculture, where the combination of high interest rates and low commodities prices led to increased farm foreclosures and very low farm income. The high interest rates and the recession have also hurt state government. The lower incomes in all sectors of the state's economy have led to decreased collections of corporate and individual income taxes. Sales tax revenues have also fallen significantly, since this tax is limited to durable goods and other products that citizens can delay purchasing. (If this tax had a broader base that included food and clothing, sales tax collections would not have been as adversely affected.) In addition to lower revenues, the state has had to pay higher interest costs in financing its short- and long-term borrowing needs.

-77- REORGANIZATION OF GOVERNMENT-DEVOLUTION OF RESPONSIBILITY

Everything that can be run more effectively by state and local governments we shall tum over to state and local governments along with the funding sources to pay for them. We are going to put an end to the money merry-go­ round where our money becomes Washington's money to be spent by states and cities only if they spend it exactly the way the federal bureaucrats tell them to.

Ronald Reagan, "Acceptance Speech," Republican National Convention, Detroit, Michigan, 17 July 1980 (quoted by Richard S. Williamson, "Block Grants­ A Federalist Tool," State Government, p. 114).

One of President Reagan's prime goals has been reorganization of the fiscal and regulatory relationships between the federal government and state and local governments. Through a set of sweeping proposals, he sought a dramatically diminished federal role in the affairs of states and localities as well as a devolution of responsibilities now shared by the federal government. These proposals include: e Consolidation in FFY 1982 of 85 categorical programs into seven block grants accompanied by an average 25 percent budget reduction for these programs. • Consolidation in FFY 1983 of 40 additional categorical programs into seven more block grants or consolidated programs (beyond those enacted by Congress in 1981). • A "swap" plan involving a complete federal takeover of the Medicaid program in exchange for state governments' assumption of total responsibility for AFDC and food stamps. • A major program transfer, as part of the "New Federalism," to phase out over an eight-year period (FFY 1984--FFY 1991) all federal involvement in 61 federal grant programs; utilizing a $28 billion annual "trust fund" of federal dollars to facilitate an orderly phase-out. • Easing of federal standards, mandates and regulations on state and local governments. While the Administration has thus far not achieved all that it had hoped in this area, significant changes have been accomplished that now affect Minnesota and other states. These accomplishments include: • Consolidation by Congress in 1981 (for FFY 1982) of 77 categorical programs and two existing block grants into nine block grants to the states, accompanied in

-78- most cases by significant reductions in the federal funding for those programs. In addition 62 other categorical programs, representing about 10 percent of all federal grants-in-aid, were not funded. o Enactment by Congress in 1982 (for FFY 1983) of at least one block grant to replace the CET A program but with significantly less funding. o Easing of federal standards, mandates, regulations and reporting requirements on state and local governments. Much of this deregulation occurred as part of the enactment of the block grants, while other changes were made through exercise of executive authority within federal agencies or through congressional action to deregulate. o Budget reductions in other programs, which are having a de facto devolution effect because state and local governments must decide whether to fund programs that were previously paid for by the federal government. o Establishment of negotiations with representatives of the National Governors Association and local government associations regarding the "New Federalism" "swap" and program transfers. With the exception of the last accomplishment, these actions place additional financial burdens on Minnesota. In addition, the state must develop implementation strategies for the block grants and its administration must adjust to other changing regulatory relationships. Moreover, the state and its local governments will have to determine to what degree they will assume financial, administrative, regulatory and reporting responsiblities previously assumed by the federal government.

BLOCK GRANTS

A critical component of the President's effort to transfer federal responsibilities to states is his proposal for consolidating numerous categorical grant-in-aid programs and some existing block grants into block grants administered by states. The 1981 Omnibus Reconciliation Act included a modification of the Administration's block grant proposal for FFY 1982. While the number of programs consolidated was fewer than proposed and the degree of state discretion was less than the Administration hoped, the 1981 changes were significant. Seventy-seven categorical programs and two existing block grants were consolidated into nine block grants. Perhaps the most significant changes associated with this action Were the large budgetary reductions for the consolidated programs, ranging from 17 .6 Percent to 51.4 percent. Only the Community Development Block Grant programs received increased funding. In addition, 62 other categorical programs (representing more

-79- than 10 percent of all federal grants) were eliminated, (Palmer and Sawhill, eds., The Reagan Experiment, p. 165). These include various grant programs administered by the Title V Multistate Regional Commissions, two discretionary programs of the Secretary of Housing and Urban Development, the intergovernmental personnel grant program, and four programs of the Environmental Protection Agency (David B. Walker; Albert J. Richter; and Cynthia Cates Colella, "The First Ten Months: Grant-in-Aid, Regulatory, and Other Changes," Intergovernmental Perspective, 8 (1982), p. 5). The block grants enacted in 1981 also shifted the target of some federal aid by granting dollars to the states which had previously gone directly to local governments. Forty-seven of the seventy-seven programs consolidated into block grants to the states formerly delivered federal dollars directly to localities (Palmer and Sawhill, eds., The Reagan Experiment, p. 171 ). Table 20 outlines the nine block grants enacted in 1981, changes in their funding and the most significant intergovernmental changes associated with them. At the time of this writing, congressional action is still pending on FFY 1983 appropriations for these block grants. However, funding levels are likely to remain roughly what they were in FFY 1982 (Steve Cramer, ed., "The New Federal Block Grants in Minnesota: Implementation and Future Issues," Urban Coalition of Minneapolis, October 1982). In 1982, as part of its FFY 1983 budget recommendation to Congress, the Administration proposed consolidation of an additional 40 categorical programs into seven new block grants or consolidated programs, along with additional changes and spending reductions. (The FFY 1983 proposal is summarized in Appendix D). However, the Administration has thus far been largely unsuccessful in obtaining additional congressional block grant action. As of this writing, only one additional block grant has been enacted by Congress through the "Job Training Partnership Act." This block grant replaces the CET A program, which was also a block grant, but at about one-fourth of CET A funding at its peak. The level of funding could change, however, as the congressional budget process continues. The new block grant gives states more discretion over administration of the program by transferring federal responsibilities to governors and expands private sector participation in the formulation of local plans for fund distribution (Sandy Solomon, "Status Report," memorandum, Coalition on Block Grants and Human Needs, 11 October 1982).

-80- TABLE 20. 1981 BLOCK GRANT ACTION

CONSOLIDATION, FUNDING AND SIGNIFICANT INTERGOVERNMENTAL CHANGES

Community Development Elementary Preventive (Small Cities and and Secondary Health and BLOCK GRANTS: Rural Areas) Education Health Services

Number of programs 1 discretionary 37 categoricals 1 existing block superceded (iden- grant (the Budget grant and 6 tified in OMB's Reconciliation Act categoricals catalogue of fed- also expanded eral domestic existing CDBG by assistance) folding in 3 ca tegor icals)

National funding, $796 $735 $160 estimated FY 1981 (million)

National funding $952/19.6% change $519/-29.4% change $84/-47.5% change Reagan's FY 1982, appropriation request (million)

Above adjusted for 10.7% change -34.6% change -51.4% change inflation (at 8.0%)

Minnesota funding, $19.7 $5.4 $2.5 FY 1981 (millions)

Minnesota funding, $23.0/16.8% change $7.6/40.7% change $2.1/-16.0% change expected FY 1982 (millions)

Above adjusted for 8.1 % change 30.3% change -22.2% change inflation (at 8.0%)

Significant inter- Shift from federal- Shift from federal- State discretion governmental local relationship local relationship allowed for transfer changes in fund allocation in fund allocation of up to 7% of to state-local for some of these this block grant relationship (from programs to a to other block HUD area office to state-local rela- grants the Department of tionship Energy, Planning & Development)

Minn. agency Department of En- Department of Department of responsible for ergy, Planning & Education Health administration Development

-81- Alcohol, Drug Maternal and Abuse, and Child Health BLOCK GRANTS: Mental Health Services Primary Care

Number of programs l O ca tegor icals 9 categoricals 2 categoricals superceded (iden- tified in OMB's catalogue of fed- eral domestic assistance)

National funding, $524 $411 $321 estimated FY 1981 (million)

National funding $432/-17.6% change $291 /-29.2% change $215/-33.0% change Reagan's FY 1982, (FY 83) appropriation request (million)

Above adjusted for -23.7% change -34.4% change -38.0% change inflation (at 8.0%)

Minnesota funding, $3.8 $7.l N.A. FY 1981 (millions)

Minnesota funding, $3.6/-5.3% change $5.4/-23.9% change N.A. expected FY 1982 (millions)

Above adjusted for -12.3% change -29.6% change N.A. inflation (at 8.0%)

Significant inter- Additional man- State and local In FY 1983 the governmental dated services on match requirements state may changes the part of reduced from 50% administer the counties required to 42.9% (3/7) of program which by federal law actual expendi- funds health tures care centers

Minn. agency Department of Department of Department of responsible for Public Welfare Health Health administration

Number of programs l existing block 7 categoricals l categorical superceded (iden­ grant (Title XX) tified in OMB's and l categorical catalogue of fed­ eral domestic assistance)

National funding, $3,008 $484 $1,714 estimated FY 1981 (million)

-82- Low Income Community Home Energy BLOCK GRANTS: Social Services Services Assistance

National funding $1,974/-34.4% $225/-53.5% $1,400/-18.3% Reagan's FY 1982, change change change appropriation request (million)

Above adjusted for -39.2% change -57.0% change -24.4% change inflation (at 8.0%)

Minnesota funding, $54.4 $5.6 $68.6 FY 1981 (millions)

Minnesota funding, $43.0/-21.0% change $2.8/-50.0% change $70.0/2.0% change expected FY 1982 (millions)

Above adjusted for -26.8% change -53.3% change -5.5% change inflation (at 8.0%)

Significant inter- Federal regulations The state will ad- State discretion governmental changed to remove minister all these to transfer up to changes restrictions on monies, most of 10% to other block persons eligible which were pre- grants and up to for services and viously admin- 15% for the requirement istered by weatherization for a 25% match in community action funding; state dis- agencies cretion allowed for transfer of up to 10% of Title XX to Heal th Block Grant or Low Income Energy Assistance

Minn. agency Department of Department of Department of responsible for Public Welfare Economic Security Economic Security administration

SOURCES: Walker; Richter; and Colella, "The First Ten Months," pp. 8-12; Minnesota Department of Energy, Planning and Development, Governor's Task Force on Federal Budget; Albert H. Quie (Governor, Minnesota); "Guidelines for Implementing The New Federal Block Grants," memorandum, Office of the Governor, St. Paul, Minn., 18 September 1981.

-83- What the Block Grants Mean for Minnesota Minnesota has implemented seven of the nine FFY 1982 Block Grants enacted in 1981. The Primary Care Block Grant was not available last year, and Minnesota chose not to implement the Small Cities Community Development Block Grant until FFY 1983. The eight available block grants totalled $162 million, 14 percent of all federal funds coming into the state (Cramer, "The New Federal Block Grants," p. 2). Table 20 (page 81) summarizes the Minnesota funding for the block grants. The size of the block grant funds in relation to the total government spending in these areas varies widely (Ibid.). While the FFY 1982 block grants hold the potential for significant changes in state administration and fund distribution for these programs, few alterations have yet been made. This is because state legislative action requires that the block grants initially flow through existing categorical channels and/or state social service and health program formulas (Ibid.). Planning and policy-making activities have been underway within the , ' state's agencies in anticipation of FFY 1983 implementation of those block grants and any new ones enacted in 1982 for FFY 1983. In at least three cases--the Education, Maternal and Child Health and Preventative Health Block Grants--the combined effect of the federal government's shift of grants from local jurisdictions to the state and the current implementation plans of the state agencies involved will be to change distribution patterns of these funds. The distribution formulas now in place in Minnesota will shift funding away from some jurisdictions which had previously achieved above-average success in obtaining funds directly from the federal government. The impact of this change could be significant for some jurisdictions and the people served by these programs (George R. Pettersen, (Commissioner of Health, Minnesota Department of Health), memorandum, 28 October 1982; Cramer, "The New Federal Block Grants," pp. 46, 52, 53, 57). Thus far, the state legislature has played a minimal role in defining state policies with respect to block grants. By and large, the planning and policy-making conducted in anticipation of block grant implementation has occurred without significant legislative involvement. That is likely to change, however. The legislature could decide to expand its role in overseeing the agencies' planning and decision-making regarding the block grants. It could do this by defining policies about the distribution of funding and the establishment of standards, mandates, regulations and monitoring requirements. In addition, the legislature will have to determine, with respect to specific program areas, the degree to which the state will replace from its own revenues funds that were cut from these areas by the federal government when the programs were consolidated.

-84- Beyond this, a number of potential legislative issues concerning each block grant can be identified. An October 1982 report summarized the current status of state implementation of the federal block grants in Minnesota. The report was prepared by the following organizations: Community-University Health Care Center, League of Women Voters of Minnesota, Legal Services Advocacy Project, Metro Community Health Consortium, Minnesota Association of Voluntary Social Services Agencies, Minnesota CAP Directors Association, Incorporated, and the Urban Coalition of Minneapolis. Several key findings are summarized below, particularly those that suggest significant legislative issues (Ibid, pp. 1-57).

Community Development (Small Cities and Rural Areas). Prior to its consolidation into this block grant, the Small Cities Program was a federally administered program for local government. Minnesota has decided to maintain the competitive nature of the program, which will be administered through the Minnesota Department of Energy, Planning and Development (MDEPD). MDEPD will be submitting a proposed rule to the 1983 legislature for implementing the block grant, including provisions relating to targeting of funds, public participation and monitoring and enforcement. The appropriation for the Small Cities Program was increased in FFY 1983 as a result of the block grant action. The principal legislative issues involved here relate to those provisions which will be submitted to the legislature by MDEPD in 1983.

Elementary and Secondary Education. A significant number of the programs consolidated into this block grant previously provided funding directly to local school districts. Now all of these dollars are administered by the state. This means that while overall funding for these programs in Minnesota is increased and the state may actually receive a higher percentage of federal educational funding than under the old categorical system, local school districts targeted by the previous categorical grants will receive less money. However, the Minnesota advisory committee for this block grant has recommended state distribution criteria that include some of the factors of the old categorical system. Furthermore, an allowable "set aside" amount will be reserved for administration by the State Department of Education. The education block grant also includes more extensive provisions for children in private schools, which means there may be a smaller percentage of federal education funds available to public schools. Legislative issues raised by these changes include:

-85- o To what degree will the legislature wish to become involved in formulating the distribution criteria to meet the needs of targeted populations? If the legislature involves itself, what criteria should be established that meet state needs and that the federal government will approve? o In view of the more extensive provisions for private school participation in these programs, should the state re-evaluate its own funding levels for programs and services of private schools to assure that Minnesota public school funding does not diminish in view of the federal changes?

Preventive Health and Health Services. Federal funding to Minnesota for the programs in this block grant decreased by 16 percent during consolidation. However, the federal share of the funding for these programs is not great except in Emergency Medical Services, where federal dollars represent major funding. As with the Maternal and Child Health Block Grant, the Minnesota Department of Health has , adopted policies which would distribute these funds through the Community Health Service (CHS) formula (Cramer, "The New Federal Block Grants," pp. 54--57; Pettersen, memorandum). Legislative issues associated with block grants are similar to the Maternal and Child Health Services Block Grants and relate to the state's funding share for these programs and its distribution formula.

Alcohol, Drug Abuse and Mental Health. Funding for these programs was reduced at the same time that the state-mandated local property tax levy limits remained in force, limiting the degree to which counties could pick up the slack in funding. However, because the FFY 1982 allocation was received well into Minnesota's fiscal year, some FFY 1982 monies will be spent in FFY 1983, thereby easing the impact of funding reductions next year. This block grant contains more restrictions than most of the others. However, the block grant does increase the state's discretion in allocating the funds. In 1983, 1984 and 1985 the portion that can be shifted by the state from one activity to another will increase. Legislative issues raised by these changes include: e Should the level of state funding for alcohol, drug abuse and mental health programs be increased to make up for the decrease in the federal contribution to these programs? o Should the state ease the current revenue-raising limitations on counties to enable them to further supplement their contributions to these programs to make up for some portion of the federal cuts?

-86- o Right now the state has no plans to utilize its additional discretion in shifting allocation of the federal funds among activities under this block grant. Should it utilize this discretion and, if so, how should these monies be shifted?

Maternal and Child Health Services. During consolidation, federal funds for these programs in Minnesota were reduced from $7 .1 to $5.4 million in FFY 1982. While the state did not appropriate any funds to make up the loss, it did enact a "hold­ harmless" clause that protects current special projects until July 1983. However, both the task force appointed to consider implementation of the Maternal and Child Health and Preventive Health Block Grants and the Minnesota Department of Health are interested in a per-capita distribution of these funds through the Community Health Services (CHS) formula. Because the CHS formula does not consider certain Maternal and Child Health indicators and contains minimal targeting provisions for low-income households, current maternal and child health providers estimate that the CHS distribution approach for these funds will result in as much as an 80- percent decrease in maternal and health funds in urban areas. To prevent this, the state legislature in 1982 directed that the original intent of the maternal and child health programs be maintained. Nonetheless, the Minnesota Department of Health has adopted policies which would distribute the funds for the FFY 1983 block grant through the CHS formula. Legislative issues raised by these changes include the following: o Should the state appropriate additional funds for maternal and child health programs to make up for the 24 percent reduction in federal funding? o How should these federal funds be distributed--through the CHS formula or some other scheme which will more closely approximate former distribution patterns?

Social Services. Funding for these programs was reduced at the same time that the state-mandated local property tax levy limits remained in force, limiting the degree to which counties could pick up the slack. The Block Grant legislation also eliminated the required 25 percent local match in funding, leaving the potential for further reductions. In addition, because some federal targeting standards have been eliminated, the state is required to fund only the populations presently targeted for social services. There is no category for "low income" persons. Legislative issues raised by these changes include the following: o Should the level of state funding for social services be increased to make up some portion of the 21 percent reduction in the federal share?

-87- o Should the state ease the current revenue-raising limitations on counties to enable them to further supplement their share of social service funding to make up for federal cuts? o Should the state reimpose the 25 percent local matching requirement dropped by the federal government? o Are the current Minnesota targeting . requirements for social services still adequate in view of the federal changes in this regard?

Community Services. Funding for these programs, now primarily carried out through Minnesota's existing Community Action Agencies, was reduced substantially as a result of the federal change. Neither the state nor local governments have picked up the funding slack created by the federal reductions. Federally imposed local matching requirements have been dropped or minimized, although the state is proposing to retain a 20 percent match requirement for all Community Services Block Grant and state funds received by the local Community Action Agencies. Legislative issues raised by these changes include: e Should the level of state funding for community services be increased to make up for the decrease in the federal contribution to these services? o Should localities be required to continue to provide funding to the Community Action Agencies, perhaps through retention of a 20 percent matching requirement? In view of the federal reductions should the local share of such funding be increased to support these agencies?

Low-Income Energy Assistance. The federal appropriation for this block grant was roughly the same as for the programs in FFY 1981 prior to their consolidation. However, because state implementation of assistance was based on the expectation that funding would be significantly reduced, some households no longer received benefits in the winter of 1981-82. At the same time, the average amount of grants was decreased. When the full funding levels were established the state actually had funds remaining which were partially utilized for weatherization as allowed by federal law. The state also transferred $2 million in 1982 to the Community Services Block Grant for a statewide Energy Crisis Intervention Program and development of alternative energy projects. Legislative issues raised by these changes include the following: • What portion of these federal energy assistance funds within the Low-Income Energy Assistance Block Grant should continue to be shifted to other energy­ related programs?

-88- o If federal energy assistance monies are to be transferred to other block grants, should the state continue to fund only energy-related programs?

ATTACKING RED T APE--EASING FEDERAL REGULATION OF STATE AND LOCAL GOVERNMENT

In addition to easing regulation of business, the Reagan Administration has also sought to diminish the regulatory role of the federal government in matters it believes are of state and local concern. The administration has proposed far-reaching policies in this regard, a significant number of which have already been enacted into law by Congress, promulgated by executive action or established through agency directives. This effort seeks to undo aspects of the so-called "government regulation of government," which developed largely since the 1960s with the passage of civil-rights legislation and other "Great Society" programs. Regulations have accompanied categorical grant-in-aid programs, prohibited against discrimination, provided assurances of environmental safety and protection of trade unions and workers. A number of these regulations also mandate citizen participation, citizen boards and public hearings. Many of these regulations have not come with federal funding to assist their implementation, a fact which has caused state and local officials to call for reform (Neal R. Peirce and Jay Hamilton, "'Flypaper Federalism'--States, Cities Want to Shed Rules That Accompany Aid," National Journal, 12 September 1981, pp. 1636-1639). One important Administration accomplishment in deregulating state and local governments was the easing of regulations that accompanied the consolidation of 77 categorical programs into nine block grants. While the regulatory changes were not as far-reaching as the Administration had hoped, significant alterations did occur. As evidence of those changes, the White House notes that the 318 pages of regulations in the Federal Register associated with the block grants administered by the Department of Health and Human Services now comprise only six pages. 0MB has estimated that those changes will save state and local governments 5.4 million person-hours--an 83 percent reduction in person hours from FFY 1981 to FFY 1982 for those governments (Walker; Richter; and Colella, "The First Ten Months," p. 28). Beyond these changes, the Administration has withdrawn, altered or rewritten numerous other regulations through the exercise of executive authority within the various agencies or through congressional action. 0MB has also been working with federal agencies to develop a single set of implementing rules for each of about 60 "cross-cutting" requirements--general provisions applied to numerous programs. ·

-89- What Easing Regulations for State and Local Governments Means for Minnesota

Identification of specific impacts of deregulation on Minnesota's state and local governments requires an agency-by-agency review of programs with which the federal govenment is involved. Such a review is beyond the scope of this paper. However, "The Effects of Budget Cuts on Major Minnesota Environmental Programs," a study soon to be published by CURA, suggests that budget reductions to federal environmental agencies and program funds to states will have significant impact in Minnesota. Reductions in federal agencies' research activities, for example, limit the kind of information Minnesota agencies, including the Minnesota Pollution Control Agency (MPCA), utilize in their state enforcement efforts. In addition, federal reductions in program monies to Minnesota, especially in the MPCA, similarly reduce that agency's ability to regulate. At the same time, federal EPA requirements of proof that specific wastewater treatment projects will yield benefits have decreased the MPCA's flexibility in granting these federal monies. At least in this case, the federal government, in applying its cost/benefit standards for regulations, has increased regulation of the state agency involved. Beyond that, federal budget reductions in environmental regulation programs have led to staff reductions and have therefore slowed existing regulatory processes. (Nancy Walters, "The Effects of Budget Cuts on Major Minnesota Environmental Programs," Center for Urban and Regional Affairs, Minneapolis, Minn., forthcoming). Minnesota's state and local governments are now being asked to decide whether they wish to operate federally-supported programs without the mandates, standards, regulations and reporting requirements of the federal government, or replace these with their own requirements. The state and its localities will now have to determine which of those federal requirements were unnecessary "red tape" and which were important enough to merit their re-establishment in Minnesota. Some of those requirements may be replaced with ones more specifically designed for Minnesota. Presumably these determinations will be made through state and local agency rule-making as well as through enactment of policies by elected officials.

-90- THE "NEW FEDERALISM" PROPOSAL

In his State of the Union message on January 26, 1982, President Reagan announced a proposal that goes far beyond the block grants and changes in regulation in altering federal-state relationships. In its original form, his two-part plan called for a major program "swap" between the federal government and the states, with the federal government assuming full administrative and financial responsibility for Medicaid in exchange for a take-over by the states of the AFDC and Food Stamps programs. The second aspect of the proposal called for a transfer to the states, beginning in 1984, of federal responsibility for 61 aid programs Oisted in Appendix E). To facilitate an orderly phase-out of these federal responsibilities, a $28 billion annual trust fund would be established to finance the state take-over between FFY 1984 and FFY 1987. During those four years the turnback programs and the trust fund would be used to compensate financial gains or losses to the various states from the Medicaid/ AFDC--Food Stamp swap and to assure "no winners or losers." Between 1987 and 1991, federal participation in those programs would be phased out completely (Rochelle L. Stanfield, "New Federalism, A Neatly Wrapped Package with Explosives Inside," National Journal, 27 February 1982, pp. 356-362). Shortly after announcing his proposal, the President established negotiations with the National Governors' Association and several associations of local governments to formulate legislation for introduction in Congress in 1982. Senator David Durenberger (R­ Minnesota) played a key role in these negotiations as the chairman of the Senate Governmental Affairs Subcommittee on Intergovernmental Relations. By May of 1982, agreement on a modified proposal seemed imminent. Representatives of the National Governors Association supported the plan and the National League of Cities agreed not to obstruct the proposal if certain further modifications were accepted by the Administration ("Governors, Reagan Barter Aid Programs," St. Paul Pioneer Press, 6 May 1982, p. 3A; "Cities Group Backs Reagan Welfare Swap," St. Paul Pioneer Press, 18 May 1982, p. 7C). But by summer that agreement fell apart as state and local groups raised objections about the scope of the federalized Medicaid plan and the conditions under which states would take over AFDC. The modified proposal lost the support of the National Governors' Association, the National League of Cities and the National Association of Counties. The National Conference of State Legislatures also refused to endorse the new proposal and Senator Durenberger denounced it. After threatening to halt negotiations with the Administration and deal instead with Congress, the National Governors' Association agreed in August to continue discussions, but directly with President Reagan rather than

-91- the White House negotiating team. At the same time, the Association decided to draft its own proposal for introduction in 1983, based on what it called its "historic principles" of federalism (Rochelle L. Stanfield, "Is this the End for Reagan's New Federalism?" National Journal, 14 August 1982, p. 1407).

What "New Federalism" Means for Minnesota Critical aspects of the "New Federalism" swap and program transfer were not specifically defined in the Administration's original proposal. They are still subject to negotiation and change before a legislative proposal is introduced in Congress. Therefore it is impossible to accurately assess at this point what such a proposal, if ultimately enacted, would mean for Minnesota. Table 21 outlines the estimated fiscal impact on Minnesota and the federal budget of the original proposal. In testimony presented in April 1982 before the U.S. Senate Governmental Operations Committee's Intergovernmental Relations Subcommittee, Kent Eklund, Commissioner ,of the Minnesota Department of Energy, Planning and Development, outlined several Minnesota concerns about the proposal. With respect to the Medicaid/ AFDC--Food Stamp swap, Eklund suggested that the proposal's uncertain baseline appropriations and estimated rates of increase in these programs make reliable fiscal impact estimates difficult. Even so, he noted that estimates made by the Minnesota Department of Public Welfare suggest the swap would net $193 million for the state rather than the $299 million figure given in the President's proposal. Of particular concern was the proposal's ambiguity about whether the federal government, in taking over Medicaid, would provide Minnesotans with the same range of services they now receive from the state. The commissioner also expressed concern over the lack of guarantees that provisions of the swap would be adhered to in future years. He also wondered whether state-funded administrators of Medicaid would automatically become federal employees. Finally, he asked what local incentives would be built into the federalized Medicaid program to ensure cost containment. With respect to the program transfer, Eklund noted that "if a state opts to participate immediately in the program, honoring of previous commitments to local governments can create problems for the state." This is because MDEPD's estimates indicate that local governments will receive about $10 million less from the programs after their consolidation and transfer to the state. To meet its previous commitments to these localities, the state would have to pass all of the transfer funds on to local governments. The federal funds that would be passed through to Minnesota's local governments under the proposal are listed in Table 22.

-92- TABLE 21. FISCAL IMPACT OF THE NEV/ FEDERALISM (JANUARY 1982) PROPOSAL

FEDERAL TAKEOVER OF MEDICAID

o States (as a whole) save $19.1 billion in FFY 1984. o Minnesota Cits state and local governments) saves $501 million in FFY 1984.

This assumes that current trends in Medicaid expenditures will continue in FFY 1983 and FFY 1984. However, while the $19.1 billion national figure assumes current aggregate expenditure trends, the amount of funding to individual states and the associated eligibility requirements and range of services provided in those states is not assumed to be necessarily those which exist currently.

STATE TAKEOVER OF AFDC AND FOOD STAMPS

o Federal government saves $16.5 billion in FFY 1984. o Minnesota's costs are $202 million in FFY 1984.

This assumes a $4.2 billion reduction in AFDC and food stamps in FFY 1984.

STATE TAKEOVER OF THE SIXTY-ONE TRANSFER PROGRAMS

o Federal government establishes a $28 billion trust fund for FFY 1984-87, after which federal support is phased out during FFY 1988-91. o Minnesota's portion of the transfer expenditure is $535 million (less the $299 million savings to Minnesota from the swap, which when deducted means Minnesota will receive $236 million annually from FFY 1984-87).

This assumes a $2.2 billion cut in those programs prior to the turnback.

SOURCES: Glenn Nelson; Wilbur Maki; Thomas Stinson; Arley Waldo; and Carole Yoho, "The New Federalism: What it Means for Minnesotans," Staff Papers Series, University of Minnesota, Institute of Agriculture, Forestry and Home Economics, Department of Agricultural and Applied Economics, St. Paul, Minn., April 1982; Rochelle L. Stanfield, "'Turning Back' 61 Programs: A Radical Shift of Power," National Journal, 27 February 1982, pp. 369-374; Stanfield, "New Federalism," pp. 356-362.

-93- TABLE 22. FEDERAL FUNDS REQUIRED TO BE PASSED THROUGH TO LOCAL GOVERNMENTS UNDER THE "NEW FEDERALISM" PROPOSAL (estimated FFY 1982 levels)

Wastewater Treatment Facilities Construction $ 44,900,000 Community Development Block Grants 57,000,000 Urban Development Action Grants 20,000,000 General Revenue Sharing 92,000,000 Urban Mass Transit Construction 9,000,000 Urban Mass Transit Operating 11,650,000 Water and Sewer Loans 3,500,000 Water and Sewer Grants 2,400,000 Community Facilities Loans 4,400,000 TOTAL $244,850,000 SOURCE: Minnesota Department of Energy, Planning and Development, Governor's Task Force on Federal Budget Reductions, Fiscal Year 1982, St. Paul, Minn., 11 February 1982.

Eklund also told the Senate Committee that the most critical issue the state would face under the New Federalism proposal is the reallocation of state funds that would be required as a result of "the interrelationship of the swap and the turnback." In Minnesota the estimated $299 million savings from the swap would have to be allocated to a wide array of programs, including many outside the human services area. "This interaction could well involve every committee in the legislature," he said. As an example he noted that in order for the Department of Transportation to receive its portion of the $299 million, the legislature would have to break its long-standing tradition of not infusing trust funds with general fund revenue. Similarly, Eklund said, if the federal government does not assume all the current Minnesota Medicaid options, the legislature could decide to absorb the $299 million "windfall" from the swap into restoring those options, leaving the other programs of the transfer $299 million short. Eklund also expressed the general concern that as the trust fund for the transfer programs is phased out along with the excise and oil windfall profits taxes supporting it, the ability of states to institute those types of taxes will vary significantly. This will be a particular concern for Minnesota, which, as an energy-poor state, will be unable to readily replace the trust fund revenues generated by the federal oil windfall profits tax. In addition, excise taxes do not increase at the same rate of inflation, which will make state funding of these programs with those taxes increasingly difficult (Kent E. Eklund, (Minnesota Department of Energy, Planning and Development), testimony given before Intergovernmental Relations Subcommittee of the United States, Senate Governmental Operations Committee, 29 April 1982, Minneapolis, Minn.). -94- CHAPTER IV. LOCAL GOVERNMENT RESPONDS

Minnesota's local governments provide and administer a large share of the programs that government provides in the state. Human services programs such as AFDC and social services, which are usually associated with the federal government, are administered and partially funded at the county level. Primary and secondary education, whose major source of funding is state government, is carried out by the 436 school districts in the state. Because of these highly integrated intergovernmental relationships, any budget or tax actions by the state and federal governments have significant impact on Minnesota's counties, cities, school districts, towns and special districts.* In 1981 and 1982, the state's local units experienced the initial stages of devolution in intergovernmental relations. Changes at the state level, driven by the need to balance the state's budget, transferred both expenditure and revenue responsibilities from the state to local governments. Reductions in programs such as Local Government Aid (LGA) forced cities and counties to reduce or restructure services they provide, while changes in state law made it possible for school districts to raise more revenues at the local level. At the federal level, a new philosophy of government promoted by President Reagan resulted in changes that transferred many responsibilities that had been held for years by the federal government to state and local governments. While the federal changes devolved responsibilities downward, some of the federal funds that previously flowed directly to local governments now must pass through state government, a change that concerns many local officials. To identify the immediate impact of recent state and federal actions, the authors met with over 100 Minnesota local officials from counties, cities and school districts.** In addition, CURA--with the cooperation of the University's Hubert H. Humphrey Institute of Public Affairs, the Association of Minnesota Counties, the League of Minnesota Cities and the Minnesota Department of Energy, Planning and Development--surveyed a sample of Minnesota's cities and counties to identify both the fiscal conditions these local governments find themselves in and the actions they took to cope with fiscal stress. This chapter summarizes the discussions with local officials and the initial results of these surveys. It also identifies the factors which appear to be crucial in determining the type of response a local governmental unit can make to a changing environment brought on by state and federal actions.

* This chapter. explores only the responses of the three major units of local governments-- counties, cities and school districts. While towns and other units of local government are important, time constraints limited the research to these three. ** Appendix F lists the names of the officials with whom the authors met.

-95- IMPORT ANT FACTORS OF LOCAL GOVERNMENT RESPONSE

The ability of local governments to respond to changes in their revenue or aid from state and federal government depends on a number of factors, including local resources, flexibility, economic conditions and innovation. The difference in responses between local governments can be partially explained by examining these factors. Even superior technical and management skills of some local officials are not enough to overcome many problems, since some of these factors are beyond the control of local governments. To some degree these factors are also tied to regional and size differences so that the responses of local governments vary widely across the state. The factors identified include:

o The creativity of local government officials and their access to technical and managerial support. In responding to recent state and federal actions, the strategies employe~ by local officials reflect in large measure the entrepreneurial abilities of those officials. This seemed less the case in the largest cities and counties, where the scale and bureaucratic nature of government apparently diminishes the effectiveness of individual entrepreneurial action. Beyond this, access to technical and managerial support, generally most available to large and medium-size jurisdictions, aided in accommodating the changes. Those jurisdictions which had instituted long-term planning processes and revenue strategies prior to the state and federal actions appeared to be better equipped to cope with the changes than those who had not done so.

o The degree to which local governments have the resource capacity to accommodate the changes. Important components of resource capacity include: o The current level of and future outlook for the local tax base--whether it will grow, remain stable or decline. This measures the relative wealth or revenue generating capacity of a particular unit of local government. • The vitality of the local economy. Some regions in the state are worse off economically than others. For example, northeastern Minnesota currently has very high unemployment. This increases the demand for human services in that area and affects the degree to which taxpayers with depressed or lost incomes can afford to pay higher property taxes. • The level of fund balance (surpluses) in the local government's budget at the time state and federal aid reductions were promulgated. This is one measure of the financial health of a particular local government unit.

-96- o The type of local government (county, city or school district) and the type of services it provides. Since the impact of state and federal cuts was not uniform across income, age and other groups, the type of population that the local government serves affects the nature of the response. o The degree to which policy-making and administrative flexibility exists. This flexibility is dependent, in large measure, on internal and external constraints including: o Mandates, standards and regulations imposed by state and federal governments, including those that limit local revenue-raising. o Court involvement (or the threat of such involvement) in local program and personnel areas. o Certain employee contract provisions (and bargaining strength) particularly those that affect transfer or layoff of employees or redefinition of employee's positions, including reduction of hours. o Overall size of individual local budgets and work force and the degree to which those budgets and personnel are "locked into" provision of "necessary" services. o The degree of dependence of a local government on aid from state and federal government. Those units that depend on intergovernmental aid for a large share of their budgets will have a more difficult time responding to state and federal aid cutbacks than those that rely more on local revenues. o The degree to which local officials (and citizens) believe that the current fiscal situation is short-term rather than long-term. Those who view the current situation as short-term are more likely to make revenue and expenditure decisions which provide primarily short-term relief but which may exacerbate local problems if the revenue situation continues into the long term. Such decisions might include deferral of needed capital improvements for necessary services like roads and wastewater treatment systems. In addition, local officials with that perspective are more likely to utilize stop-gap or "band-aid" measures to get them through the immediate situation rather than seek long-range policies, such as basic reform of service systems and governmental operations or development of innovative revenue­ raising strategies and local economic development initiatives.

-97- HOW LOCAL GOVERNMENT RESPONDED

Minnesota's local governments faced some very difficult decisions during 1981 and 1982. As their state and federal aid began to fall, local units had to increase their revenue (local property tax increased an average of 24 percent statewide), reduce spending and use existing fund balances--the only real solutions to the problem of balancing their budgets. A survey conducted by the Hubert H. Humphrey Institute of Public Affairs and CURA demonstrated that of approximately 100 cities with populations over 2,500, 71.5 percent felt that the budget and tax situation made preparing the 1982 budget more difficult than in other years. Furthermore, approximately one-half of the same cities expected that they will be worse off in 1983 than they were in 1982. Only six percent felt that they would be better off. For these reasons, almost 70 percent of these cities classified themselves as being under moderate or extreme fiscal pressures. Counties appeared slightly more optimistic in their view of the next budget year. In another CURA survey, it was discovered that of 66 Minnesota counties, 36 percent felt that the next year (1983) would be worse. No county anticipated that 1983 would be better. When asked about the fiscal pressure that counties experienced in 1982, 53 percent claimed they were under extreme or moderate fiscal pressure. All school officials interviewed said that the budget process for 1982-83 was very difficult. Fifty-six percent of the cities surveyed reduced spending in 1981 in anticipation of fiscal problems in 1982. Approximately the same percentage (55 percent) decided to postpone purchase of major equipment in 1982. Other means of reducing expenditures included deciding to defer maintenance (28 percent), defer capital improvements (30 percent), place a freeze on hiring (60 percent), reduce services (41 percent), eliminate services (23 percent), and close public facilities (17 percent). Many cities enhanced their revenue either through increased taxes or increased fees and charges. Many increased their charges for services such as water and sewer (61 percent) or for permits or licenses (45 percent). Some cities, 21 percent of the sample, anticipated that they would have to borrow in 1982 to meet cash-flow needs. It is apparent that counties either have less flexibility in reducing services and increasing revenues or their fiscal conditions are better than cities. Very few counties froze their hiring and only 11 percent of the counties surveyed reduced their services. Few counties postponed purchasing new equipment (27 percent) and even fewer deferred any maintenance (8 percent). Approximately half of the counties increased the fees they charge for services while only a quarter of the counties raised the fees for various permits and licenses. None of the counties surveyed anticipated any need for short term borrowing to meet cash flow problems.

-98- The difference in the survey responses of counties and cities may depend on the factors outlined in the first part of this chapter. For example, it appeared that cities had more flexibility in reducing services and raising revenues through increases in fees and charges than counties. County budgets are subject to a significant number of state and federal mandates, standards and regulations. In addition, judicial involvement through court-imposed mandates also plays an important role in the budget process of counties. A further reason for differences in response may be the nature of clientele served by the local unit. Of the recent actions taken by the state and federal governments, those affecting counties and school districts were actions with the greatest impact on individuals. The services provided by these units of government are directed toward special populations--human service recipients in the counties, children in the school districts--while the services provided by cities and towns are directed to the general population. Tables 23 through 27 provide additional information on how each jurisdiction responded to recent changes in state and federal policy and also summarize important intergovernmental issues that local officials raised during the discussions. This information and summary of issues are grouped into five subject areas: 1) local government revenue, 2) local government expenditures, 3) flexibility of local governmental operations, 4) alternatives to traditional public service provision and 5) local officials' views of expanding private sector service delivery. Key findings of the discussions held with local officials regarding each jurisdiction are summarized after the tables.

-99- TABLE 23. LOCAL GOVERNMENT REVENUE

COUNTIES:

o Some counties changed the mix of their county revenues--an increased reliance on property taxes and user fees.

o Property tax delinquency became a problem for some counties, specifically those in areas of economic stress like northeastern Minnesota.

o The counties with growing tax bases generally had fund balances enabling them to adjust to budget reductions more gradually and in a more orderly fashion than counties without such balances.

o Views about levy limits differed among officials. Some saw them as a major cause of falling service levels while others viewed them as necessary evils or as protection against the state government relinquishing its funding responsibilities to local governments.

CITIES:

o Cities increased their reliance on user fees for a revenue source.

o Other revenue-generating options cities discussed included economic development, annexation of adjacent towns to expand property tax bases, increased reliance on public enterprises such as municipal liquor stores and a Twin Cities metropolitan-wide sales tax.

o Levy limits were generally thought of as a further restriction for cities and unnecessary.

SCHOOL DISTRICTS:

o School districts increased their reliance on local revenues (discretionary and referendum levy) as aid from state and federal sources decreased.

o There is more use of the referendum levy but the success rate depends in large measure on the number of households in the district with children--a generally declining number.

o Both the discretionary levy and capital fund shift were being utilized by almost every eligible district interviewed.

o Districts also increased their use of user fees.

-100- TABLE 24. LOCAL GOVERNMENT EXPENDITURES

COUNTIES:

o County comm1ss10ners felt they had received much of the blame for service cuts and tax increases that are due to state legislative and U.S. congressional actions.

o Some counties had explicitly prioritized budget reductions while many just made "across-the-board" cuts.

o A great concern for some officials, mostly in rural areas, was continued maintenance and construction of necessary physical infrastructure in the face of diminishing state and federal aid targeted for those types of projects.

CITIES:

o At one time or another, all cities interviewed have utilized federal funds for particular projects as well as receiving general revenue sharing funds.

o Flexibility to respond to reductions was apparently limited for small cities which either had already lean budgets or its limited personnel assigned to provision of essential services.

o Measures taken to reduce city spending included:

o Reduction of personnel through attrition and layoffs o Sale of surplus land and equipment o Purchase of more efficient or used equipment o Long-term savings provided by the purchase of capital equipment to replace employees o Self insurance for workers compensation o Delaying purchases and capital improvements

SCHOOL DISTRICTS:

o Expenditures were reduced through:

o Layoffs of teachers, teacher aids, special education faculty, main- tenance, and administrative personnel o Increases in class size o Reducing the number of class periods in the school day o Eliminating certain programs such as music o Elimination of summer school o Discontinuing participation in shared facilities like AVTI o Closing school buildings and selling excess district property o Reducing the number of course offerings available to students

-101- TABLE 25. FLEXIBILITY OF LOCAL GOVERNMENT OPERATIONS

COUNTIES:

o County officials expressed concern about the extent of a county's budget which is beyond the control of the county board. For example, Ramsey County officials estimate that only 18 percent of the budget was subject to local discretion (not tied to state and federal mandates or absolutely essential services).

e Some officials believe the courts are eroding the power of counties to make expenditure and expenditure reduction decisions through the imposition of mandates, standards and regulations. An example of court involvement was the Walsh v. Noot decision which increased counties' mental health expenditures.

o The majority of county officials interviewed recognized the need for federal and state goals and mandates but said many are unrealistic for local problems and needs.

o Reduced hours and seniority are key labor issues and officials interviewed said that the new financial situation for local governments will demand a different approach to employee union contracts.

CITIES:

G Cities appeared to have the most flexibility of the three types of local governments described here because they seem generally less encumbered by state and federal mandates, standards and regulations than do counties and school districts.

o The levy limit is viewed as the greatest constraint on local flexibility.

o The degree of flexibility is, in part, dependent on the size of the city--smaller cities had much less flexibility in reducing or rearranging city employees when there may be only one or two employees in a department.

• Some city officials viewed state mandates as excessive or unnecessary and said regulations should be localized. One example which was mentioned was the state guidelines on police training.

o Sharing employees between city departments could increase flexibility but some city officials saw this causing disputes with public employee labor unions.

SCHOOL DISTRICTS:

o School officials also expressed the need for more flexibility during periods of budget reductions.

e Most officials said they would continue the majority of the state and federal mandated programs in some locally designed form if they were given a choice.

• Most officials interviewed said they could easily operate within curricular and other requirements imposed by the state. However, PELRA, and particularly its strike provision, was repeatedly cited as the exception.

-102- TABLE 26. ALTERNATIVES TO TRADITIONAL PUBLIC SERVICE PROVISIONS

SPECIFIC ALTERNATIVES BEING EMPLOYED OR EXPLORED BY COUNTIES OR CITIES:

o Pooling police, fire and other services with other jurisdictions.

o Contracting with private companies to provide public services, including a number of social services.

o Charging fees and special assessments for services such as garbage collection and disposal, previously paid for with tax dollars.

o Adopting new technology to improve efficiency or quality of government activities, including the use of smaller, more efficient vehicles and other more efficient equipment.

o Replacing labor with technology and other forms of capital investment.

o Expanding use of volunteer, student, and part-time employees to assume duties previously performed by paid civil service or full-time personnel, particularly in park and recreation programs.

SPECIFIC ALTERNATIVES BEING EMPLOYED OR EXPLORED BY SCHOOL DISTRICTS:

o Instituting alternative curricular approaches and new technology, especially computers, to reduce personnel requirements or improve education quality.

o Beginning or maintaining cooperative arrangements with other districts for the purchase of supplies or the provision of special education or vocational training programs. (But at the same time, some other districts have discontinued, for financial reasons, their participation in cooperative efforts).

o Consolidating school districts is continuing to be discussed, particularly with respect to the smallest of Minnesota's districts.

o Establishing four-day school weeks to save building, energy, transportation and personnel expenses. (Some years ago one district, Mora, established Minnesota's only full-year school program. The efficiency of that program may have buffered the Mora district against recent aid cuts).

o Utilization of school facilities and services by community groups and citizens, sometimes for a fee.

o Initiating cooperation between school districts and the business community in training pupils for high-technology occupations.

o Utilizing to some larger degree volunteers, particularly to augment rather than replace teaching staff.

-103- TABLE 27. EXPANDING PRIVATE SECTOR SERVICE DELIVERY

REACTIONS OF COUNTY AND CITY OFFICIALS:

o The majority of local government officials interviewed said they do not anticipate a greatly expanded role of the private sector in delivery of services formerly or currently provided by local government. Reasons for this view varied but centered on two themes:

o The government reductions which have occurred, or might occur, are so large that there is simply no way they can be met by the private sector. Portions of the private sector, including churches, businesses and individuals, cannot be expected to expand their philanthropic contributions to meet public goals at a time when economic trends limit their own fiscal capability. o The level of volunteerism which is associated with earlier periods in American history cannot be expected to occur again because the society and its needs have changed--people's expectations of government service are higher, and people's willingness to volunteer to do things themselves rather than pay for them to be done is much reduced (in part because people's time is consumed now by their own work or leisure pursuits).

e Many outstate officials noted that contracting with private companies to provide public services is an option primarily available to jurisdictions located in larger cities or metropolitan areas which offer a range of potential contractors.

o Increased contracting out to private companies, while it may reduce some public administration costs, would require public monitoring of contractor's work.

o Strong public employee bargaining units may politically oppose contracting of services because they view it as a potential staff-reducing technique.

SCHOOL DISTRICT OFFICIALS' CONCERNS ABOUT "PRIVATIZING" PUBLIC EDUCATION:

e School officials expressed strong opinions about private vouchers and the expanded use of tuition tax credits for parents with children in private schools. The concerns local officials raised included:

• These actions, if applied to parochial schools, would be a violation of the U.S. constitutional wall of separation between church and state. o These actions would contribute to already existing inequities in educational opportunities. e These actions would increase the costs of education to the state and might have the effect of diminishing funds available to public schools. e These proposals fail to recognize that non-public school options are very limited, especially for quality programs, outside the major metropolitan areas. o Public schools now must operate within state and federal mandates not applied to private schools, thus giving private schools a "competitive" advantage over public schools if vouchers were instituted or tax credits expanded.

-104- Key Findings

o Counties in Minnesota dropped a significant number of clients from their income maintenance and social service programs in response to changes in eligibility criteria at both the state and federal levels. This ·resulted in cancellation of contracts and layoffs of county employees who administer and provide these programs. The human-services portion of the county's budget seems to be the hardest hit by aid cutbacks. Further reductions were made in portions of county budgets that are classified as "discretionary"--not tied directly to mandated or "essential" services. However, these "discretionary" services represent, by some estimates, as little as 15 to 20 percent of the counties' total budgets. Some counties were able to avoid making these reductions, because of two factors--their ability to increase local revenue and the size of their fund balances. In almost every county, local revenue was increased by raising the property tax to or nearly to the state­ mandated levy limit for the human services area of the budget. In fact, a number of counties violated the limits applied to human services. County officials are also examining the user charges and fee structure of the counties to increase local revenue.

o Cities appear to have more flexibility overall in responding to the state and federal aid reductions since they seem to be less the administrative arm of state and federal government than counties and school districts. Reductions in the state-funded Local Government Aid and Homestead Credit programs had the greatest impact on cities. Duluth and the cities in the metropolitan area were hit hard by federal cuts in Community Development Block Grant funds, housing assistance and economic development, while reductions in programs like wastewater grants affected cities across the state. All cities made personnel reductions, but a number of creative alternatives in providing services and generating revenue minimize~ these personnel reductions. Reductions in services affect everyone in a city because the services provided by cities are directed to the population as a whole. Cities in general felt constrained by the levy limits and thought they should be eliminated because they don't realistically reflect recent aid reductions or the way in which inflation eats into the cities' budgets. Many city officials felt that with declining aid, the types of services cities provide will be cut back to traditional responsibilities such as public safety, streets and parks. Ci ties also increased their user charges wherever possible and will attempt to provide incentives for economic development as one means of expanding the tax base for increased local revenue.

-105- • School Districts were affected most by the reductions in the state Foundation Aid program and other state categorical programs. Federal program reductions affected special student populations such as the handicapped and the disadvantaged, and the reductions resulted in staff cuts for these specific programs. The state-aid cuts for many districts resulted in regular classroom staff cuts and other personnel reductions, since personnel costs generally make up 80 to 85 percent of a district's budget. The consequences are larger class size and fewer educational programs. A survey done by the Minnesota Education Association (MEA) demonstrated that a number of school districts are violating state rules regarding class size. While this problem has existed for some time, the number of school districts violating the state rules increased in 1982. Overall, the student/teacher ratio has increased 10 percent statewide (Mammenga, Gene (Minnesota Education Association), conversation with Doug Wilson (CURA), 20 December 1982). To avoid reductions in both staff and programs, some districts were able to "deficit spend," utilizing fund balances that had been built up in previous years. Almost all districts had in some way increased their reliance on local sources of income either through the referendum levy, the discretionary levy or the capital fund shift. The ability of school districts to respond to these reductions in revenues was constrained by state and federal mandates, specifically the Public Employee Labor Relations Act (PELRA), and tenure and seniority protections for teaching staff.

-106- CHAPTER V.

EXECUTIVE SUMMARY

CHAPTER I. MINNESOTA FACES REVENUE SHORTFALLS

During the past two years, Minnesota state government has experienced the worst fiscal crisis in recent history. A series of five revenue shortfalls from August 1980 to November 1982 required state officials to take actions to make up for a total of over $2 billion in state revenue. While many other states experienced similar problems, Minnesota's budget difficulty is considered to be among the worst in the country. Minnesota's fiscal crisis can be traced to four causes: o The slowing of national and state economies, which decreased the revenues of the state's major taxes, increased demand and expenditures for many of the state's human service programs and rendered revenue projections inaccurate. o Expenditure commitments in 1979 and 1980 that resulted in unexpected increases in expenditure growth. These included substantial increases in property tax relief programs, indexing of the individual income tax, other tax relief measures and growth in state aids to schools, counties, cities and other local jurisdictions. State participation in welfare programs also increased. o Over-ambitious indexing of the individual income tax, creating a significantly larger than expected loss in state revenue for the four year period FY 1980 to FY 1983. o Inaccurate forecasting of state revenues because the slowed economic growth, the continued high interest rates and increased unemployment were not fully anticipated. During the 1982 regular legislative session and the special sessions of 1981 and 1982, the state reacted to these revenue shortfalls for the 1981-83 biennium in the following ways: o Cuts in virtually all areas of the state's budget, including health, welfare, transportation, corrections and other state departments. o Substantial reductions in aid to counties, cities, towns and special districts, along with reductions in their property tax relief programs. o Substantial reductions in aid to education, including property tax relief, and acceleration of a trend toward lifting restrictions on local revenue-raising by school districts. o Tax increases, including temporary increases in income and sales taxes.

-107- o Shifts of revenue collections into the current biennium, transfer of expenditures into the next biennium and deferred actions. The legislative actions offset the budget shortfalls by providing more than $1. 1 billion in tax increases, $405 million in expenditure reductions and $756 million in shifts of expenditures and revenues for a combined total of over $2.2 billion. However, $640 million of the tax increases were temporary and will not be available for the 1983-85 biennial budget unless they are made permanent. At least a portion of the expenditure reductions were also temporary and will not automatically continue into the next biennium. Programs and services that bear these temporary reductions are still in effect and must be funded. In addition, further use of revenue and expenditure shifts, which provided a "windfall" resource for the 1981-83 biennium, will be limited for the next legislature because apparently most of the shifts possible have already been made.

CHAPTER II. WEAKENING A DECADE-LONG COMMITMENT TO MINNESOTA'S LOCAL JURISDICTIONS

In adjusting to its fiscal crisis, the state enacted budet reductions, tax changes and intergovernmental policies which undermined the approach to state/local government relations that characterized Minnesota during the past decade. That approach, known natinally as the "Minnesota Miracle," had as its major tenets the following: o An increasingly progressive state revenue system based in large measure on the principle that those best able to carry the tax burden would do so. This meant that corporate, individual income and sales taxes would generate an increasing share of revenues for state government and local jurisdictions and that reliance on local property taxes would be diminished. This was accomplished through continual increases in state revenues and expenditures, including a major spending commitment by the state to provide school and local government aids and property tax relief to local jurisdictions. o An attempt to equalize, through an elaborate set of formulas and local revenue­ raising limitations, local tax burdens, educational opportunities and public services across the state regardless of the fiscal capacities of local jurisdictions. Because of budget reductions at the state level, local jurisdictions now have little choice but to assume substantial additional financial responsibility for the services they provide. Besides increasing local property taxes by an average of 24 percent in 1982, many have reduced services as well. In funding education, the legislature in 1981 and 1982 enacted changes which accelerated a trend, begun during the 1970s, toward increasing local revenue-raising

-108- responsibility and diminishing the state's relative role in funding education. This was accomplished through a combination of spending reductions totaling $185.5 million in various aid programs to school districts, delays of state property tax relief and payments to districts, and shifts of some of next biennium's property-tax revenue into the current biennium. Numerous changes were also made in state limitations on local revenue raising in order to authorize expanded use of property taxes for funding education. The effect of these changes has been to dramatically increase reliance on the local property tax for funding education while decreasing reliance on state support. Between school years 1981-82 and 1982-83, the state's portion of state/local funding for schools dropped from 73.1 percent to 57.2 percent, reflecting reductions in state aid and the revenue shift as well as increased use of revenue-raising authority by districts. In addition, revenues and expenditures per pupil have become less equal in Minnesota school districts since school year 1979-80, primarily because of the increased use of the referendum and discretionary levies by local districts. The result is that high revenue districts now have, on average, lower pupil-staff ratios, higher average salaries and more experienced, highly-educated staff than do lower revenue districts. The legislature, in coping with the state fiscal crisis, also shifted additional revenue-raising responsibility to counties, cities and towns through the following: o Local Government Aid reductions (to counties, cities, towns and special districts) of $46 million. o Homestead Credit Aid payment reductions of $30 million. o Potential further reductions due to a cap placed on total 1982-83 appropriations for aid payments to local governments from the Homestead Credit and other property tax credits. o Reductions associated with cuts to specific state programs administered locally (such as human services) and to certain grant programs. Unlike school districts, counties, cities and towns did not receive expanded authority from the state for local revenue-raising to replace the funds lost through reductions in state aid.

CHAPTER III. A NEW DIRECTION FOR THE FEDERAL GOVERNMENT

During the past two years, while Minnesota and other states struggled with mounting fiscal problems, the Reagan Administration and Congress promulgated actions that directly and indirectly added to the difficulties the states faced. These actions included major reductions in domestic spending, large cuts in corporate and individual income

-109- taxes, deregulation of business and industry and a monetary policy designed to inhibit inflation. Congress also enacted significiant changes in the fiscal regulatory relationships between the federal government and state and local governments. These included consolidation of numerous federal grant-in-aid programs into block grants accompanied in most cases by substantial reductions in funding; easing of federal standards, mandates, regulations and reporting requirements on state and local governments, and budget reductions in other programs administered by state and local governments. These federal actions have affected Minnesota in several ways: o Federal budget reductions, the most significant among all the federal actions, reduced benefits and availability to individual Minnesotans of programs like AFDC, housing assistance and food stamps, and reduced federal funding for grant-in-aid programs provided by Minnesota state and local government. Programs in Minnesota most affected by federal reductions include AFDC, food stamps, social services, employment programs, low income housing assistance, waste water treatment construction, highways, community development (UDAG), and economic and regional development. e Changes in the federal tax laws affected Minnesota tax revenue during the current biennium. Substantial reductions in the federal individual income tax rate increased Minnesotan's taxable income and thereby state revenues by reducing the amount of deductible federal taxes. However, new federal depreciation schedules, to which the state has partially conformed, may have reduced state revenues. o Federal actions to deregulate business and industry through budget reductions and changes in regulations will have short and long-term effects on Minnesota's regulatory efforts. Primary targets for deregulation have been environmental, consumer-protection and worker-safety regulations. Reductions in federal funding to state and local regulatory authorities will affect Minnesota's monitoring, enforcement and research programs, while at the same time those authorities are being asked to assume addiitonal regulatory responsibilities being devolved by the federal government. e Federal monetary policy, which has contributed to maintaining high interest rates, may have a significant impact on Minnesota because the interest-rate-related slack in the construction and automobile industries reduces the demand for timber and taconite produced in northeastern Minnesota. In addition, high interest rates, combined with low farm prices, have led to increased farm foreclosures and low farm income. o The most significant aspect of the consolidation of federal grant-in-aid programs into block grants has been the spending reductions associated with that action.

-110- Reductions have been substantial in several Minnesota block grants. While the block grants hold the potential for significant changes in state administration and fund distribution for these programs, few alterations have yet been made. However, in the case of at least three block grants--Education, Maternal and Child Health, and Preventative Health--the combined effect of the federal government's shift of grants from local jurisdictions to the state and the current implementation plans of the state agencies involved will be to shift funding away from some jurisdictions which had previously achieved above-average success in obtaining funds directly from the federal government. Legislative involvement in implementation of the block grants has thus far been minimal, but that involvement is likely to increase as state agencies seek legislation for state implementation rules and as pressure increases to supplement the reduced federal aid with state funding. o Minnesota's state and local governments, because of the federal attack on "red tape," are now being asked to decide whether they wish to operate federally­ supported programs without many of the mandates, standards, regulations and reporting requirements of the federal government, or replace these with their own requirements. The state and its localities will have to determine which of those federal requirements were unnecessary "red tape" and which were important enough to merit their re-establishment in Minnesota. Some of these requirements may be replaced with ones more specifically designed for Minnesota. Presumably, these determinations will be made through state and local agency rule-making as well as through enactment of policies by elected officials. o The administration's "New Federalism" proposals, if eventually enacted, would dramatically affect Minnesota government. The plan to federalize Medicaid in exchange for the state assuming responsibility for the AFDC and Food Stamp programs would likely change the type and level of those services provided to Minnesotans and could affect state expenditures associated with these programs. Whatever changes occur will depend on the eligibility and service requirements of the federalized Medicaid program and the magnitude of federal reductions in AFDC and food stamp programs prior to the swap. The transfer of numerous federal grant­ in-aid programs to the states, if enacted, would place growing financial and administrative responsibilities on Minnesota as federal involvement is phased out so that by 1991 those programs would be the sole responsibility of Minnesota state and local government.

-111- CHAPTER IV. LOCAL GOVERNMENT RESPONDS

In 1982 Minnesota's schools, counties, cities and other local jurisdictions faced a more difficult fiscal situation than in previous years, largely because of state and federal reductions in funding to those jurisdictions. The most severe pressure resulted from state reductions in school and local government aid, property tax relief and state funding for particular programs adminstered locally. Delays and shifts in state-aid payments also created cash flow problems for some local jurisdictions. Federal reductions affected locally administered programs targeted for particular populations as well as various grant­ in-aid programs. In adjusting to the sudden and unexpected reductions, Minnesota's local jurisdictions cut spending through service and personnel reductions and increased local revenue through increases in property taxes and expanded use of fees and other charges. They also depleted existing fund balances, engaged in short-term borrowing, and deferred maintenance, capital expenditures and new purchases. The ability of local jurisdictions to respond to the new fiscal pressure was related to a number of factors including: o The creativity of local officials and their access to technical and managerial support. o The degree to which local jurisdictions had the resource capacity--particularly the local property tax base--to accommodate the reductions. o The type of local jurisdiction (county, city or school district) and the type of services it provides. o The degree to which policy-making and adminsitrative flexibility exists. Local jurisdictions are subject to constraints associated with state-imposed limitations on local revenue-raising, state and federal mandates, standards, regulations and reporting requirements, court involvement in local program and personnel areas, union contract provisions and worker protections, and the degree to which local budgets are discretionary (not tied to mandated or "essential" services). e The degree of dependence of a local jurisdiction on aid from state and federal government. o The degree to which local officials (and citizens) believe that the current fiscal situation is short-term rather than long-term, and therefore promulgate short-term or temporary measures to cope with immediate fiscal stress rather than long-range policies which assume continuing fiscal constraints.

-112- Counties in Minnesota dropped a significant number of clients from their income maintenance and social service programs in response to changes in eligibility criteria at both the state and federal levels. The human services portion of county budgets seems to be the hardest hit by aid cutbacks. Local revenue was increased by raising the property tax to or near the state-mandated levy limit for human services in almost every county in the state. In fact, a number of counties violated the limits applied to human services. Cities apparently have more flexiblity overall in responding to the state and federal aid reductions since they appear to be less the administrative arm of state and federal government than counties and school districts. Personnel reductions accounted for a large share of the response but these were minimized by a number of creative alternatives for providing services and generating revenue. Cities also increased their user charges wherever possible and will attempt to provide incentives for economic development as one means of expanding the tax base for increased local revenue. Many city officials believe that because of declining state and federal aid, cities will increasingly assume only traditional responsibilities like public safety, streets and parks. The state aid cuts for many school districts resulted in regular classroom staff cuts and other personnel reductions since personnel costs generally make up 80 to 85 percent of a district's budget. The consequences of these reductions are larger class sizes (a number of districts violated state requirements in this regard) and fewer educational programs. To avoid reductions in both staff and programs, some districts were able to "deficit spend," utilizing fund balances that had been built up in previous years. Districts also increased their reliance on local sources of income either through the referendum levy, the discretionary levy or the capital fund shift.

-113- CONCLUSION

NEW FISCAL CONSTRAINTS AND RECENT ST A TE ACTIONS MEAN TOUGH PROBLEMS AHEAD

The first two years of the decade have brought new fiscal constraints on Minnesota government that challenge the way it has operated over the past decade. The major underlying cause of these new fiscal constraints has been the current economic predicament in the state. Minnesota government is affected in several ways: o Most importantly, growth or decline in personal and corporate income strongly affects the level of state revenues generated from the three major taxes--individual income, corporate income and sales taxes. Prior to the current recession, economic growth created automatic increases in revenues, which enabled the state to meet its budget responsibilities including its primary expenditure commitment to local jurisdictions. e Worsening unemployment and poverty increase the demand for, and therefore the total costs of, government programs designed to respond to those problems. These include income maintenance, social services and medical assistance. e The costs of state and local interest payments for capital improvement projects as well as for borrowing to cope with short-term cash flow problems are dependent on the level of the interest rates, which have been high. o The economic situation affects the ability of local units to raise revenues locally without significant increases in property tax delinquency. Even though property tax revenues do not fluctuate widely with economic conditions, the loss of income to property owners during recessionary periods may jeopardize their ability to make property tax payments. This is especially true in areas of the state hard hit by high unemployment or depressed farm prices and income. o The downturn in the economy has led to state and local political climates that generate anxiety among citizens about tax increases in any form while at the same time resulting in increased public demand for government actions and services. These new fiscal constraints have put extreme pressure on Minnesota's state/local government system, which developed and operated successfully during previous periods of economic expansion and state revenue growth. In recent years, however, the "Minnesota Miracle" approach to state/local relations was substantially undermined by a combination of state reductions in school and local government aids and property tax relief as well as expansion of revenue-raising authority for school districts, and by the increased use of that authority by the districts. Beyond the problems associated with the state's revenue shortfalls, additional fiscal constraints have been placed on Minnesota by recent federal actions. Driven in large

-114- measure by philosophical commitments on the part of the Reagan Administration and Congress, the federal government has promulgated a full range of budgetary, tax, regulatory and intergovernmental policies designed to stimulate the economy, reduce growth in federal domestic expenditures and diminish the fiscal and regulatory involvement of the federal government in state and local matters. These policies have contributed to the state's immediate and long-term fiscal problems. Faced with new fiscal constraints and the difficulty of balancing the budget in view of previous state expenditure commitments, the state legislature substantially reduced the growth of state spending even while significantly raising taxes. Yet, despite the importance of the economic situation and widespread concern among analysts and citizens that these problems may exist for some time, there is little evidence that state officials have prepared policy options to deal with those growing problems should the economic situation persist. In fact, the legislature's decision to attach sunset provisions to the income tax surcharge and one percent sales tax increase, transfer some of the next biennium's expected revenue into the current biennium and defer expenditure commitments into the next biennium suggests either an assumption or a hope on its part that economic recovery is imminent. But what if the difficulties of these past two years indicate the emergence of a new period in which economic expansion of the magnitude experienced during the years since World War II is no longer likely? What if the automatic increases in Minnesota tax revenues, which reflected earlier economic prosperity, can no longer be expected? In view of continuing economic and revenue problems and state actions taken during the past two years of fiscal crisis, it is evident that the state's fiscal situation at least in 1983 will probably be no less severe than it was in 1981 and 1982. Governor Perpich and the 1983 legislature will face difficult decisions regarding budget, tax and intergovernmental policies as they develop a state budget for the 1983-85 biennium. Several areas of likely legislative deliberation and action regarding the 1983-85 budget include: o State budgetary and tax policies to respond to continued •state revenue shortfalls should Minnesota's economic situation--particularly unemployment, low farm incomes and high interest rates--continue or worsen. o Decisions regarding the sunset provisions on the state's 10 percent income tax surcharge and the 1¢ increase in the general sales tax and whether the state will begin the transfer of 25 percent of the motor vehicle excise tax revenue to the transportation fund. o Recognition of the impact payment and expenditure shifts will have on the revenue available for the 1983-85 biennial budget.

-115- o State budgetary, tax and other policies which recognize continued reduction in federal aid to the state through various programs. o State expenditure, tax, and other policies associated with state implementation of the already enacted federal block grants as well as block grants and other New Federalism actions which may be enacted by Congress in subsequent years. In coping with the 1983 fiscal situation, state officials will face several larger issues as well. While the revenue and expenditure issues outlined above are of an immediate nature, state officials should examine the overall revenue system of the state and its local jurisdictions. This system not only involves the major taxes paid by Minnesotans--income, sales and property taxes--but also the state aid and property tax relief payments paid to local goverments and individuals by the state. In light of the revenue measures enacted in response to the recent shortfalls and the tax relief measures passed during the 1979 and 1980 legislative sessions, questions have been raised regarding the stability, progressivity and efficiency of this revenue system. Another area for re-examination is the current system of intergovernmental aids and property tax relief, state-imposed limitations on local revenue-raising, and state­ imposed mandates, standards and regulations on local jurisdictions. Given growing pressure for public service reform, the legislature may also wish to develop specific reform strategies as an ongoing part of their formulation of the tax, expenditure and intergovernmental policies associated with state/local relations. Finally, given Minnesota's continuing economic problems and the desire to protect existing economic productivity as well as stimulate new economic activity and jobs, state officials will need to examine a broad range of policies which could improve Minnesota's economy, particularly in the long-term. Such policies, if implemented in the near term, could help buffer the state against potential long-term revenue problems. These larger issues, and alternative policy approaches to them, will be discussed by the authors in a report soon to be released by CURA.

-116- APPENDIX A

DIVISION OF STATE GENERAL FUND APPROPRIATIONS BY EXPENDITURE CATEGORY

1. School Aids Foundation Aids Vocational Education Aid Transportation Aid Non-Public School Aid Special Education Aid

2. Education/Higher Education Department of Education Community College System State University System Mayo Medical School Higher Education Coordinating University of Minnesota Board

3. Health, Welfare and Corrections Department of Public Welfare Department of Health Department of Economic Security Various Medical Baords Department of Corrections

4. Tr ans po rt a tion/ Semi-State Department of Transportation Public Utilities Board Department of Public Safety Department of Public Service Department of Commerce Historical Society Various State Boards such as Electricity, Cosmetology, Boxing, Watchmakers

5. State Departments Legislature Departments of Administration, Finance Courts Employee Relations, Revenue, Agriculture, Governors Office Natural Resources, Energy, Planning and Pollution Control Agencies Development, Veterans, Military Affairs and others.

6. Debt Service Interest costs and payment on balances of long-term- state borrowing.

-117- 7. Interest on Short-Term Financing Interest costs of short-term borrowing during the present biennium for cash flow problems.

8. Retirement Contributions Contributions to retirement plans of state employees and teachers.

9. Aids and Credits Property Tax Refund Local Government Aid Low Income Credit Homestead Credit Agricultural Credit Wetlands and Native Prairie Credit Senior Citizen and Renters Credit Disability Credit

10. Other Expenditure Categories

A. Salary Supplement, COLA and Insurance

Salary increases, cost of living adjustments (COLA) and insurance increases for state employees.

B. Mining Apportionment

Property tax relief and payments to those local government units who are in eligible regions of the state.

C. Transfers/Open and Standing

Represents payments or transfers to funds with specific purposes such as campaign financing, taconite environment production fund, and IRRRB.

D. Appropriations Carried Forward

Balances carried forward from one fiscal year to another.

-118- APPENDIX B

SUMMARY OF CHANGES IN THE TAX LAW BY THE 1981 TAX ACT

Tax Category Tax Changes

Individual income taxes o individual tax rate cut o indexing of individual income taxes o marriage penalty o child care credit o charitable contributions o capital gains o unearned income tax rate cut o tax exemptions on foreign income

Business tax cuts o accelerated depreciation tax (ACRS) o corporate tax rates on small businesses o research and development tax credit o rehabilitation of older buildings tax credit o target job tax credit o accumulated earnings tax o trucking firm tax deductions

Energy related taxes o royalty tax credit change o stripper oil tax exemption

Savings incentives o tax free All Savers Certificates o individual retirement accounts o Keogh Accounts o interest exclusion

Estate and gift taxes o maximum estate size o pass-between-spouse exemption o annual gift exclusion e estate and gift tax rate reduced o estate valuation difference changed

Other tax changes • commodity tax straddles • railroad employee contributions to retirement fund increase o tax payment schedule change for large corporations o state legislator's per diem deduction

-119- APPENDIX C

REAGAN ADMINISTRATION EFFORTS TO EASE REGULATION ON BUSINESS AND INDUSTRY

A SAMPLING OF AGENCY ACTIONS AND PROPOSALS:

• The Federal Trade Commission (FTC) dropped its proposal to ban television advertising aimed specifically at children; the FTC may drop its eight-year-old antitrust case against the three largest United States ready-to-eat cereal manufacturers and is considering revision or elimination of the requirement that companies substantiate all statements they make about their products in advertisements. (Caroline E. Mayer, "Federal Agencies Sheathe Swords," The Minneapolis Star, November 3, 1981, pp. lD, 2D, 4-D.) o The Consumer Products Safety Commission has urged Congress to abolish the agency. The agency dropped many investigations, including those looking into firehazards of electric clothes dryers, electric light fixtures and kerosene lamps; it delayed a final decision on a proposed rule to ban home insulation made with formaldehyde, rejected a mandatory standard for children's projectile toys, and refused to require special labeling on children's thermal underwear that does not comply with the agency's flammability standards for children's sleepwear. (Ibid.)

• The United States Department of Agriculture (USDA) has indicated plans to make major changes in meat inspection procedures as well as change beef-grading standards that would allow beef now marked "good" to be graded "choice," proposed new standards for school lunches to reduce minimum requirements, decided to review its long-time system of marketing orders through which USDA determines the amount of fruit and vegetables that may be shipped at a particular growing time and indicated that it wants revision of the law banning the use of any food additive that has been found to cause cancer in animals. (Ibid.)

• The Food and Drug Administration (FDA) has begun an overall review of its drug­ approval process with an eye toward its streamlining to encourage drug development; the agency halted consideration of labeling requirements improving the indication of the contents of food, ordered review of FDA's nonprescription drug evaluation and is considering a major Congressional effort to rewrite United States food safety laws. (Ibid.)

-120- o The National Highway Traffic Safety Administration (NHTSA) has repealed the requirement that cars be equipped with airbags or automatic seatbelts and scheduled for review a number of other rules which may be modified ·or eliminated, including the fuel economy standards for post-1985 cars and a new bumper design standard. (Ibid.) o The Occupational Safety and Health Administration (OSHA) has exempted three­ fourths of United States manufacturing concerns from routine inspections, proposed restriction on surprise workplace inspections made in response to employee complaints and is generally substituting voluntary industry compliance where possible. (Joann S. Lublin, "New OSHA Chief Tries to Please Business and Labor, but Cutbacks Rile Unions," Wall Street Journal, November 23, 1981, p. 25). o The Department of Health and Human Services (HHS) wants to relax or repeal many of the rules governing nursing home services, the rights of patients and the qualifications of the staff at long-term care facilities. (Robert Pear, "Reagan Officials Seek to Ease Rules on Nursing Homes," New York Times, December 20, 1981, pp. 1 and 20.)

o The Environmental Protection Agency (EPA) has begun review of some 400 rules stemming from 12 environmental statutes and seeks statutory changes in the Clean Air Act; the EPA also initiated review of the consolidated permit regulation with an eye toward simplifying the process, changed air pollution regulations estimated to save industry $1 billion dollars in 1982 by avoiding installation of pollution control equiment, reduced agency lawsuits to crack down on industries dumping pollutants that were designed to force cleanup of hazardous waste sites (a drop from 43 such suits in 1980 to 7 in 1981) and relaxed restrictions on ocean disposal of municipal waste, sludge and low-level radioactive wastes. (Lawrence Mosher, "Reagan's Environmental Federalism--Are the States up to the Challenge?" National Journal, January 30, 1982, pp. 184-188; "Cleanup is 'Killed,' Pair Claim," St. Paul Pioneer Press/Dispatch, April 3, 1982, p. 16A; "Major Rules Change Eases Air Standards," St. Paul Pioneer Press/Dispatch, April 3, 1982, p. 16A; Lawrence Mosher, "Reaganites, With OMB's List in Hand, Take Dead Aim at EPA's Regulations," National Journal, February 14, 1982, pp. 256-259).

-121- • The Department of Interior has proposed a five-year oil and natural gas leasing schedule for the outer continental shelf (20 times faster than the current leasing rate), expanded from 3 million to 160 million acres the geographic scope of environmental impact statements for outer continental shelf leasing (apparently to limit the efficacy of such statements), proposed new rules to allow motorboats continued operation on the Grand Canyon's Colorado River and is considering allowance of airboats in part of Everglades National Park and snowmobiles in four California national parks, proposed new management rules easing restrictions on Bureau of Land Management grasslands, shifted responsibility for regulating oil and gas exploration from the Fish and Wildlife Service to the United States Geological Survey and is seeking to increase the role of private concessions in the national parks by recommending waiver of their franchise under certain conditions and by lengthening the terms of their contracts. (Reagan shifts U.S. Policies on Public Land Management," Congressional Quarterly, October 3, 1981, pp. 1,899-1,904.)

-122- APPENDIX D

THE ADMINISTRATION'S 1982 BLOCK GRANT PROPOSAL (FEDERAL FISCAL YEAR 1983 BUDGET)*

Child Welfare Block Grant would include child welfare services, child welfare training, and foster care and adoption assistance.

FUNDING: FFY 82 - $465 million FFY 83 - $380 million (proposed)

Rental Rehabilitation Grant would replace Section 8 moderate rehabilitation program and Section 312 rehabilitation loans.

FUNDING: FFY 82 - $11.65 billion FFY 83 - $.15 billion (proposed)

Training and Employment would replace grants to state and local governments through CET A--due to expire September 30, 1982--with a block grant to states.

FUNDING: FFY 82 - $2.2 billion FFY 83 - $1~8 billion (proposed)

Combined Welfare Administration Grant would combine grants for state administration of Medicaid, AFDC, and Food Stamps into a single payment with no state match required.

FUNDING: Proposed FFY 83 - 95 percent of the FFY 82 federal share (states would also assume the costs of errors above 4 percent in their administration of AFDC and Medicaid, now the responsibility of the federal government).

Vocational and Adult Education would combine a number of small grants into a grant to the states.

FUNDING: FFY 82 - $634 million FFY 83 - $500 million (proposed)

Education for the Handicapped would combine 13 grants, consolidating the Education for All Handicapped Children Act and handicapped educational services under Title I of the Education Consolidation Program and transferring rehabilitation services and handicapped research to the Department of Health and Human Services--all into a grant to the states.

FUNDING: FFY 82 - $1.74 billion FFY 83 - $1.56 billion (proposed)

Rehabilitation Services would combine basic state grants with several project grant authorities.

*SOURCES: 0MB, Major Themes and Additional Budget Details, FY 83, Jan. 1982, pp. 17, 18; Center for Community Change, FY 83 Block Grant Proposals Set Stage for "Turnback" of 43 Programs to States in FY 84, Monitor, March 1982, pp. 13, 14.

-123- OTHER CHANGES:

Health Block Grant The Women, Infants, and Children (WIC) Nutrition Program would be added to the existing Maternal and Child Health Block Grant.

FUNDING: FFY 82 - $1.3 billion FFY 83 - $1.0 billion (proposed)

Primary Care Block Grant would add Black Lung Assistance, migrant health centers and family planning aid programs to the Primary Care Block Grant.

Low Income Energy and Emergency Assistance would consolidate the two programs.

FUNDING: Proposed reduction to $1.3 billion in FY 83, less than the current funding for energy assistance alone.

-124- APPENDIX E

SIXTY-ONE TURNBACK PROGRAMS

The Reagan Administration has proposed a phase-out of the following federal grant programs. This includes several which have been proposed for consolidation into block grants in FFY 1983. (Administration statements that only 44 programs would be involved in the FFY 1984 takeover reflect the intention to consolidate.)*

PROGRAM AREA PROGRAM AREA Social Services: Transportation: Child nutrition program (4)* Airport grants Child welfare grant (4) Primary highways Runaway youth and child abuse (2) Rural highways Social services Urban highways Community services Bridges Prevention Highway construction safety Alcohol, drug abuse, mental health Other federal aid highways Primary care block expansion (4) Interstate transfers--highways Maternal, child health block Appalachian highways expansion (2) Mass transit (construction) Mass transit (operations) Education and Training: Highway safety Vocational rehabilitation block grant (5) Revenue Sharing: Vocational and adult education General revenue sharing block grant (8) OSHA state grants Education block grant EPA state grants Training & employment block grant (4) Low income energy aid (2)

Community Development: Water and sewer grants Water and sewer loans Community facility loans Community development block grant Urban development action grant Wastewater treatment TOTAL: 61

SOURCE: Rochelle L. Stanfield, "'Turning Back' 61 Programs: A Radical Shift of Power," National Journal, February 27, 1982, p. 371.

*Numbers following listings indicate the number of programs to be consolidated if more than one program is involved.

-125- APPENDIX F PARTICIPANTS IN WORKSHOPS AND OUTSTATE INTERVIEWS

URBAN COUNTIES WORKSHOP -- February 3, 1982

Anoka County Wayne Johnson, Chief Deputy Auditor; Tim Yantos, Administrative Assistant

Dakota County Jerry Krueger, Economic Assistance Director; Joe Schur, Director of Planning, Human Services

Hennepin County Commissioner Jeff Spartz, Board of Commissioners; Dale Ackmann, Administrator

Ramsey County Commissioner Robert Orth, Chairman, Board of Commissioners; Carrie Wasley, Administrative Assistant to Board of Commissioners

Association of Minnesota Counties James Shipman, Director; Beverly Driscoll, Legislative Affairs Staff

NON-PROFIT ORGANIZATIONS WORKSHOP -- February 24, 1982

Branch II Dave Schultz, Director

Catholic Charities Eustolio Benavides, Coordinator of Social Services to Hispanics

Common Space Charlie Warner, Director

Greater Minneapolis Council of Churches Tom Quigley, Director

Inner Urban Catholic Coalition Paul Marincel, Director

Metropolitan Community Health Consortium K.C. Spensley, Executive Director

Metropolitan Senior Federation Jim Zentner, Associate Director

-126- Minneapolis United Way Byron Laher, Government Relations Director

Minnesota COACT John Musick, Director

Northwest Hennepin Human Services Council Lisa Cohen, Planner

Working Opportunities for Women Yvette Oldendorf, Executive Director

METROPOLITAN AREA CITIES WORKSHOP -- March 3, 1982

City of Minneapolis Mayor Donald M. Fraser; Ed Dirkswager, Deputy Mayor

City of Mound Mayor Rock Lindlan; John Elam, City Manager

City of Roseville Mayor June Demos; John F. Andre, City Manager

City of St. Paul Jerry Stein, Administrative Aid for Policy, Mayor's Office

Metropolitan Council Charles Weaver, Chairman; Eugene Franchett, Executive Director

League of Minnesota Cities Don Slater, Executive Director

OUTSTATE CITIES WORKSHOP -- March 10, 1982

City of Fergus Falls Mayor Kelly Ferber; Jim Nitchals, City Administrator

City of Olivia Mayor Mary Page; Christine Gilchrist, Manager, Olivia Chamber of Commerce

City of Red Wing Mayor Ed Powderly; Dean Massett, Council Administrator

City of Virginia Mayor Jalmer T. Johnson; Norma Nekich, City Clerk; Greta Ocklind, Treasurer

-127- METROPOLITAN AREA SCHOOL DISTRICTS WORKSHOP -- March 31, 1982

Anoka-Hennepin School District # 11 Chairman Larry Johnson, School Board; Lewis Finch, Superintendent

Buffalo School District # 87 Chairwoman Idella Ziegler, School Board; Darrell Miller, Superintendent

Hastings School District II 200 Chairman Tom Schaffer, School Board; Kenneth LaCroix, Superintendent

Hopkins School District #270 Chairman George Holthus, School Board; Arthur Bruning, Superintendent

Minneapolis Public Schools Joy Davis, School Board; Lyle Baker, Coordinator, Federal Project Staff; Larry Harris, Coordinator, Legislative and Community Affairs

St. Paul Public Schools James Phillips, Assistant Superintendent

Minnesota Association of School Administrators Norman Maguire, Executive Director

Minnesota School Boards Association W.A. Wettergren, Executive Secretary

BUSINESS, INDUSTRY AND FOUNDATIONS WORKSHOP -- April 21, 1982

City Venture Corporation George Bardos, President; James Harrington, Vice President

First Bank Minneapolis James Hetland, Vice President

First Bank St. Paul Robert Van Hoef, Vice President for Community Development

General Mills Foundation James Shannon, Vice President and Executive Director

Minneapolis Chamber of Commerce Joe Stipanovich, Manager of Research

Minneapolis Foundation Thomas Beech, Executive Director

Minnesota Business Partnership John Cairns, Executive Director; Pam Berkwitz, Deputy Director

Minnesota Council on Foundations Jacqueline Reis, Executive Director

-128- St. Paul Chamber of Commerce Amos Martin, Executive Director; William Schilling, Governmental Action Manager

St. Paul Foundation David Ziegenhagen, Senior Program Officer

ST ATE GOVERNMENT WORKSHOP -- May 5, 1982

Minnesota Senate Senator Roger Moe, Majority Leader; Gary Bastian, Administrative Assistant, Senate Minority; Victor Moore, Assistant to Senate Majority Leader

Minnesota House of Representatives Rep. David Jennings, Minority Leader; Rep. Willis Eken, Majority Leader; Bette Anderson, Director, IR Caucus Research; Anndrea Benson, Assistant to Majority Leader; John Redmond, Director, DFL Caucus Research

Governor's Office Robert Renner, Administrative Aide

Department of Education Barry Sullivan, Legislative Relations Specialist

Department of Energy, Planning and Development Kent Eklund, Commissioner

Department of Finance Peggy Kenney, Assistant to the Commissioner

Department of Revenue Clyde Allen, Commissioner

COUNTY AND CITY OUTSTATE TRIP - FEBRUARY 16-19, 1982

Aitkin County Commissioner John Karelis, Board of Commissioners; Commissioner Michael Zilver­ berg, Board of Commissioners; Franklin Draper, Auditor; Robert Farrell, Welfare Director

Blue Earth County Commissioner David Stevens, Chairman, Board of Commissioners; Patrick McDonnell, Central Services Coordinator

Kandiyohi County Al Hoogeveen, Audi tor

Martin County Commissioner Phil Theobald, Chairman, Board of Commissioners; Robert Katzen­ berger, Auditor; Duane Shimpach, Human Services Director; Robert Witty, County Engineer

-129- St. Louis County Commissioner Gary Doty, Chairman, Board of Directors; Commissioner Bill Kron, Board of Commissioners; Roger Elverhoy, Business Manager; Russell Petersen, Auditor; Miles Wagensteen, Social Services Director; Bob Zelezniker, Deputy Social Services Director

City of Aitkin Mayor Carol Norris; Jerry Boldt, City Manager

City of Duluth Mayor John Fedo

City of Hibbing Mayor James Collins; Harry Jherardi, Deputy Clerk

City of Sleepy Eye Mayor Harry Hornbrook; Edwin Treml, Clerk

City of Willmar Councilwoman Irma Peterson

SCHOOL DISTRICT OUTSTATE TRIP -- April 13-16, 1982

Aitkin School District /11 Patrick DeSutter, Superintendent; Robert Sarff, Elementary Principal

Albert Lea School District /1241 Curtis McCamy, Superintendent; Ray Henderson, Director of Education; Marge Lukehart, Title I Director

Cold Spring School District 117 50 William J. Virant, Superintendent; J. Nick Demuth, Elementary Director; Bill Goede, Community Education Director; Gary Haberman, Elementary Principal; Jim Hieminz, Special Education Director; James Johnson, High School Principal; Robert Martinson, Jr., High School Principal; Tom Wester ham, Elementary Principal

Marshall School District 11413 Dick O'Connell, School Board; Jerald Huber, Superintendent

Mora School District 11332 Pius Lacher, Superintendent

Rochester School District fl 535 Al De Boer, School Board; Harry Vakos, Superintendent; George Snyder, Director of Elementary Education

Rushford School District 11234 Dennis Rislove, Superintendent

Worthington School District 11518 Shirley Held, Superintendent; Dale Jenson, Assistant Superintendent

-130- UNIVERSITY FACULTY PARTICIPANTS

University of Minnesota John Adams, Department of Geography; John Brandl, Humphrey Institute of Public Affairs; Thomas Dewar, Humphrey Institute of Public Affairs; Edward M. Foster, School of Management; Joe Galaskiewicz, Department of Sociology; Diane Hedin, Center for Youth Development; Jim Jernberg, Humphrey Institute of Public Affairs; Ted Kolderie, Humphrey Institute of Public Affairs; Ira Moscovice, Center for Health Services Research; Art Naftalin, Humphrey Institute of Public Affairs; Glenn Nelson, Agriculture & Applied Economics; Gordon Rose, Community Development, Natural Resources and Public Policy Education; Esther Wattenberg, School of Social Work; David Zerbe, Lab Medicine & Pathology

Other John Harrigan, Department of Political Science, Ham line University

CURA STAFF PARTICIPANTS

Thomas Anding, Penelope Burke, Tom Peek, Thomas Scott, Fred Smith, Doug Wilson

-131-

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