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.