Tuesday, November 17, 2009

Budgets, Unallotment and Litigation--What is a city to do?
By Gary Carlson, Intergovernmental Relations Director, League of Minnesota Cities
At last week’s hearing of the Legislative Commission on Planning and Fiscal Policy Subcommittee on a Balanced Budget, Management and Budget Commissioner Tom Hanson strongly suggested that the state would face an additional deficit announced with the release of the state budget forecast on December 2. Although he didn’t indicate whether additional unallotment reductions will be likely, the state’s precarious fiscal condition should be of great concern to city officials as they plan their budgets for 2010 and beyond.

The likelihood of an additional December unallotment of 2009 LGA and MVHC or additional legislative cuts to 2010 LGA and MVHC would probably increase with the size of the announced state deficit. Given that the state budget does not technically need to be balanced until the end of the current biennium on June 30, 2011, the Governor could certainly wait until the Legislature convenes in February and allow them to take the necessary actions.

However, the state is facing an uncertain cash flow challenge that could require the state to borrow money on a short-term basis---unless action is taken by the Governor or Legislature to reschedule or reduce existing state appropriations.

Another wild card is the pending legal challenge to the Governor’s $2.7 billion unallotment that was filed on October 29. That legal challenge is focused, in part, on the Governor’s authority to rewrite the formula for the renters refund program and another, small nutrition program. However, the complaint also challenges a basic premise upon which the unallotments were based. The unallotment statute requires that “probable receipts for the general fund will be less than anticipated.” The complaint suggests that the state budget deficit was known long before the 2009 legislative session and as a result, unallotment authority was improperly used by the Governor to balance the state’s projected deficit.

If the judge ultimately rules in favor of the plaintiff on this larger, foundational issue of whether the deficit was “unanticipated,” it is possible that the Governor’s entire $2.7 billion unallotment could be invalid. In other words, 2009 LGA and MVHC cuts could conceivably be restored and the 2010 unallotments would also be restored—at least temporarily.

This outcome would leave the state with an immense deficit that the legislature would have to quickly address. Under this scenario, the Governor could call an immediate special session, or he could simply wait and let the Legislature solve the budget deficit when they reconvene next February. Based on the events of the 2009 session and the budget proposals developed by each body, that exercise could be contentious and any solution would likely involve broad cuts in state appropriations, including LGA and MVHC.

In summary, city officials should watch carefully as the state budget forecast is announced in December. In addition, the pending litigation surrounding the Governor’s use of unallotment to balance the state deficit could have a significant bearing on the state as well as city budgets.