Judge decision on unallotment challenge may bring more fiscal uncertainty for cities

By Gary Carlson 

Ramsey County District Court Judge Kathleen Gearin issued an order on Dec. 30 that will prevent the Minnesota Department of Management and Budget (MMB) from unalloting funding for the Minnesota Supplemental Aid Special Diet Program. The statewide program provides cash assistance to elderly and disabled Minnesota residents who have certain medically prescribed diets.  

The temporary restraining order was requested by the plaintiffs last fall in the original challenge to Gov. Pawlenty’s use of unallotment to reduce the nutrition program and the renter’s refund program. Although the decision only directly impacts the Special Diet program, the rationale expressed by Judge Gearin suggests that the entirety of Pawlenty’s 2009 and 2010 unallotments could be overturned.

The governor announced that he would appeal the decision on the temporary restraining order. Another hearing on the underlying case is scheduled for March 1—after the 2010 session begins and at about the same time as the release of the semi-annual state budget forecast.

The meaning for cities
For cities, the decision potentially creates more fiscal uncertainty for 2010 and beyond. The decision clouds the second phase of the governor’s $2.7 billion unallotment plan. Last June Pawlenty announced a package of budget-balancing expenditure reductions that totaled $2.7 billion. However, only $2.2 billion of the unallotments were actually effectuated at that time. The balance, or approximately $500 million in cuts, was scheduled to be announced this month. This second phase of the unallotment plan includes $128 million in cuts to city local government aid (LGA) and market value homestead credits (MVHC) scheduled for payment in 2010. At this time, it is not clear if the decision will have any bearing on the second phase of the unallotment plan.

In late December, cities across the state finalized their 2010 budgets under the assumption that 2010 LGA and MVHC appropriations would be reduced by $128 million. Judge Gearin’s decision makes it possible that an additional legal challenge might restore the $128 million in 2010 unallotments and possibly even the $64 million in 2009 unallotment reductions. However, given the broader state budget problems, a restoration might only increase the uncertainty for city budgets in 2010 and could leave cities susceptible to even greater cuts.

In early December, MMB released the state budget forecast, which projected an additional state budget deficit of $1.2 billion for the current 2010-2011 biennium. The restoration of any portion of the previous unallotments would add to the state’s deficit. If the entire $2.7 billion unallotment were overturned and added to the recent $1.2 billion forecasted deficit, the governor and Legislature would have to address a $3.9 billion problem.

Perhaps more importantly, the December budget forecast gives the governor a new, “unanticipated” deficit and therefore, even if unallotments are overturned by the courts, the governor would likely have new independent authority to unallot up to $1.2 billion based on the December forecast. In the Gearin order, she states that “this order does not prohibit either the governor or the Legislature from the exercise of their legitimate constitutional power in light of the current budget issues facing the state of Minnesota.” In fact, the judge stated that the unallotment statute itself “is constitutional” and that it is only “the specific manner in which the governor exercised his unallotment authority that trod upon the constitutional power of the Legislature.”

Last session ended in a budget stalemate between the governor and the Legislature over the best strategy to balance the budget. The final component of the Legislature’s budget included a tax bill that would have raised roughly $1 billion in additional tax revenues over the biennium. Gov. Pawlenty opposed the tax increase and vetoed that bill. At this time, there is no indication that either party has changed its position on balancing the state’s budget and with a deficit that could potentially reach $3.9 billion, it seems almost certain that every sector of the state budget would be subject to appropriation reductions—including city LGA and MVHC.

Gearin’s reasoning
In reaching her conclusion on the temporary restraining order, Judge Gearin found that the requisite statutory conditions for using unallotment did not exist because the $2.7 billion deficit that remained after the 2009 session ended was “neither unknown nor unanticipated when the appropriation bills became law.”

Judge Gearin also cited the fact that the governor signed appropriations bills, “which taken together, he knew would not balance the budget unless revenues were raised.” She went on to state that “the authority of the governor to unallot is an authority intended to save the state in times of previously unforeseen budget crisis, it is not meant to be used as a weapon by the executive branch to break a stalemate in budget negotiations with the Legislature or to rewrite the appropriations bill.”

Minnesota Statutes, section 16A.152 states that “If the [MMB] commissioner determines that probable receipts for the general fund will be less than anticipated, and that the amount available for the remainder of the biennium will be less than needed, the commissioner shall, with the approval of the governor, and after consulting the Legislative Advisory Commission, reduce the amount in the budget reserve account as needed to balance expenditures with revenue.” After the reserve is depleted, the statute allows for the unallotment of appropriations. 

Gearin stresses in her opinion that the decision made by the Court has nothing to do with the merit or lack of merit of the individual programs that lost funds in the governor’s unallotment, but that the Court’s decision is based on the way he unalloted. According to Gearin, “Those budget and policy decisions are not the business of the courts unless they are made in a way that violates the constitution.”

LMC Board actions
In the wake of the governor’s initial unallotment announcement last summer, the League of Minnesota Cities (LMC) Board of Directors discussed at length whether to bring a suit challenging the governor’s action, and decided not to pursue litigation. In reaching its decision, Board members speculated about whether an invalidation of the 2009 aid cuts might translate into even more massive 2010 cuts as the Legislature and governor try to balance the budget with less time and fewer alternatives.

Last fall the Board discussed whether to seek permission to intervene in the most recent lawsuit. The Board decided to wait and see how Judge Gearin ruled and make a decision on whether to participate if and when the matter is appealed.

In light of Judge Gearin’s decision on the temporary restraining order and the broad-based nature of her decision, the League Board will discuss the matter at its Jan. 21 meeting and make a decision on how to proceed in the best interest of member cities.

For more information, contact Gary Carlson, LMC, at gcarlson@lmc.org or (651) 281-1255.

Editor:
Claudia Hoffacker