Senate Majority Research Update:

March 15, 2013

Governor Dayton Supplemental 2014-2015 Budget

Total 2014-2015 budget: $37939 billion Change from January: $47 million increase Total new revenue: $1.8 billion $298,000 less than January ($2.139 billion)

Cost savings and reductions: $1.115 billion in savings (2014-2015) $225 million of reductions and reallocations in the proposed budget $890 million in cost inflation absorbed by state agencies Gov. Daytons office also counts $2 billion in cuts from 2012-2013

School shift: Repaid as under current law (surpluses) Januarys budget proposed active repayment of the shift beginning in 2016. Bonding: Includes debt service on a $750,000 bonding bill

TAXES Major changes

$1.8 billion raised through income, corporate and tobacco tax changes ($298,000 less than January)

Whats eliminated: All sales tax broadening except the Amazon tax eliminated Sales tax rate reduction from 6.85% to 5.5% eliminated $500 property tax rebate to all homeowners eliminated Two-year statewide business property tax freeze and rate reduction eliminated Corporate tax rate reduction from 9.8% to 8.4% eliminated Upfront sales tax exemption on capital equipment (2016) eliminated Whats new: Federal conformity o Spends $15.6 million to conform to additional federal tax changes, including the higher phase-out for Working Family Credit for married-joint returns

Renters Property Tax Refund o Spends $18.4 million to increase the maximum refund, improve benefits for seniors/disabled renters, and other changes. Minimum fee brackets and tax amounts are indexed for inflation since 1990 o Spends $18.7 million to update these brackets, which S-Corps, C-Corps and partnerships annually pay based on the sum of property, payroll and sales in Minnesota.

Whats maintained: Income tax: $1.118 billion raised o 4th tier proposal remains the same as January; the revenue raised increases slightly due to underlying changes in the February Forecast o Proposal: 4th income tax tier on top 2% of earners rate of 9.85% (2% increase from current law). Begins Tax Year 2014. Married-joint: $250,000 taxable income (about $306,000 gross income) Head of household: $200,000 taxable income Single filers: $150,000 taxable income o This would affect about 56,000 Minnesotans with an average income of $617,000 o Regarding small businesses, 6% of small businesses would pay higher taxes under the 9.85% rate. o The 'Snowbird tax' raises $60 million and is left intact: It requires anyone living in Minnesota for more than 60 days/year to pay a prorated portion of their income taxes in Minnesota. Under current law only those who live in Minnesota for more than six months of the year must pay state income taxes. Sales tax: Amazon tax remains; all other sales tax items eliminated o Affiliate nexus definitions (Amazon tax) are changed to require Minnesota sales taxes be applied to online sales - raises $10.3 million Property tax: LGA/CPA increase maintained; $500 Rebate eliminated o The $120 million increase in Local Government Aid and County Program Aid is maintained: $80 million in LGA and $40 million in CPA The Renters Refund increase is new, at a cost of $18.4 million It does not increase the percentage but, instead puts more funding into the current program to increase the maximum refund, increase income subtractions for seniors/disabled and qualifying dependents, etc. Would increase refunds by an average of $57 for about 93% of 334,000 renters Corporate taxes: $297.6 million raised: Reforms maintained; rate reduction gone o Modest reduction in revenue raised due to underlying forecast changes o Efforts to close corporate tax loopholes unchanged; rate reduction eliminated Repeal Foreign Operating Corporation loopholes

Repeal Foreign Royalty Subtractions Conform to federal treatment of P Real Estate Investment Trust (REIT) deductions allowed

Tobacco taxes: $316.9 million raised proposals unchanged o Proposal remains the same; revenue slightly reduced due to underlying February Forecast changes Cigarette excise tax increased from $0.48/pack to $1.42/pack, an increase of $0.94. The total tax on a pack of cigarettes in Minnesota (excise taxes and Health Impact Fee) would increase from $1.23 to $2.17/pack. The 35% tobacco products excise tax will increase 20%, to a total of 55% of the wholesale price.

KEY INVESTMENTS major changes:

Judiciary Budget No change listed to the Dept. of Corrections, the courts, or the Attorney General found in the supplemental budget. Overall, new items include:

ARMER: o The ARMER system was intended to be funded in the January report, but it was omitted by mistake. $1.6 million cost for the FY14-15 biennium, and $2 million in cost for the FY16-17 biennium. BCA: o Increased Funding: Leverage existing criminal justice data information systems and improve information sharing and analysis among law enforcement agencies. This is a $3.5 million cost in the FY14-15 biennium, and a $1.1 million cost in the FY16-17 biennium. Crime Victim Assistance grant program: o $3 million each biennium to restore FY10-11 reductions to the. Uniform Law Commission: o One-time funding of $63,000 to pay back dues accrued from 2004-2012 and an ongoing increase of $70,000 each biennium to pull pay anticipated costs for dues and annual conference expenses. Commerce Budget No changes. E-12 EDUCATION Major changes
$15.5 billion in General Fund spending on E-12 for FY14-15 biennium (increase of $8.6 million from Gov. Daytons January budget and $355 million more than February forecast)

Whats increased: Optional all-day kindergarten o Spends $48.1 million on all-day kindergarten ($8.1 million increase from Gov. Daytons January budget) Special Education funding o Spends $127.2 million on special education ($2.7 million increase from January) Teacher Growth and Evaluation o $10.2 million ($200,000 increase from January) English Language Learners revision o $14.5 million to increase classroom instruction eligibility from 5 to 7 years ($5.7 million increase from January)

Whats reduced: Basic Formula simplification and investment o Spends $113 million on basic education formula ($5.4 million decrease)

Whats eliminated: Buyback of education shift is eliminated o January budget included FY16-17 buyback which would have cost $1.25 billion

Whats maintained: Early education scholarships (MinneMinds) o Spends $44 million for income-eligible students Regional Centers of Excellence o Spends $4.5 million to create up to 6 more centers

Environment and Natural Resources: Whats new: Forestry investments o An additional $4 million each biennium to address the backlog in forest management activities and to invest in the health and productivity of forests. Water use monitoring/fees o A new water use monitoring program is initiated for $8.86 million/biennium. o A new fee on large consumers of water will cover most of the costs of this new program. Silica Sand Mining Technical Assistance Team

o $3.4 million a year is invested in technical assistance to local units of government related to silica sand mining. o Revenue is raised from new fees imposed on silica sand extraction and processing. $1.9 million a year (of the $3.4 million) supports an interagency team (Environmental Quality Board as well as Departments of Pollution Control, Natural Resources, Transportation, Health, and Revenue) that will provide technical assistance. $1.5 million a year is paid to local units of government in which extraction and washing of silica sand takes place. Campaign Finance Total budget: $2 million New spending: $622,000 The Governor amended his original proposal by eliminating the fees and instead uses $622,000 from the General Fund. The board was hesitant to use fees because it may lead to litigation and this is in response to their concerns. This additional revenue will be used for technology upgrades and investigations.

Department of Agriculture No change

Transportation -- Major Changes TOTAL: $154.434 million to $157.434 million, an increase of $3 million Cuts: Metro Transit: An additional $46.8 million in cuts, to be offset by an additional tax increase. Change from January: This is an addition $46.8 million cut to transportation, but this would be offset by an addition quarter of a cent increase in metro sales tax revenue. State Airport Fund Revenue/Expenditure Alignment: This was revised to a $1.3 million reduction because of forecast changes. Change from January: This is a $300,000 increase in the reduction amount, from the original reduction of $1 million. Increases:

State Road Construction Infrastructure Investments: The supplemental budget increased this by $95,000 because of forecast changes. Change from January: The original allocation was $263 million. Capitol Security: The supplemental budget increased the budget amount to $3 million over the coming biennium. Change from January: This is a $2 million dollar increase. New items: Veterans License Plates: The department accidently omitted revenue from veterans license plates. They are estimating $750,000 to be transferred to Veterans Affairs. Page & Hill Superfund Site: $1 million. Governor recommends one-time general fund expenditure to clean up 15 acres of abandoned railroad property. Higher Education -- Major Changes TOTAL: $2,815,626,000 increased to $2,827,961, an increase of $12.335 million University of Minnesota: $80 million change from January The Governors January budget granted the U of M $80 million but connected that funding to a spans and layers analysis of administrative costs. The Higher Education Committee heard from President Kaler about the completed report on March 12. The U of M noted some areas where efficiency could be improved and said it would work toward that end. $42.6 million to freeze tuition for two academic years. o This would allow the U of M to hold the line on rising tuition, but also maintain investments on all campuses. $36 million to the MnDRIVE program. This program invests in research and development in emerging fields like: robotics, sensors, and advanced manufacturing, securing the global food supply, advancing industry, conserving our environment; and advancing discoveries and treatments for brain conditions. $1.4 million in loan forgiveness for healthcare professionals who choose to work in underserved areas.

Office of Higher Education: $12.35 million change from January Increased this allocation from the original $3.2 million after it was discovered there was going to be a much higher reciprocity deficit with North Dakota. Would increasethe original amount by $5.96 million in FY 2014 and $6.37 in FY2015, for a total of $15.535 million.

HEALTH AND HUMAN SERVICES General Fund Total budget: $11.17 billion Change over January budget: +$210 million New Spending/Savings in the Supplemental Budget: (Calculated for FY 2014-2015 General Fund) Family Assets for Independence (FAIM) - Invests $500,000 MFIP Child Care Savings as a Result of All-Day Kindergarten Saves $1.3 million Creation of a Youth Homelessness Prevention Program Invests $5 million Buyback of the 1.67% Long-Term Care Rate Reduction Invests $12.8 million Establishing New MinnesotaCare as the Basic Health Plan Saves $5.4 million Administrative Costs to Implement the ACA - $2.5 million

Revised Spending/Savings in the Supplemental Budget: (Calculated for FY 2014-2015 General Fund) Forecast Changes in Reform 2020 Invests $2.9 million Expanding MA to Children and Pregnant Women up to 275% FPG Saves $14.3 million Increasing Quality Care to Children with High Needs Saves $2.7 million MA Rate Increases for Targeted Providers Invests $1.2 million

Major New Proposals: Family Assets for Independence (FAIM) The Family Assets for Independence in Minnesota (FAIM) program is a matched savings project to help Minnesota low-wage earners build assets. The program helps participants build up their assets through purchasing a home, pursuing a higher education or starting a small business. FAIM participants place up to $40 a month from their income into Family Asset Accounts (savings accounts) which are matched 3-1 upon completion of asset contracts. o The Governor reinstates the $500,000 cut to the program that occurred in the 2011 session.

Youth Homelessness Prevention Program The Governor recommends the creation of a Youth Homelessness Prevention Program. The programs resources will be utilized by DHS to fund the full

spectrum of youth homelessness from prevention to finding a permanent home for these children. o The Governor invests $5 million to increases the resources to the homeless youth. 1.67% Long-Term Care Rate Reduction Buyback As part of the 2011 Special Session, DHS agreed to apply for a waiver from CMS to implement the nursing facility level of care (NF LOC) criteria on July 1, 2012, 18 months earlier than currently permitted under federal law. If the waiver is not granted, there is a cost of $39.2 million for these 18 months to continue the current NF Level of Care levels until January 1, 2014. The Legislature paid for this cost with a 1.67% rate reduction to long-term care providers, excluding nursing facilities. This contingent rate reduction would have been effective for 18 months, from July 1, 2012 to December 31, 2013. However, in the 2012 session the Legislature bought back the rate reduction through a shift for FY 13, leaving only 6 months left of the rate reduction. o The Governor buys back this rate reduction. Therefore, long-term care providers will not receive this reduction in July.

MNCare as the Basic Health Plan Starting in 2014, MNCare as it has operated for the last 20 years will be out of compliance with the Affordable Care Act. Therefore, the Legislature has to rework MNCare in order to bring it into conformity with federal law. Fortunately, the ACA provides a mechanism by which states can create their own public health program with financing from the federal government the Basic Health Plan (BHP). The BHP would cover individuals between 138% - 200% FPG (below 138% is covered by the MA Expansion passed earlier this session) and must cover, at a minimum, the same essential health benefit set plans need to offer on the Exchange. Under the BHP, plans have to pay approximately 80%-90% of the total medical expenses that are covered for a recipient. States would contract with health insurance companies to provide a managed healthcare plan that would meet essential health benefit requirements. Once a BHP is established the federal government will give the state 95% of what they would have spent on tax subsidies and cost-sharing assistance for this population. o The Governor makes investments and implements transfers from the Health Care Access Fund to facilitate this new program.

STATE GOVERNMENT Major changes The Governors March Supplemental Budget spends $928.5 million on state government, which is $799,000 less than his January budget. Whats eliminated: MMB Non-Operating Transitory Reduction to Budget Reserve o A reduction in the budget reserve of $325 million in FY14 is no longer necessary.

Whats new: $60,000 more to cover a deficiency at the Office of Administrative Hearings $622,000 more for the Campaign Finance Board o General Fund dollars as an alternative to the original recommendation of a registration fee to provide staff support for client services, investigations, and audits. (Those fees were expected to raise $704,000 ) $83,000 more for the State Auditor (above the January budget of $11.9 million)

Whats corrected: Veterans Affairs Lottery Ticket o Revision to correct error in January budget that miscalculated costs to the General Fund (this causes an $840,000 cost in the March budget) MN Ambulance Association Grant o Revises mischaracterized $110,000 cancellation as $110,000 one-time reduction to MDVA appropriation from the General Fund. This correction restores $110,000 to MDVAs base for FY14.

Whats maintained: $255 million in cuts to reinvest in effective programs State agencies must absorb $890 million in inflationary costs, with the exception of public safety funding Expansion of the LEAN Office to support process improvement and innovation across government Expand the Small Agency Resource Team (SMART) to lower operating costs for smaller state agencies Investments in statewide IT systems through MnIT services that support human resources and budget processes Development of a revamped state web portal and new online services