Gov. Mark Dayton's budget legacy secure: Surpluses and more spending

The year Gov. Mark Dayton took office, the state budget was $15.3 billion. The year he leaves, it is projected to be $23 billion — a 50 percent increase.

Dayton, a second-term DFL governor not running for re-election, largely sealed his ambitious budget legacy in May when he signed his final two-year budget that funds schools, health and human services, parks and other state programs.

"We've restored fiscal integrity and stability to the Minnesota budget," Dayton said in an interview Friday.

After inheriting deficits and a nearly depleted rainy-day fund, Dayton is now in charge of a state that's running surpluses and carrying $2 billion in its reserves.

But his Republican opponents in the Legislature say Dayton's record is one of spending profligacy — paid with a big 2013 tax increase — that is ultimately unsustainable and adds little to the lives of average Minnesotans.

"A lot of Minnesotans haven't seen increases in their paychecks and aren't seeing the value of a 50 percent increase in government spending, and for them it's frustrating," said Rep. Matt Dean, R-Dellwood, who is running for the 2018 Republican nomination for governor.

Absent GOP opposition, Dayton would have spent billions more, as evidenced by the budgets he submitted that were pared back by Republican lawmakers.

The debate about Dayton's budget legacy and the proper role of government will help frame the 2018 election to determine his successor. Because state senators won't stand for election in 2018 and the GOP has a relatively firm lock on the House, the election of a Republican governor would probably give the party complete control of state government for the first time since 1970.

That would allow Republicans to steer Minnesota in a starkly different direction, resembling that of Wisconsin under Gov. Scott Walker — or Minnesota under former Gov. Tim Pawlenty.

The year Pawlenty took office, the state budget was $13.9 billion. When he left, it was 15.3 billion, an increase of just 1.2 percent per year, or lower than the average rate of inflation at the time.

Dayton's budget director, Myron Frans, argues that the records of Pawlenty and Dayton are distorted by the Great Recession that was pummeling state finances when Dayton took office in 2011.

Pawlenty, for instance, borrowed about $1.4 billion from school districts to shore up the state budget during the crisis, which the Dayton administration paid back, shifting Pawlenty spending into the Dayton years.

Pawlenty's administration also received $960 million as part of the 2009 federal stimulus package to help states' ailing budgets.

After incorporating those factors, the record looks different: Spending up by 3.1 percent per year during the Pawlenty years, and 3.4 percent in the Dayton years.

Moreover, after population increases and inflation are factored in, per capita state spending is slightly less now than it was in 2003, according to data from the North Star Policy Institute, a liberal-leaning think tank.

Even given the smaller spending increase, Dayton and his defenders say they have invested in the state's future, citing spending initiatives in education, health and human services, infrastructure and other programs they say will lead to a healthy and educated population.

That, in turn, they argue, will anchor the large and small companies that have helped Minnesota achieve the highest per capita income in the region outside of oil-rich North Dakota.

Dayton proudly touts his 2013 tax increase, which fell mostly on the wealthy and cigarette smokers, for stabilizing the state's finances and shifting the tax burden from the middle class to the affluent. It was accompanied by some property tax reductions.

Overall, the cost of funding state and local government as a percentage of Minnesotans' personal income is declining. By 2021, it's expected to be lower than in any year during the Pawlenty administration.

Although the administration downplays his overall spending record, Dayton is more than happy to take credit for a 38 percent increase in education funding compared to 22 percent during the Pawlenty years, once the accounting shifts are factored in.

The administration instituted all-day kindergarten and expanded prekindergarten, and both are already showing results, Frans said.

"If you want to create more jobs for more people, you have to create better education and training opportunities," he said.

Other than resistance to universal prekindergarten and some policy fights with the teachers' union, Republicans have largely accepted Dayton's education agenda — most importantly on the money front. For some conservatives, this is a problem.

"We have to have a very real conversation about school spending. Just spending more money on schools is not going to improve educational outcomes," said Peter Nelson, senior policy fellow at the conservative-leaning Center of the American Experiment.

Despite the spending, Minnesota is plagued by significant achievement gaps between whites and students of color.

Because education consumes 42 percent of the state budget, Republicans will struggle to hold the line on spending unless they cut growth in education spending, Nelson said.

And without spending constraints, he argues, taxes will drive out wealthy Minnesotans and businesses. "We can only tax so much, especially in the United States where we're competing with 49 other states," he said.

Republicans point to health care as an area of rapid growth in state government without results for average people. It accounts for 28 percent of the overall budget.

A 68 percent expansion of Medical Assistance enrollment has given 451,000 Minnesotans access to basic health care. The number of Minnesotans without health insurance has shrunk to about 6 percent, according to Kaiser Family Foundation data.

Nursing home workers and home health care aides have received pay increases to stem staffing shortages.

But Republicans say Dayton's push to participate in the Affordable Care Act, by expanding Medical Assistance and restructuring the individual health insurance market, has been a failure.

Dayton and Republicans agreed to spend $868 million during the next two years on insurance rebates and subsidies for insurance companies to help beleaguered Minnesotans on the individual health insurance market. Still, Dean charged, "Middle-class Minnesotans are paying more and getting less."

Although Dayton has signed his final budget, the fiscal fight with Republican lawmakers is not finished.

A tax on health care providers will sunset at the end of 2019, creating a potential budget hole unless Dayton gets skeptical Republicans to extend it.

The governor signed a bill granting $650 million in tax cuts during the next two years to farmers, property-owning businesses, Social Security recipients, smokers and a range of other groups. The bill will ultimately cost $5 billion in revenue during the next decade, and Dayton wants to renegotiate.

In a signal of his commitment to the fiscal path that he set the state on, Dayton cut the Legislature's operating budget in an attempt to force them back to the negotiating table. The Legislature is expected to sue him.

"The shifts and borrowing and gimmicks — we've undone all those and restored fiscal integrity and we have a balanced budget," he said. "It's distressing to me they would so cavalierly start to unravel that."

J. Patrick Coolican • 651-925-5042