Hasty 3 a.m. decision triggered Minnesota's budget impasse

Long past midnight on the last day of the legislative session, a hasty, quiet step on an obscure issue sowed the seeds of the stalemate now gripping the Capitol, blocking a special session and putting nearly 10,000 state workers at risk of layoffs.

It was 3 a.m. In a Capitol corridor, GOP House Speaker Kurt Daudt, a top aide for DFL Senate Majority Leader Tom Bakk and a few other legislative leaders were engaged in a tense conversation on a surprise amendment to allow counties to outsource audits.

Approved by the House, the measure — which would gut the role of the state auditor, Democrat Rebecca Otto — had never been heard in the Senate. Yet that night, Sens. Sandy Pappas and Jim Carlson, leaders of that bill's conference committee, were being instructed by Bakk's chief of staff, Tom Kukielka, to approve the controversial change.

"Do it," Kukielka said, according to one senator's recollection of the conversation. Pappas and Carlson told the Star Tribune that Daudt and Kukielka had insisted the change was a crucial part of top leadership's final agreement.

That single action triggered a chain of events culminating in the ongoing impasse and further exposing a rift between Bakk and Gov. Mark Dayton, who has vowed to protect the role of auditor, a post he held in the early 1990s.

The behind-the-scenes maneuvering that led to the policy change has surprised many at the Capitol, including Senate Democrats and even lobbyists for the counties, who say privatization was not their priority this year.

Some Democrats in particular are livid over the deal Bakk and Daudt apparently cut, saying they were pressured to vote for bills containing provisions they ordinarily never would have supported.

"Many of us feel disrespected, taken for granted, and that we were played for fools and pawns in some game of power that only a select few caucus members are playing," Sen. Scott Dibble, DFL-Minneapolis, wrote to Bakk last week in an e-mail obtained by the Star Tribune.

Exactly why Bakk and Daudt agreed to give the counties the option to hire private auditors is unclear. Daudt, however, is a former county commissioner who has lobbied for the change before, arguing that it saves local governments money.

Bakk, meanwhile, is from the Iron Range, where some DFLers were harshly critical of Otto's 2013 vote against exploratory mining leases in the region. In an interview with the Star Tribune, Bakk denied any political motive for limiting the auditor's office: "The mineral leases, or her action on that, meant zero to me," he said. "She was the only 'no' vote, so her vote didn't make any difference. It was like a vote of protest. I didn't quite understand why anyone cared, to be honest."

Daudt, between meetings with Lt. Gov Tina Smith Thursday, denied that he and Bakk agreed to push through the privatization language.

"Bakk and I didn't necessarily have an agreement that the language would be in the bill," Daudt said. He insisted that Sen. Tom Saxhaug, DFL-Grand Rapids, and Rep. Sarah Anderson, R-Plymouth, brokered that amendment.

In an interview, Saxhaug offered a different version of that late-night event. "Leadership told us that this was the way it had been negotiated," he said.

Bakk also denied any direct involvement and said he had no knowledge of the hallway conversation involving his aide.

He declined to make Kukielka available for comment, saying, "We have a provision in our employee manual that staff do not talk to the press."

Bakk in recent days has tried to assuage members of his caucus, blaming the impasse on the Association of Minnesota Counties. In an e-mail to DFL senators Thursday night that was obtained by the Star Tribune, Bakk wrote: "I know, and echo, many of your sentiments when I tell you that I remain concerned that the House GOP refuses to accept any alteration to the Association of Minnesota Counties changes to the State Auditor's authority."

Two representatives for the counties' lobbying group disputed that account, and other sources corroborated their position.

"We decided early on to stay out of it," said Matthew Hilgart, a lobbyist and policy analyst for the Association of Minnesota Counties. He added: "When we saw this included [the final night], we were surprised." The original House legislation, he and the group's executive director Julie Ring said, was drafted without their involvement.

Anderson, House chair of the conference committee, said DFL senators should not have been surprised by the amendment.

"If conferees were surprised, that's their fault," she said, arguing that the privatization language was contained in spreadsheets of the state government bill.

The Star Tribune obtained eight spreadsheets — known in the Capitol as "side-by-sides" — which showed that the Senate never agreed to the House position on county audits.

As the impasse has dragged on this past week, Dayton's weak negotiating position has become clear. GOP leaders said that if the governor didn't like the bill, he should have vetoed it. Dayton said he approved it to limit the number of state employees facing possible layoffs in the event of a government shutdown. He immediately made it known that repealing the auditor job changes was one of his conditions for calling a special session.

Otto meanwhile has lobbied furiously to undo the move since mid-May, when the state government conference committee approved the privatization language.

Otto already must await the outcome of a committee decision to require the Legislative Auditor to review "the efficiency of examinations" conducted by her office. That report is due in mid-January, before the 2016 legislative session convenes.

The state auditor is required to audit many local governments, including Minneapolis, St. Paul, the Minnesota State High School League, watershed districts and other entities. A law change some years ago allows 28 counties to hire private auditors, but the state auditor retains oversight, can require additional documentation and guide private firms on compliance issues.

Without fees from the remaining 59 counties, the state auditor's office has said it would be unable to cover overhead costs, rendering it unable to complete many of those tasks.

David Schultz, a Hamline Law School professor with two decades of experience studying the Minnesota Constitution, said the privatization change likely violates two of the constitution's provisions.

"The Legislature probably cannot enact a law that strips away powers from a constitutional office and thereby undermine the core functions of the auditor's office," Schultz said. "It's one branch [of government] telling another branch how it has to act, in ways that might violate that separation of powers provision, by rendering it impossible to do her [Otto's] job."

He said there's strong precedent on the legal question. In 1986, the Minnesota Supreme Court ruled that a law transferring the state treasurer's duties to the finance commissioner violated the separations of power clause.

Earlier in the week, Otto said she would "fight this until the very end to make sure that this function is preserved."

After the late-night hallway conversation, Pappas and Carlson were left with a difficult choice. If they dug in, they would hold up the closing of a major budget bill that funds many aspects of state government and some 7,000 state jobs. Their refusal would have threatened an on-time conclusion to the end of session.

Carlson said he and Pappas hoped Dayton would veto the legislation. He had vetoed similar legislation before.

In the end, Carlson and Pappas settled for a symbolic protest. They did not sign the final conference committee report, and Pappas voted against the overall bill on the Senate floor.

Ricardo Lopez • 651-925-5044