The Mad Men Guide to the 2014 Session

Striving for federal tax conformity is generally considered good tax policy – regardless of politics or revenue implications. But as this session demonstrated, when circumstances allow federal conformity to be pursued and packaged as a middle class tax relief initiative, real political benefits are realized.

Political success is driven as much by the messages, context and perceptions surrounding policy as it is by policy itself. With this in mind, we thought it would be worthwhile to summarize our take on the 2014 session by using some marketing wisdom and insights from the cast of Mad Men, the popular television drama about a 1960’s advertising agency. The following quotes, culled from the greatest hits of Don Draper and Roger Sterling, seem to have as much relevance to public policy in 2014 as they did to selling cars and cigarettes 50 years ago.

"What is happiness?  It's a moment before you need more happiness."

In 2013, lawmakers’ achievements included a balanced budget absent accounting shifts and sketchy revenue sources, the payback of accounting shifts used in the past, and $1.58 billion in new spending over the biennium in areas – most notably K-12 education and local government aids – that many strongly felt had been seriously neglected over the past decade. But any residual feelings of joy and satisfaction leftover from last year were trumped by the new possibilities a $1.3 billion surplus in 2014 presented.

As Table 1 highlights, this year lawmakers can tick off an additional $568.5 million in supplemental spending, including a $25 per-pupil increase in the general education aid formula and 5% wage increase for home care workers – both especially likely to be popular with voters. Last year’s major increase in income-tested direct property tax relief was given a one-time bump. When combined with $853 million in bonding for capital projects plus the federal conformity measures and full repeal of the B2B taxes adopted earlier this year, everyone can find something appealing. Even fiscal worrywarts can smile about the $150 million put into the budget reserve, bringing the state’s extra cash up to $1.16 billion when taking the cash flow account into account. All this was made possible by last year’s tax changes and a rapidly recovering economy. Whoever said money doesn’t buy happiness must not have spent time in politics.

		Feb 2014 Forecast	May 2014 As Enacted	Change From Forecast
				Amount	Percent
	Balance Forward	1,711,915	1,711,915	0	--
	Current Revenues	39,574,605	39,090,472	(484,133)	(1.2%)
	Total Resources Available	41,286,520	40,802,387	(484,133)	(1.2%)
	K-12 Education	16,625,318	16,679,568	54,250	0.3%
	Higher Education	2,813,761	2,836,011	22,250	0.8%
	Tax Committee Appropriations (Aids and Credits)	2,922,607	2,976,785	54,178	1.9%
	Health and Human Services	11,343,457	11,449,978	106,521	0.9%
	Environment & Agriculture	318,686	329,442	10,756	3.4%
	Transportation	254,085	269,335	15,250	6.0%
	Public Safety & Judiciary	1,949,150	1,984,207	35,057	1.8%
	Jobs and Economic Development/Commerce/Housing	383,632	413,907	30,275	7.9%
	State Government & Veterans	963,105	964,016	911	0.1%
	Debt Service	1,252,740	1,253,992	1,252	0.1%
	Capital Projects & Grants	212,355	411,103	198,748	93.6%
	Cancellation Adjustment	(20,110)	(20,110)	0	--
	Dedicated/Other Expenditures*	190	39,220	39,030	NA
	Total Expenditures	39,018,976	39,587,454	568,478	1.5%
	General Fund Balance Before Reserves	2,267,544	1,214,933	(1,052,611)	(46.4%)
	Cash Flow Account	350,000	350,000	0	--
	Budget Reserve	660,992	810,992	150,000	22.7%
	Stadium Reserve	23,392	23,392	0	--
	General Fund Balance	1,233,160	30,549	(1,202,611)	(97.5%)

"Even though success is a reality, its effects are temporary."

Lawmakers this session claimed the first year-on-year decline in property taxes in over a decade. All it took was $400 million-plus in new property tax aids and credits, a sales tax exemption for local governments’ purchases, some serious late-2013 jawboning of local government officials, and a computation that treated income-tested property tax rebates as a negative levy.

It’s a sign of the unique politics of the tax and place it has in public finance. A year-on-year decline in tax collections from any other revenue source would be considered a budgetary problem, not a major policy accomplishment. The property tax is fundamentally just another source of revenue, but it has the grave misfortune of coming out of bank accounts in big chunks rather than dribbling out through transactions or paycheck withholdings. And like all taxes, property taxes will immediately resume their normal upward course. The two other historical moments when property taxes in Minnesota declined from one year to the next illustrate what happens next. After the adoption of the Minnesota Miracle, which reduced property taxes by 6% between 1972 and 1973, property tax collections increased by 45% over the next five years. Similarly, five years after the adoption of the Big Plan, which reduced property tax collections by 14%, property taxes had grown by 48%. This is not necessarily a policy failure but an entirely expected and natural course of events: when the costs of local government go up, local levies must rise accordingly to pay for them. (Although a strong case can be made that the larger jumps in levies occur when the relief has been provided, economic conditions improve, and taxpayers take their eyes off the ball.)

We also cannot help noting another predictable outcome that once again demonstrates the problem of expecting the state to safeguard local government finances. As the session wound down, funding for the Lewis and Clark Regional Water System for communities in southwestern Minnesota became the last piece of the puzzle that needed to fall into place – since it was a demand of Republicans to secure their support for the bonding bill. Where in $40 billion of state government spending could lawmakers find additional money at the 11th hour? Why in the recently agreed-upon LGA appropriation increase, of course – the appropriation the House wanted to index to inflation to protect local government finances. To help finance the project, the tax conference committee reduced the LGA increase it had agreed to only a couple of days earlier by 23% (from $10.1 to $7.8 million). It’s certainly not the first time lawmakers have subordinated local aids to other spending needs and priorities, but it might be the first time an agreed-upon increase had the shelf life of unrefrigerated leftovers.

"Its OK if nobody knows what I'm doing.  It's good for mystique."

One of the more fascinating end-of-session developments was the passage of the Women’s Economic Security Act (WESA) – a multi-dimensional piece of legislation designed to break down barriers to opportunity and protect women in the workplace. Many of WESA’s features provide additional discrimination protections relating to pregnancy and familial status and ensure various accommodations for working mothers.

But the legislation’s centerpiece is its expansion of efforts to eliminate gender-based wage discrimination. Under the new law, businesses with 40 or more full-time employees that want to contract with the state to provide at least $500,000 worth of goods or services must obtain a equal pay certificate of compliance. The certificate would affirm that the business complies with various state and federal laws, including the “Minnesota Equal Pay for Equal Work Law” which prohibits wage discrimination “for equal work on jobs the performance of which requires equal skill, effort, and responsibility.”¹ WESA also grants the state’s Department of Human Rights authority to audit businesses for compliance.

The greatest challenge for lawmakers was turning that statutory language in the Equal Pay for Equal Work law into an auditable definition of wage discrimination. Originally, the intent was to employ the concept of pay equity.² According to the director of the Legislative Office on the Economic Status of Women, “pay equity” is not equal pay for equal work – which has been the law for 50 years – but rather equal pay for work of comparable value.³ Minnesota has mandated that government employers adhere to such “pay equity” provisions for decades. But mandating it in the private sector presents problems. Practically, taking the 1940s-based highly bureaucratic job scoring systems that make comparable worth assessments possible in the public sector and force-feeding them into 21st century private sector human resource departments is a non-starter. In a letter to the bill’s conference committee members, the Commissioner of Human Rights explicitly stated “this legislation would not create the authority to compel contractors to adopt comparable worth.” ⁴

If pay equity is off the table, then what is the auditable framework and standard to comply with “equal pay for equal work”? WESA requires gender-based wage comparisons using the federal Equal Employment Opportunity Commission’s major job classifications. According to one of the act’s authors, “comparable worth would be like comparing apples to oranges and we’re asking (sic) businesses to compare green apples to red apples within broad categories.” It’s worth noting that under the EEOC’s “Professional” category the apple bin includes everything from real estate appraisers to chemical engineers; the apples in the “Technicians” bin range from dental hygienist to mechanical drafters; and in the “Administrative Support” category, you can find applesauce with ingredients such as proofreaders, bank tellers, shipping clerks and mail room workers.

To summarize, there is a clear interest in extending the practice of pay equity, an auditing framework that enables comparisons of very dissimilar jobs which is the cornerstone of pay equity, editorial pages heralding the law’s passage based on the belief it extended pay equity,⁵ and a statement by the agency charged with administering and enforcing the law that explicitly denies three times that they will be enforcing pay equity. As a result, a legitimate policy issue – wage discrimination protection – has been packaged in an absolute hot mess of ambiguity, uncertainty, and confusion.

The bigger question is: why did conferees include this provision in the final version of the bill when it was clearly not ready for primetime? One plausible answer is that appearance was politically more valuable than product. Definitional clarifications and all the other messy details essential to good law don’t really matter in November; image and mystique does. And voting “no” on this issue could be truly toxic to legislators’ reelection efforts.

"If you don't like what's being said - change the conversation."

A couple of rather spectacular investment years have seemed to reduce the public scrutiny a bit on Minnesota’s public pensions. The primary feature of this year’s omnibus pension bill concerned the disposition of the stand-alone Duluth and St. Paul Teachers pension plans. The Duluth plan was absorbed into the statewide Teachers Retirement Association (TRA) while the St. Paul plan will continue as an independent entity. The additional cost to the state for these two plans – in aids to the Saint Paul plan and to TRA on behalf of the Duluth plan – will be $21 million annually.

What was more noticeable this year was the defensiveness and occasional backlash directed at those questioning the longterm viability of the status quo. Charges that those expressing these concerns have politically driven, ideological agendas have become more common. One reason why we may be seeing more of this: people on both sides of the debate are increasingly framing the issue as a simple defined contribution vs. defined benefit battle. As we note in our pension guide, there are potential reform avenues to explore both inside and outside of the traditional defined benefit system.

Be that as it may, there is no escaping the fact that our improving reported funded ratios are still “inflated” by employing discount rates to pension liabilities that are higher than those used by other public plans around the country, and substantially higher than what financial economists and even many defined benefit advocates recommend.

The story of public pensions is pretty simple. Government wants to provide high quality retirement packages for employees. But government finds it difficult or inconvenient to fully pre-pay the costs and finds it too easy to use accounting methods to lower current cost and push the tab forward. This is what ultimately needs to be fixed, and a continuation of good investment markets will just paper over the problem until the next poor period of investment performance.

"Our worst fears lie in anticipation."

All that happiness and gratification provided this session does come with fiscal tails. As Table 2 shows, the state went into the legislative session with a $2.6 billion structural surplus (current revenues minus total expenditures) forecasted for the 2016-17 biennium. Legislators reduced that forecasted surplus by $1 billion by reducing revenues in the two tax bills and further reduced it by another $1.06 billion through the various appropriations bills, leaving a forecasted structural surplus of $544 million for FY 16- 17. With February’s economic forecast unofficially anticipating inflation to add another $1.07 billion to the planning estimates (as an aside, where were the ever-present inflation hawks this year? Or does inflation only matter when there’s a budget deficit?), policymakers may find another budgetary challenge looming.

		Feb 2014 Forecast	May 2014 As Enacted	Change From Forecast
				Amount	Percent
	Balance Forward	2,267,544	1,214,933	(1,052,611)	(46.4%)
	Current Revenues	43,283,612	42,286,790	(996,822)	(2.3%)
	Total Resources Available	45,551,156	43,501,723	(2,049,433)	(4.5%)
	K-12 Education	16,733,916	16,838,916	105,000	0.6%
	Higher Education	2,849,330	2,899,030	49,700	1.7%
	Tax Committee Appropriations (Aids and Credits)	3,283,218	3,418,883	135,665	4.1%
	Health and Human Services	12,545,359	13,196,957	651,598	5.2%
	Environment & Agriculture	331,716	333,677	1,961	0.6%
	Transportation	207,306	211,806	4,500	2.2%
	Public Safety & Judiciary	1,984,433	2,024,428	39,995	2.0%
	Jobs and Economic Development/Commerce/Housing	344,327	346,077	1,750	0.5%
	State Government & Veterans	896,768	897,358	590	0.1%
	Debt Service*	1,268,294	1,290,882	22,588	1.8%
	Capital Projects & Grants	260,002	260,002	0	--
	Cancellation Adjustment	(20,000)	(20,000)	0	--
	Dedicated/Other Expenditures**	2	45,039	45,037	NA
	Total Expenditures	40,684,671	41,743,055	1,058,384	2.6%
	General Fund Balance Before Reserves	4,866,485	1,758,668	(3,107,817)	(63.9%)
	Cash Flow Account	350,000	350,000	0	--
	Budget Reserve	660,992	810,992	150,000	22.7%
	Stadium Reserve	0	0	0	--
	General Fund Balance	3,855,493	597,676	(3,257,817)	(84.5%)
	Structural Balance (Current Revenues minus Total Expenditures)	2,598,941	543,735	(2,055,206)	(79.1%)

Of course, continued economic expansion would likely render any concerns about the next biennial budget moot. Hence, the $64,000 question: will strong revenue growth persist? State economic trends appear quite positive although a couple of flags suggest the economy bears some watching. According to Minnesota Management and Budget, revenue collections in February and March were 2.5% less than projected. Although weather and timing issues are likely a source of this short-term variance, the forecast for U.S. economic growth has weakened since the state’s last Economic Forecast in February. Perhaps most interestingly, the state’s Coincident Index⁶ – which summarizes four key state level indicators to capture current economic conditions in a single statistic – has strung together its three lowest month-on-month increases since Minnesota’s emergence out of the Great Recession four years ago.

If we do get an unexpected slowdown the actions of this session and last may eventually be seen in a slightly different light. Or in the words of Roger Sterling, “I’m not the solution to your problem. I’m another problem.”