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State lawmakers likely will begin the 2013 budget-writing legislative session faced with a $1.1 billion shortfall. File photo by Don Davis/State Capitol Bureau

Minnesota deficit pegged at $1.1 billion, more if Washington fails

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ST. PAUL -- Minnesota's budget future includes uncertainty, spending cuts and tax increase proposals.

Especially uncertainty.

State officials Wednesday announced a $1.1 billion budget shortfall, but warned that number could grow to $2.8 billion if Congress and the president fail to solve a federal budget problem by year's end. The so-called federal fiscal cliff, a combination of tax increases and spending decreases, could have a major impact on the Minnesota economy, including fewer people holding jobs and personal income dropping 4 percent by 2015, State Economist Tom Stinson said.

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Without a federal fix, the state would join the rest of the country in a recession early next year, Stinson said, even though the last recession has not quite ended.

If federal officials fix budget issues, Stinson and Commissioner Jim Schowalter of Minnesota Management and Budget said the state economy will continue to grow, although slower than they would like.

"There's no relief in sight for our fiscal woes," Schowalter declared as he announced the deficit.

Senate Majority Leader-elect Tom Bakk, DFL-Cook, said the numbers Schowalter's staff released do not show the full problem. He said that the $1.1 billion deficit grows to $2 billion when inflation is considered.

State leaders will use Wednesday's budget forecast to write a budget for the two years beginning July 1, but the so-called federal "fiscal cliff" leaves what Bakk said is the most uncertain fiscal future he has seen.

"Forecasters are warning it won't be pretty," Stinson said.

Democratic Gov. Mark Dayton told reporters that it is likely he will propose tax increases on Minnesota's richest 2 percent. He did that two years ago, but Republicans who controlled the state House and Senate rejected the idea.

Dayton said the forecast provides a starting point for forming a budget to present to the Legislature next month.

"We haven't made any decisions on anything at this point," Dayton said.

With Democrats in charge of the governor's office and both legislative chambers for the next two years, a tax increase has a better chance than when Republicans controlled the Legislature the past two years.

Incoming Democratic legislative leaders would not discuss tax and spending specifics.

House Speaker-designate Paul Thissen, DFL-Minneapolis, said the next budget forecast, planned for February, will be more helpful when it comes to nailing down specifics about the state's spending and revenues.

"The fiscal cliff makes our path a little more murky," Thissen said.

Minority leader Sen. David Hann, R-Eden Prairie, said the forecast shows Republican fiscal policies have worked. The policies included spending cuts.

"To suggest that we need to grow spending ... is not productive," Hann said.

In other news from the budget forecast, state officials said that a better financial outlook for the two-year budget that ends June 30 means the state can begin repaying $2.4 billion it borrowed from school districts.

State Budget Director Margaret Kelly said the first half of a $1.3 billion payment will go to schools on Dec. 15, with the rest coming early next year.

The added money in the current budget comes from one-time sources, such as borrowing against a late-1990s lawsuit settlement with tobacco companies. Money that helped the current budget does not continue into the next one.

The budget report showed drops in state health-care spending, including some lower costs, reduced enrollment and cost-saving changes, Kelly said.

The current savings in health programs is $196 million, with $185 million expected in the next two years.

Those savings pale compared to the overall state budget. Wednesday's forecast indicates the next two-year budget will include nearly $36 billion of state revenues.

With federal budget cuts and more than $500 billion in tax increases beginning Jan. 1 unless Congress and President Barack Obama act, the national economy could face a recession.

State unemployment could rise to 7.1 percent in 2014, while national employment would be 9 percent, Stinson said.

The economic slowdown would result in the state losing $1.7 billion beyond the already-projected $1.1 billion deficit.

Here is a look at Minnesota's budget forecast for the past decade:

-- February 2012, $323 million surplus.

-- November 2011, $876 million surplus.

-- February 2011, $5 billion deficit.

-- November 2010, $399 million surplus.

-- February 2010, $994 million deficit.

-- November 2009, $1.2 billion deficit.

-- February 2009, $4.6 billion deficit.

-- November 2008, $426 million deficit.

-- February 2008, $935 million deficit.

-- November 2007, $373 million deficit.

-- February 2007, $1 billion surplus.

-- November 2006, $1 billion surplus.

-- February 2006, $88 million surplus.

-- November 2005, $701 million surplus.

-- February 2005, $157 million surplus.

-- November 2004, $700 million deficit.

-- February 2004, $160 million deficit.

-- November 2003, $185 million deficit.

-- February 2003, $11 million deficit.

-- November 2002, $356 million deficit.

Budget notebook: Parties agree tax changes needed

Democrats and Republicans said tax reform should be part of a plan to tackle the state's deficit and create a budget, although on Wednesday they were light on specifics.

Senate Majority Leader-elect Tom Bakk, DFL-Cook, said in discussions with people across the state it has become evident that "a growing reliance on property taxes is a problem." But he was reluctant to say that tax changes would mean higher payments.

"I think tax reforms and raising taxes are different things," Bakk said.

House Speaker-designate Paul Thissen, DFL-Minneapolis, said taxes cannot solve everything.

"Taxes are only one component" of a state budget, he said.

Bakk said he has talked with Sen. Rod Skoe, DFL-Clearbrook, who will chair the Tax Committee, about tax goals for the coming year. He said when it comes to tax reforms, the idea is to "not make us an outlier."

Gov. Mark Dayton said the Legislature likely can expect his budget proposal to include higher taxes on the wealthiest 2 percent of Minnesotans.

Senate Minority Leader-elect David Hann, R-Eden Prairie, said when Democrats bring up the idea of tax reform, they likely instead mean tax increases. Republicans are open to "genuine reforms," he said.

"We think the talk about tax increases is grossly premature," House Minority Leader-elect Rep. Kurt Daudt, R-Crown, said.

Union and liberal groups called for higher taxes, while conservative organizations mostly were quiet after a state budget deficit was announced.

"Raising revenue responsibly by asking corporations and the wealthiest Minnesotans to pay their fair share is as essential to budget stability as reforming the tax code and championing government efficiency," said Executive Director Jim Monroe of the Minnesota Association of State Employees.

School payment a plus

State leaders said one positive of the budget forecast is the opportunity to begin paying back money owed to Minnesota schools.

"The good news is we are able to repay the schools," Dayton said.

Bakk said Democrats made that a key priority while campaigning this year.

Thissen pointed out the issue is not done.

"We still owe our schools over $1 billion," he said.

Legislators and governors in recent years have delayed payments to schools to help solve state budget problems.

Under current law, surplus money in the two-year budget that ends June 30 must be used to repay schools. On Wednesday, Dayton and lawmakers learned that $1.3 billion will be spent to lower the state's debt to schools.

Half of the $1.3 billion is to be sent to schools on Dec. 15, with the rest following in the coming months.

Housing an economic key

The Minnesota housing market could help bring back the state economy.

If officials in Washington fix federal fiscal woes, State Economist Tom Stinson said, the housing market and its related forestry and lumber industries would benefit.

"That's the area that was hurt the worst," he said.

Stinson said Congress and President Barack Obama need to take meaningful action or the economy probably will drop into a recession.

"If they kick the can down the road or allow us to go down the fiscal cliff, that probably costs us money," Stinson said.

Such inaction would cost individuals who are caught in a recession, which would cost the state in terms of lower revenues.

Stinson's staff produced a report about what would happen with no fiscal cliff solution, including Minnesotans holding 45,000 fewer jobs than expected by the end of 2013 and 70,000 fewer a year later.

Personal income would drop 4 percent, the report shows, and the state unemployment rate would jump to 7.1 percent from the current 5.8 percent.

Even with the Minnesota problems, however, the state would do better than other states. Stinson said, because defense spending would take the biggest hit and Minnesota has few military bases or suppliers.

Pull tabs lagging

Revenues from electronic pull tabs are lower than anticipated, but Dayton said that is due to a lag in getting the program off the ground.

"It is taking longer than expected to ramp up," he said.

Money from the new program is earmarked to pay for a new Vikings football stadium.

Once the program is fully implemented, there is no expected fund shortage, Dayton said.

"The lower revenue collection is a result of the pace at which this new technology can be implemented, not an underlying problem with electronic gaming as a source of revenue," a Dayton spokesman said.

Dayton said many vendors are waiting to see if it is worth entering the field of electronic gaming. Establishments that are using electronic pull tabs seem to be happy with the results so far, Dayton said.

No more 'gimmicks'

Democrats said the next state budget needs to focus not just on filling the immediate deficit, but preventing more in the future.

"Each time we've faced a deficit we have failed to take the long view," Thissen said. "We need to have a budget that doesn't rely on the gimmicks of the past."

Dayton said he is committed to producing a balanced budget.

"We're done with the gimmicks, we're done with the games," he said.

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Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.
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