Minnesota's long-term budget outlook is worse than state officials had feared: A projected deficit of $6.2 billion over the next two years.
Even a jolt of short-term good news proved illusory. The state will end this fiscal year with a surplus of $399 million, but that's due largely to federal stimulus money.
State economist Tom Stinson said Thursday's grim economic news was a direct result of past political decisions that favored payment delays and one-time fixes over politically painful structural reform.
Now the yet-to-be-determined new governor and ascendant Republican Legislature must come in January to stem budget hemorrhaging at a time when revenues remain down, job growth is anemic and one-time solutions are gone.
"We've played all the cards available," Minnesota Management and Budget Commissioner Steve Sviggum said Thursday. "We have significant unfinished business in coming years."
In the short term, Republican Gov. Tim Pawlenty, the architect of many of the payment delays and one-time fixes, will leave office claiming a balanced budget. At a news conference Thursday, Pawlenty said the forecast offered "very good news" and he was pleased to end his term "with a surplus, and money in the bank."
"The books are balanced and the economic indicators for Minnesota are now out-performing the rest of the nation substantially," said Pawlenty, a potential 2012 presidential candidate who is attempting to project a national image as a savvy budget maestro.
DFLer Mark Dayton, the top vote-getter in the governor's election who is still mired in a recount, saw a more ominous picture and a "very, very difficult task" ahead.
"I think he's left us in a terrible situation," Dayton said of Pawlenty.
Republican Tom Emmer echoed Pawlenty's upbeat assessment and heaped blame on DFLers, who "simply kicked the can down the road.
"Gov. Pawlenty has relentlessly worked to control growth but was thwarted at every turn by the DFL Legislature," Emmer said in a statement.
Bill comes due
The forecast shows how a strong reliance on one-time fixes, borrowing from schools and payment delays have exacted a heavy toll on the state's long-term outlook -- a multibillion-dollar deficit that stretches out to at least 2015.
State spending is expected to increase a stunning 27 percent over the next two years. Much of that would go to fill in for federal stimulus money that has run out and payment delays that blink back on or need to be paid. The alternative is to cut the jobs temporarily funded by the stimulus or to push back even further repayments of accounting shifts.
The short-term surplus was caused not by a favorable spike in the economy, but rather by favorable debt-service savings and the federal government's decision to extend higher Medicaid reimbursement rates another six months, budget officials said. State tax revenues are actually $44 million less than what was expected.
The brief surplus "gives us a little breathing room" before the next biennium, said Jim Schowalter, deputy budget commissioner. Schowalter noted that the long-term budget forecast banks on state leaders not spending that surplus. If they do, the deficit grows by another $400 million.
Minnesota's basic budget dilemma is this: The state is projected to take in $32 billion in revenue in 2012-13. It needs $38.5 billion to meet its current obligations. If nothing changes, forecasters anticipate another $5 billion deficit in the fiscal period from 2014-15.
Stinson said the state is unlikely to emerge from the budget trouble unless state leaders commit to structural changes rather than one-time fixes.
"We've got to commit to a more normal path," he said. If we continue to do things "partially with smoke and mirrors, it will take us several more bienniums to get out of it."
Just since February, the long-term forecast has worsened by nearly $600 million.
In past recessions Minnesota has relied on a strong push from a rebounding economy to lift it from the economic mire. But Global Insight Inc., the state's national economic forecaster, predicts the nation will recover from the deep, nearly two-year recession more slowly than anticipated.
On the plus side, Minnesota's growth appears to be stronger than the national average, bolstered by a better job market. The state lost 157,000 jobs in the two years ending December 2009. Since then, it's added 55,000 jobs, mostly in leisure and hospitality, health care and manufacturing. The state's unemployment rate stands at 7.1 percent -- painful, but still 2 points below the national average.
"I think the state's economy is performing a little bit better than we expected in February, but not a lot better," Stinson said. "We've come back a little faster than we thought."
But, he cautioned, "we still have a long a way to go before we are back in satisfactory condition."
Minnesota school officials took little comfort in the forecast.
Public education eats up 37 percent of the state budget, and the state has borrowed money from schools and delayed K-12 payments to patch budget holes.
Some school districts may resort to borrowing to make up for the money the state has withheld. Officials around the state are left to wonder whether these accounting tricks will continue.
"It's going to be tough," said Charlie Kyte, executive director of the Minnesota Association of School Administrators. "We've been going with zero new funding for two years. ... We're hoping at the minimum that they'll just keep funding steady. Even then, the districts are going to have problems."
Republican legislative leaders heeded the somber budget news and said it reaffirmed their call to rein in government spending.
"The forecast shows what voters told us on Election Day: Government is spending too much money and they want it restrained," said incoming House Speaker Kurt Zellers, R-Maple Grove.
"The answer to solving the budget deficit is not to raise taxes, but to help create a business-friendly environment that will stimulate the creation of private sector jobs," said incoming Senate Majority Leader Amy Koch, R-Buffalo.
Democrats drew a different lesson, taking aim at what they said was Pawlenty's economy-killing pledge to not raise taxes.
"That's the legacy of the Republican addiction to 'No New Taxes': No new jobs, chronic deficits and a state undermining its children's future," state Rep. Ryan Winkler, DFL-Golden Valley, said in a statement. "Democrats must draw a line in the sand: We will not quit or go home until the budget is balanced fairly and protects Minnesota's legacy of investment in our children's future."
Staff writers Rachel E. Stassen-Berger and Norman Draper contributed to this report. Baird Helgeson • 651-222-1288