The official economic forecast for Minnesota comes out Thursday, but actions in Congress may skew the projections.
As legislators braced for grim financial news, Gov. Tim Pawlenty said Wednesday that the state's finances have improved enough that he probably won't need to make emergency budget cuts before he leaves office.
"It appears that revenues are ahead of schedule, ahead of projections and, at least for this biennium, I think that's going to lead to a somewhat more positive picture," Pawlenty told reporters Wednesday. He also predicted that improved finances will preclude the need to borrow money to pay bills this year.
Minnesota Office of Management and Budget officials on Thursday will release the state's economic forecast, a tool for shaping the next budget when legislators convene in January.
The numbers are a closely held secret, but several top legislators have expressed concern that a sluggish economy would trigger a short-term deficit large enough for Pawlenty to start cutting.
Despite Pawlenty's rosier assessment, economists say Minnesota is in for a long and slow recovery. Persistent joblessness and an increased need for state services mean the new governor and Republican-controlled Legislature will face a long-term, multibillion-dollar deficit that will spread budget pain across the state for years to come.
"We are looking under every rock, asking, 'What are we going to do?'" said Claire Robling, who will chair the Senate Finance Committee when the Legislature convenes. "The reserves are gone, the shifts have already been made. There are very challenging times ahead. And people need to be prepared for it. Significant cuts will have to be made."
In the past several months, the state's revenue has been essentially flat, down just $22 million from projections, according to an October economic update. Minnesota has added 45,000 jobs in the past year -- well below the job growth that would be expected in a healthy economy.
Global Insight Inc., the state's economic consultant, has downgraded the nation's rebound and said there's a 25 percent chance that the country will slide back into recession, which would worsen the state's budget pain.
State finance officials have spent the week putting final touches on a budget forecast cobbled together from myriad assumptions and calculations about the local economy, tax collections and even the political winds in Washington.
It's far from an exact science, and with just $198 million in the bank, slight miscalculations could blow a big hole in the state's financial outlook.
Budget hawks and those who rely on state money are closely watching the state's predictions about the end of the President Bush-era tax breaks, scheduled to expire at the end of the year.
Back in February, state budget leaders banked on the tax cuts going away, calculating that investors would declare their capital gains before the end of the year to take advantage of the lower rates. That small shift in taxpayer behavior, state budget officials figured, could result in more than $200 million in new tax revenue this year -- money that otherwise would have dribbled in over the next few years.
An extension of federal tax cuts could throw a wrench in that calculation.
"We are watching very closely," said Gary Carlson, a spokesman for the League of Minnesota Cities.
Carlson has a lot to worry about. The state has cut roughly $180 million in aid to cities over the past year. Local officials fear that a late-breaking deficit in the current biennium would point the budget knife their way again.
"This is not looking particularly rosy," Carlson said.
Tax officials from other recession-rattled states have made the same Bush tax-cut calculation that Minnesota officials have, said Ronald Alt, senior research associate with the Federation of Tax Advisors.
Alt said that most states that contract with Global Insight banked on the tax breaks going away. Now the company is changing its advice and telling clients not to expect the accelerated windfall.
The shifting nature of revenue forecasting has long been a target of Pawlenty, who regularly notes that the forecast assumes automatic increased costs to the state.
Staff writer Rachel E. Stassen-Berger contributed to this report. Baird Helgeson • 651-222-1288