The depth of Minnesota's budget problem is daunting, and Gov. Tim Pawlenty and the Legislature are "up against the wall."
The river of red ink running through Minnesota's budget is so vast and swift that it may threaten some programs by Christmas, and force lawmakers into quick, tourniquet-style attempts to address the situation.
Old-fashioned budget trims to stop the bleeding will have to come before any long-range overhauls can be explored because state leaders are "up against the wall,'' said former House Speaker Dee Long.
"The whole pattern of spending has to change." But long-term improvements that have a serious payoff are "enormously time-consuming," Long said. "Whether they've physically got the time in this [legislative] session, I don't know."
The depth of the state's dilemma is daunting: a projected deficit of $5.2 billion over the next two-and-a-half years. With only minor inflation, that figure leaps to $5.8 billion. The economic situation is rapidly shaping up as the worst in the post-World War II era.
The first cuts may come even sooner than was anticipated.
Before state leaders can tackle the 2010-11 budget, they must cut more than $400 million to balance this budget period that ends in June.
And with every passing day, more of the state's dwindling revenues get spent, leaving fewer options for budget-balancing.
Republican Gov. Tim Pawlenty and the DLF-controlled Legislature have pledged cooperation on the short-term deficit, but their hands may be forced by an unpleasant reality. The remaining chunks of unspent money are mostly in areas many Minnesotans consider vital -- K-12 schools, health care for the poor and the aid that goes to hundreds of Minnesota cities, counties and townships to help pay for police, fire and other services.
Local aid is paid by the state twice a year, in July and December. The final round of checks for the year go out on Dec. 26 -- $308 million worth.
Pawlenty can act on his own authority to withhold all or part of that money, but would need to do so before that date. In other words, Christmas Eve or earlier.
"Once that money goes out the door, there's no getting it back," said Tom Hanson, commissioner of Minnesota Management and Budget. "I'm not saying it's on the list or off, but it's one of the big chunks of unspent, unencumbered money that's out there."
The remaining choices are even more unpalatable. Cut money for K-12 schools, many of which already face shortfalls of their own? Head Start has budgeted money not yet spent, but few DFLers will want to snatch services from underprivileged 5-year-olds.
The all-too familiar cycle of boom-and-bust for Minnesota's budgets has its roots in several complex structures: an exceptionally volatile and antiquated tax system, a Byzantine school funding formula and a system of publicly subsidized health care that is like an elevator that travels only one way -- up.
The likelihood of real change in all those areas is possible, said Peter Hutchinson, a former gubernatorial candidate who now heads the Bush Foundation, which makes grants promoting economic and cultural development in Minnesota and the Dakotas. But change depends on whether leaders are ready to move past partisan gridlock, turn a deaf ear to special interests and embark on genuine experimentation, he said.
That could mean a new focus by Pawlenty and others on what's known as priority-based budgeting, which involves forcing each program to compete for state money by proving its worth over others.
Faced with a similar budget dilemma in 2002, Washington state Democratic Gov. Gary Locke and an evenly split Legislature spent two months ranking every program in the state by its tangible contributions to state goals. Those who fell to the bottom of the list faced extinction.
"The question was not how to eliminate the deficit, but how to spend the revenue they had brilliantly," said Hutchinson, who was drafted to help Washington state officials reinvent their budget.
"It changed the whole budgeting dynamic," he said. Instead of number-crunchers and lobbyists driving the outcome, people up and down government looked at what they could do differently.
That didn't mean not cutting, Hutchinson added. Washington state made enormous cuts, many of them controversial, but there was also belief that lawmakers got the most out of the resources they had, he said.
In Minnesota, several of the pieces are in place to yield similar change. A tax reform commission appointed by Pawlenty last year has been working quietly for months on ways to update the state's tax system. A state budget trends commission made up of gubernatorial and legislative appointees examining the impact of demographic trends on the state's budget will submit a report in mid-January.
Glenn Dorfman, a former real estate lobbyist who is on the budget trends study commission, said the state must face a new economic reality.
That includes moving out of what he calls "the Minnesota mindset; that we are a little bit better than everybody, and we're insulated and we won't be affected by anything."
He sees likely targets among the state's labyrinth-like network of tax breaks and exemptions. Perhaps, Dorfman said, the state will have to put an end to research and development tax credits for global corporations such as 3M and Medtronic.
"I'm tired of guys telling me how they are free market and then suck up to the government when things are bad," Dorfman said.
An old idea -- broadening the state's tax base to include services, clothing, food and Internet sales -- also is being revisited.
Typically, the state's periods of innovation have come when times were better and money ample enough to paper over the transition.
But, Hutchinson said, throughout history, breakthroughs also emerge out of necessity.
"If everyone in state government knew their very survival depended on them having a better idea than the next one on the list, you'd see better ideas," Hutchinson said.
Staff writer Mark Brunswick contributed to this report. Patricia Lopez • 651-222-1288