Budget ax is sharpened -- and it's going to hurt

  • Article by: PATRICIA LOPEZ , Star Tribune
  • Updated: January 27, 2009 - 11:43 AM

Deep cuts are coming and more change is needed, said the governor, who will announce today a plan for the $5 billion deficit.

When Gov. Tim Pawlenty unveils his plan today for dealing with the state's mounting $5 billion budget shortfall, it won't be the first time he's had to take a cleaver to state government.

In 2002, while still governor-elect, Pawlenty discovered that the government he was about to take charge of was $4.5 billion in the red -- a 14 percent shortfall that triggered near hysteria over possible consequences.

The formula Pawlenty devised has since become familiar to Minnesotans: cut deeply into health care while sparing K-12 schools, and complete the patch using accounting shifts, fee increases and one-time revenues.

Large endowments left over from the state's tobacco lawsuit, along with other one-time funds, helped make that solution work in 2003.

A cushion may also be available this time, in the form of a massive federal bailout for states, with Minnesota raking in perhaps $3 billion or more -- more than half its total deficit.

But some experts on the state's budget worry that the federal aid may cause policymakers to again flinch from dealing with long-term spending commitments and a willingness to tax that are increasingly out of whack.

"We'll take every dollar we can get, but it doesn't seem like they [the federal government] should be bailing us out of the whole problem," said Jim Schowalter, state budget director. "The fiscally appropriate thing to do would be to create a permanent solution."

But it's hard to sell painful long-term solutions when quick fixes are at hand, even though an aging population means the state's long-range budget outlook is troubled.

"The thing to remember about the federal stimulus is that it's one-time money," said Kevin Goodno, a former Health and Human Services commissioner under Pawlenty who now leads a long-range budget study project. "If you take the long look, our revenue growth is not going to keep pace with our spending obligations. So what everyone needs to figure out is how strongly do they feel about putting in place tools for the future."

Risk vs. shared sacrifice

After the 2003 cuts, dire predictions that Minnesota's quality of life would decay never fully materialized.

For some, life started to fray around the edges. Parents of disabled children found their road harder and more expensive. Hundreds lost health care and those who kept it faced costlier co-pays. Fees and fines increased. But the prosperous barely noticed.

The current recession is producing deeper economic pain and spreading it more widely.

Pawlenty says the right response is a budget that is "aggressive and takes on certain risk in exchange for trying to strategically reposition Minnesota to be more competitive."

That means cutting business taxes. Pawlenty will propose cutting the corporate tax rate in half over six years and lowering a raft of other business taxes as a spur to economic growth.

That makes little sense to DFLers, who say that the state's business climate was never better than in the 1990s, when Minnesota had some of the highest tax rates in the country and among the highest personal income growth.

"This is a failed philosophy," said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis. "This idea that tax cuts are the solution to every ill." What is required, Pogemiller said, is "shared sacrifice." That means spending cuts that reach across every sector -- schools, hospitals, prisons, parks. It also means higher taxes for those who can spare it.

More trouble ahead

Tom Hanson, Minnesota management and budget commissioner, said that while there are similarities between this gap and 2003, the sad reality is this one is much more dire.

The budget crisis of 2003 "was expenditure driven," Hanson said. "There was a national recession, but it wasn't anywhere near as deep or long as the one now."

And while Hanson stands by his budget, he acknowledges that it may not stand for long.

"We're going to get nailed again in February," he said, when a new economic forecast is expected to plunge the state deeper into the red.

"There's been a dramatic change in the economic outlook for the country of historic magnitude," Pawlenty said Monday. "The way it was is not that way anymore."

Patricia Lopez • 651-222-1288

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