State budget deficit projected at $1.2 billion

The state budget forecast shows a deficit of $1.2 billion. That could swell to $5.4 billion in 2012-13.

Minnesota faces a $1.2 billion budget deficit that could mushroom to an eye-popping $5.4 billion over the next three years, according to a state budget forecast released Wednesday.

To deal with the coming crisis, Gov. Tim Pawlenty said he is considering a second round of emergency budget cuts that could hit cities as early as this month and later may even trim spending for K-12 schools, which have been mostly shielded from the last few rounds of cuts.

With more Minnesotans unemployed or working fewer hours for less pay, state payroll tax collections have fallen sharply, leaving a growing gap between revenues and expenditures. State Economist Tom Stinson said Wednesday that Minnesotans' wages have taken an unprecedented drop and that the length of the average work week has reached "historic lows."

There also is some cause for optimism, he noted.

The state is "crawling out of a very deep hole," Stinson said, but "we're clearly on the long, slow path upward."

Pawlenty, who has hinted before that he might impose further cuts if the deficit were large enough, said Wednesday that he is eyeing the $400 million pot of money expected to go out to cities as local aid in December. He groused that some school districts have raised salaries and benefits and said he plans to investigate where districts came up with the extra money.

In times of fiscal crisis, Minnesota's governor has the power to single-handedly make budget cuts known as unallotments.

Pawlenty renewed his pledge not to raise taxes, calling the mounting deficits "significant, but solvable."

DFL legislative leaders said the deficits reveal flaws in Pawlenty's effort to balance the budget without raising state taxes, which they argue shifts the burden to taxpayers in other ways.

Senate Taxes Chairman Tom Bakk, DFL-Cook, deplored Pawlenty's implied threat to unilaterally cut local government aid, saying that "leads to higher property taxes."

Surprising wage drop

State officials were startled by the steep drop in income tax revenue, which accounts for about 70 percent of the state's shortfall.

Payrolls are on track to drop at a faster pace than any time since World War II and companies continue to shed jobs at an unexpected rate.

Where 120,000 lost jobs were anticipated, 131,000 have evaporated. Another 23,000 jobs will be lost before the employment begins to brighten in the spring.

By that time, Stinson said, the state will have lost a decade's worth of job creation.

For those who have jobs, wages are running 5 percent below 2008 and are not expected to pop back up until 2011.

So steep is the revenue fall-off that the state may need to borrow money to pay its bills in the spring, according to Minnesota Management and Budget Commissioner Tom Hanson. The state hasn't done that since the early 1980s.

"It's a significant deficit," Hanson said. "We all will be challenged by it."

The forecast warned that if the labor market stagnates, the recovery could founder.

Stinson, however, said he thinks recovery will be steady.

"I am really hopeful that it's a U-shaped" recovery, he said. Residential construction has already hit bottom and will tick up and manufacturing is expected to stabilize, he added.

But Stinson also warned that state leaders should not expect an economic recovery to replenish state coffers and wipe away the deficits.

"We must make permanent structural changes in both spending and revenue or we just continue to push the hole out into the future," he said.

Burning through cash

Adding to the sense of urgency for lawmakers, the state is already five months into the 2010-11 budget period and has already burned through about 22 percent of its funds, said Jim Schowalter, state budget director.

That means the $1.2 billion deficit projected for 2010-11 will have to be made up from a smaller slice of the pie.

"As time goes by, options become more and more limited," Pawlenty said.

The governor said he has instructed agencies to hold back 3 percent of their budgets until lawmakers take their shot at balancing the budget when they convene in February to pass a bonding bill.

If Pawlenty made further unallotments, they would come on top of the $2.7 billion in unilateral cuts he made this summer. Those cuts brought two lawsuits challenging his solo budget-cutting authority.

Pawlenty said making those cuts permanent would ease some of the long-term deficit, now projected to reach $5.4 billion in 2012-13. That figure rises to $6.5 billion with inflation, but state officials are prohibited by statute from including inflation in the official forecast number. The 2012-13 figure is so large in part because federal stimulus money dries up in 2011.

Jim Miller, president of the League of Minnesota Cities, said he expects Pawlenty to unilaterally cut more state aid to cities and counties.

"I don't think it's a question of if, but how much," Miller said.

DFLers said the governor needs to address the problem more holistically.

"We have reduced state spending fairly dramatically," said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis. "It's the drop in revenue that is creating this problem."

But he and six other DFLers -- three of whom are running for governor or Congress -- downplayed the prospect of tax increases at a news conference and focused instead on job creation as a means of boosting tax revenues.

House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said the 2010 bonding bill can be used to "put Minnesotans to work in transportation and construction."

Republican lawmakers saw the deficit differently.

"We have a spending problem, not a revenue problem," said House Minority Leader Kurt Zellers, R-Maple Grove, at a GOP news conference. He said any increase in income taxes on businesses or individuals "would absolutely kill our economy."

Baird Helgeson • 651-222-1288

Pat Doyle • 651-222-1210

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