The State Capitol Thursday evening.

Jeff Wheeler, Star Tribune

Ed Rooney outside his shop on Broadway St. in Alexandria Wednesday evening.

Jeff Wheeler, Star Tribune

Eric Sewalson had to use a picnic table bench to change out of his skates after skating at Twin Oaks Park last week. There's a warming hosue there, but it's not open this winter.

Jeff Wheeler, Star Tribune

Gear belonging to West Metro Fire-Rescue District firefighters is ready to go at Station 2, next door to Crystal City Hall. The department has served the communities of Crystal and New Hope since 1998.

Jeff Wheeler, Star Tribune

Our bill is due: $6.2 billion

  • Article by: BAIRD HELGESON
  • Star Tribune
  • March 22, 2011 - 2:43 PM

The question hits Anne Norris most during quiet times, like when she's driving home or relaxing on the weekend.

Where will the money come from now?

Norris is the city manager in Crystal, a suburb northwest of the Twin Cities stung by declining state aid and trying to solve budget troubles by combining countless services with neighboring towns -- from its fire department to its computer system. It also has cut back snow plowing, closed ice-rink warming houses and wiped out free park events.

"It's gut-wrenching and heart-wrenching. It stresses me out," she said. "We've stripped away everything that isn't essential."

It's still probably not enough, either.

The tension haunting Norris is rippling across Minnesota as a fateful year begins. Big cities, small towns, business interests, schools and public agencies that serve millions of Minnesotans are all bracing for a reckoning on the state's financial predicament.

Starting this week at the State Capitol, a new governor and new legislative leaders will attempt to dig Minnesota out of the $6.2 billion budget hole that it faces over the next two years -- and only exceedingly difficult decisions loom.

Over the past few years, as a long, punishing recession sapped the state treasury, state leaders have tried to stop the financial bleeding with an assortment of Band-Aids, from payment delays to one-time federal windfalls of cash. Now that bag of tricks is just about empty. The easy and not-so-easy cuts already have been made.

"If we are not on the precipice of the abyss, we are at the very least on a very long slippery slope," said Edward Foster, a retired professor of economics at the University of Minnesota and a member of the Minnesota Council of Economic Advisors. "We are at the point -- and we have been for several years -- where the state has to deal with the problems completely or they will get bigger."

High stakes, hard choices

Minnesota's financial problems are part of a larger budget crisis swamping states from California to New Jersey, where massive cuts in bedrock government services, waves of layoffs and even bankruptcy filings are being contemplated.

The situation here does not appear quite that dire, despite the state's enormous deficit, because Minnesota's unemployment rate is more than 2 percentage points better the national average. The state's prized credit rating also has held firm, so far.

But few doubt the gravity of the budget perils that Minnesota is facing. Or that there's a painless remedy.

What's more, the state's budget turmoil is reaching a critical juncture just as Minnesota's political landscape has been transformed.

Mark Dayton, the first DFLer elected governor in 24 years, will be sworn into office on Monday. The next day, Republicans will be installed as leaders in both chambers of the Legislature for the first time in four decades.

Dayton, who campaigned on the pledge to help solve the state's budget troubles by raising taxes on high earners, appears headed for a collision with GOP legislators who are vowing instead to cut back state spending -- 65 percent of which goes to education and health care.

Whatever decisions get made will likely affect local governments around Minnesota, many of which rely on state aid to help keep a lid on their property taxes.

It is an unfolding drama with endless dilemmas, high stakes and hard choices.

The prospect of higher taxes, for example, is alarming some business leaders, who say that Minnesota is already losing its competitive edge to neighboring states where workers are cheaper, taxes lower and community leaders more eager to cut deals to lure new businesses.

On the other hand, the prospect of more cuts to the state workforce or services is stirring dread, too. State government is Minnesota's largest employer. Lop off thousands of jobs, and it could hurt the state's wobbling economy.

Meanwhile, vital institutions such as courts and schools say they already are reeling from prior cuts. Nearly a dozen school districts, for example, have shrunk their week to four days to save money. Class sizes are also growing, and money for supplies is scarce.

Then there's the big conundrum of health care. With more Minnesotans stuck without it, legislators will be under renewed pressure to look at the soaring costs of health services paid by taxpayers. But Minnesota's baby boomers -- a powerful voting bloc -- are nearing retirement and expecting more health services, not fewer.

Missteps could be costly

Wall Street is watching the state's $6 billion budget problem closely, too.

Minnesota maintains one of the best credit ratings in the country, but a misstep could drag down the state's bond rating and add million of dollars in interest to taxpayer-backed projects, like a new Vikings stadium, college science buildings or local fire stations.

Last summer, Moody's Investors Service, a premier credit-rating agency, warned that Minnesota's reserves have dropped to nil and that the state is relying too heavily on one-time budget fixes.

"We are now at a point where we have to find a solution," said Jim Schowalter, now deputy commissioner of the Minnesota Office of Management and Budget and Dayton's pick to lead the agency.

The looming drama at the Capitol could deeply alter the level of services that Minnesotans have long expected government to provide. Once a flush government fueled by a demanding constituency, the state is an increasingly gaunter version of its former self.

Freeways are grubbier. Want to travel in the fast lane? It'll cost you extra in some places. Wheel-eating potholes mark roads that a few years ago were table-top smooth. Even some of the stonework is crumbling at the state's architectural gem, its 105-year-old Capitol.

In many Minnesota communities, building permits are now taking longer, court proceedings are getting delayed for months because of staffing cuts, restaurant inspections have fallen off and neighborhood crime-prevention programs have dried up.

"There's this gradual chipping away at the quality of life over the last decade," said Dan Dorman, a former Republican legislator who is the executive director of the Albert Lea Economic Development Agency.

Local officials now have the arduous task of trying to balance their budgets while keeping property tax increases at bay, without damaging the very reasons that people want to live in their communities.

Frustrated residents are showing up at budget hearings around the state, often demanding lower taxes and better government services.

Minneapolis residents packed a budget hearing in December to plead with city officials to back away from another proposed property tax hike. The property tax level in the state's largest city has risen every year since 2002, and city officials say declining state aid is partly to blame.

In the central Minnesota town of Alexandria, some residents erupted when officials proposed a modest spending and levy increase.

Ed Rooney, owner of the Cowing Robards retail store there, was so upset he attended a town hall budget meeting. He couldn't believe what he called the gall of city officials to pencil in more spending while so many businesses and families were barely breaking even.

"We see the squeeze coming," Rooney said. "But we are having a really tough time. We can't just raise our prices. We don't know what to do."

Forecast: More cuts

With little appetite for higher taxes among legislative leaders, more cuts in state spending are likely on the way.

Communities statewide are looking at reducing the number of police officers and firefighters they have, slashing library hours and putting off street repairs -- reductions that officials say they could not have fathomed five years ago.

More than 4,000 government jobs were lost in Minnesota over the past couple years, and hundreds more public workers could be pink-slipped this year.

In cities such as Faribault, cuts already have ranged from big moves such as merging government departments to reduced services for residents, such as rounding up stray cats or helping people who are locked out of their cars.

"There's a lot of tension," said Mankato City Manager Pat Hentges, whose community has imposed furloughs, reduced library hours and cut back on training for firefighters.

As the state's budget problems intensify and stay unresolved, city officials are getting stuck in a delicate, politically volatile position, Hentges said. Do they pull back on snow plowing to save a police officer's position?

"We worked plow drivers to the absolute limits" after the last blizzard, Hentges said. "But then we could have a small crime spree, or vandalism, and people expect to put all their resources to those things."

Slipping into recession

Minnesota began its descent into recession in the early 2000s, even as state spending continued to creep up.

In 2005, the housing bubble burst and the economy tumbled. Home prices sank, taxes lagged and the state burned through reserves, delaying payments and shifting money among accounts to keep up. Last year, it forced school districts with reserves to lend money to the state.

Now, the state is still so tapped out it may need to do short-term borrowing to pay bills.

Meanwhile, the economy is stuck worse than a beater in a snowbank. A year after the latest recession ended, economic growth remains weak. Good jobs are scarce and foreclosures still plentiful.

Economists see no easy path to the kind of robust economic growth that would flood the state treasury with new revenue. They say the skills of many unemployed workers no longer fit employers' needs. Some people willing to move for work can't because their homes are not selling or they are owe more on their mortgages than what their houses are worth. At the same time, many banks are unwilling to lend. Without credit, businesses can't expand or hire new workers.

But some still see reason for at least a glimmer of optimism.

The state's credit rating is intact. Its health care, tourism and service sectors are on the rise.

"What we've seen is that the state's economy can bounce back pretty quickly and refill its reserves," State Economist Tom Stinson said.

He cautioned, however, that his assumption is built on elected leaders who are willing to balance the state budget without the payment delays or additional one-time remedies that outgoing Republican Gov. Tim Pawlenty and the DFL-controlled Legislature have relied on.

Uncertain landscape

Veteran legislators from both parties are predicting a giant headache as the session opens Tuesday.

"The promises of fiscal responsibility ... are the right thing to do, but putting the bill together can be starkly more difficult," said outgoing state Rep. Randy Demmer, R-Hayfield.

Local officials don't know how much more uncertainty they can take. Some say they fear the Legislature might cave to pressure to phase out all the aid that the state sends to local governments.

In Albert Lea, that drastic step would mean the loss of $5 million -- a full third of its annual budget.

If the city closed all of its parks and library, and stopped all miscellaneous spending, that would save $3.6 million. Merging the police department with the local sheriff's office and switching to a volunteer fire department could get them closer.

Some city officials around the state compare what they are going through to an economically strapped family switching from two cars to one. You can still get to work and take the kids to practice, but it's a major hassle.

"It's been tighten the belt, tighten the belt, tighten the belt for eight years," Worthington Mayor Alan Oberloh said.

The southwestern city of 12,000 is down one police officer. When city officials needed to replace a worn out firetruck recently, they were stunned to learn they didn't have the money for a new one. They bought a used one instead. Two years ago, they sold off their prized community hospital.

Oberloh said he is preparing residents for life without many of the government services they have come to expect.

"It could get to the point where it is never the same," he said.

Baird Helgeson • 651-222-1288

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