State leaders who spent years draining reserves and borrowing money to patch up leaky budgets will get a sober reminder Wednesday that it will take years before the state's finances fully recover.
The strengthening economy has many legislators feeling upbeat before the state economic forecast is released Wednesday, but it's tempered by the knowledge any new surplus must immediately go to restore budget reserves and repay money owed to public schools.
"The Great Recession pounded us," said Minnesota Management and Budget Commissioner Jim Schowalter. "One or two, or even three good forecasts are not going to fix that right away."
After a relentless string of back-to-back budget deficits, Minnesota budget officials surprised state leaders last November when they announced the strengthening economy left the state with a nearly $900 million surplus. But that money immediately was siphoned off to start refilling the state's empty reserves.
Those reserves still must be topped off. Even then state leaders are staring at a mountain of additional IOUs. State law mandates that future surpluses be spoken for until the reserves are full and the $2.7 billion owed to K-12 public schools is repaid.
The modest $100 million surplus that some legislators are predicting would barely put a dent in that. So deep is the state's debt that it could be years before legislators see money that has no ties.
House Ways and Means Committee chairwoman Mary Liz Holberg, R-Lakeville, put it starkly: "Paying off 1 percent of the shift is about $70 million."
The new economic forecast will test last fall's assumptions about economic growth and match them against state spending estimates to arrive at a budget number for the remainder of the two-year biennium. Nearly all economic indicators show the state tracking about where budget officials predicted in November.
There are some reasons for optimism.
Minnesota's unemployment rate continues ticking downward and was at 5.7 percent by mid-January. The rate has already fallen 1.5 percentage points since August -- the biggest four-month decrease on record in Minnesota, dating back to 1976. The state's jobless rate is now nearly 3 percentage points below the national average. State figures show that unemployment in Minnesota is at its lowest since 2008, with job growth strongest in the Twin Cities, Rochester and Mankato.
Schowalter and others warned that a chance remains the state could run a small budget deficit.
Soaring gas prices and uncertainty with Congress' extension of the payroll tax break have been a drag on the economy, said state economist Tom Stinson.
Tax collections in January slipped a bit below targets, too.
"Compared to last year at this time, I am not feeling as euphoric," Stinson said. "I have more subdued expectations for growth the rest of this year."
DFL Gov. Mark Dayton's administration is already working on proposals in the event of a shortfall. Schowalter said he will advise the governor to balance the budget without tapping reserves.
If there is a modest deficit, "it's not hard to think of proposals to get that done," Schowalter said.
The budget number remains a closely guarded secret until release day, but Senate Minority Leader Tom Bakk, DFL-Cook, would not be surprised to see some red ink.
"The probability of a deficit has been increasing since November," he said. "November was better than February."
That could create a moderate disturbance in the middle of what has been a rather subdued legislative session. With re-election looming, some legislators have been dreading another nasty budget showdown during a legislative session normally reserved for less divisive measures, like bonding bills and policy changes.
"We are keeping our fingers crossed and hoping for the best," said state Sen. Warren Limmer, R-Maple Grove.
Baird Helgeson • 651-222-1288