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With state reserves already tapped out, legislators are bracing for an estimated $500 million to $1 billion in red ink when state budget officials release the November economic forecast Thursday.
The state's politicians have a lot riding on the forecast. Another large deficit could signal a savage rematch of the budget battle that engulfed the Capitol early this year and resulted in a record 20-day state government shutdown. The entire Legislature is up for election next year, so many legislators had hoped for a relatively quiet session starting in late January, letting them hit the campaign trail without baggage from a politically bruising budget fight.
"You'd have to put me in the pessimistic camp," said Deputy Senate Majority Leader Geoff Michel, R-Edina. "All of our members are very much aware of the economic situation and the probable need for us to be budgeters next session."
Elected leaders have just recovered from a six-month political fight to wipe out a $5 billion projected deficit. Legislators refused to accept Dayton's proposed income tax hikes and the governor would not cut spending as deeply as Republicans wanted. In the end, Dayton got the spending he wanted, but only after both sides agreed a mix of cuts, shifts and borrowing to square the budget.
This fall, Minnesota budget officials have been piecing together a particularly tricky financial portrait that accounts for the health of the local, national and world economy and then measures that against state expenses for the rest of the two-year budget cycle. The failure of the so-called supercommittee in Washington, the debt crisis in Europe and other potential global financial calamities could yank the state's slow economic recovery back into the ditch.
"One of the things that's different about this forecast is that there's a lot more upside potential and a lot of downside potential," said Tom Stinson, the state's economist. "There's just a lot of uncertainty."
Stinson said that it could blow a supersized hole in the state's economy if Congress and President Obama fail to renew payroll tax cuts and an extension in unemployment benefits. "That puts us perilously close to no growth and gives us no buffer" for such a shock, he said.
Minnesota Management and Budget Commissioner Jim Schowalter said the state's economic outlook is hobbled by the worsening national picture.
"There's no doubt that the national economy is expected to grow slower than we expected last February," Schowalter said.
Small signs of Minnesota's economic rebirth have started to poke through, however. The state's economy is doing better than the nation, with unemployment dipping to 6.4 percent and more companies looking to hire.
Minnesota's state coffers ended the last fiscal year with more money than forecasters predicted, totaling $354 million. "If we start from a better place, that all helps us," Schowalter said.
But the spending side of the ledger could add red ink.
A big question surrounds swelling health care costs. State budget officials face the difficult task of estimating the impact of the federal health care overhaul, both in the coming two years and in future budget cycles. "Some of these things are impossible to estimate," Schowalter said.
Already, delays in implementing many health care changes this summer will add up to $50 million to any projected deficit.
Minnesota has endured a string of deficit forecasts. February 2007 was the last time state leaders predicted extra money would show up in the coffers. Since then, the multibillion-dollar succession of shortfalls has drained reserves, caused deep cuts to almost every state service, and prompted elected leaders to borrow billions from public schools and private lenders.
The budget numbers to be released Thursday remain a closely held secret.
"We'll manage whatever it is," Dayton said Tuesday.
"We have been preparing," agreed Senate Majority Leader Amy Koch, R-Buffalo.
Rep. Jim Abeler, the Republican chairman of the House Health and Human Services Finance Committee, said he is girding for a deficit of $500 million, a figure that could take a heavy toll on state spending on health and human services. "I am very nervous," he said, "If it's $500 million, then $300 million is coming out of us."
Dayton and legislative leaders did say they won't get too riled by this week's prediction, waiting instead for the February forecast to guide budget negotiations.
Legislative leaders say they are likely to resurrect cuts proposed earlier this year but rejected by Dayton. "If it's another hole, it's going to be an ugly session," said state Sen. John Marty, DFL-Roseville.
Staff writer Jim Ragsdale contributed to this report. Baird Helgeson • 651-222-1288