Economic forecast due: All signs point to deep deficit

The forecast today at the Minnesota Capitol: Expect sadness throughout much of the morning, with periods of heavy blame and posturing during the afternoon.

State budget officials will release an economic assessment this morning that is expected to project an immediate shortfall of hundreds of millions of dollars and a two-year deficit that could top $1 billion.

If economic trends continue, "that could get you well north of a billion dollars of deficit in the current budget cycle," Gov. Tim Pawlenty told a crowd in Bloomington this week. A gap of that size, he said, would require "some significant actions."

Wiping out that level of deficit might require sudden cuts to services, state agencies and could even temper the size of a bonding bill that DFL lawmakers hope will kick-start job growth. Minnesota has been plagued by deficits.

A peek at the state's October economic update offers a glimpse at why state leaders are feeling blue.

General fund revenues totaled $3.06 billion for the first quarter of the 2010-11 budget period. That is about $52 million less than expected and could be a signal that Minnesota has yet to pull out of the economic doldrums that have plagued it for two years.

There is some reason for optimism despite the gloom. IHS Global Insight, the state's national economic consultant, says "the Great Recession" appears to be over. Economists see a slow-to-modest recovery taking shape in the state led by transportation, warehousing and medical and technological sectors.

Throw out the miserable 2008 and 2009 numbers, and "the growth trend is almost the same as recent history," said Mohammad-Qamar Siddiqui, an economist with Global Insight.

The company expects personal income in the state to grow 2.9 percent next year, eventually reaching 4.3 percent growth in 2012.

Employment will have a similar rise, Siddiqui said. In October the state pegged the seasonally adjusted unemployment rate at 7.6 percent -- much lower than the national average of 10.2 percent.

More belt-tightening

None of this does much to dull the state's immediate money woes. The budget scalpel could bloody the upcoming legislative session, usually reserved for bonding.

"We'll see what the size of the deficit is," Pawlenty said in Bloomington. "If it is reasonable and manageable, we will do all that we can to wait for the Legislature to show up in February because we'd like them to be partners in identifying the solutions and dealing with the problem."

The governor warned, however, that the state can burn through $50 to $90 million a day.

"And so every day that goes by is one less day you have to make changes, and this budget has to be balanced by end of the two year budget, so each day matters," he said.

Lawmakers, excluded from the governor's emergency cutting this summer, say they don't want to be shut out this time.

"We'd certainly like input into the solution," said House Majority Leader Tony Sertich, DFL-Chisholm.

Along with cuts, Pogemiller said he expects discussion on ways to raise revenue -- legislative speak for tax increases.

Among the possibilities: a new individual income-tax rate tier aimed at the wealthiest Minnesotans and a sales tax on clothing or services. Minnesota has become one of the few states that exempts clothing from the state sales tax.

Pogemiller said that Pawlenty's reliance on accounting shifts, one-time fixes and now-drained reserves has put the state in a precarious financial position. Legislators on both sides have relied on those same budget-balancing tactics in the past.

The state is now looking at the unusual step of borrowing money to pay bills. At the same time, Pawlenty has proposed a constitutional amendment to cap state general-fund spending.

Too many "gimmicks have been used," Pogemiller said. "We can't keep pushing off the day of reckoning."

"I am highly pessimistic about next year's session," said Senate Finance Committee Chairman Dick Cohen, DFL-St. Paul. "We are just going to plug holes in the dike."