Legislators hope for a dent in Minnesota's deficit

As Minnesota budget officials present a forecast Monday that will offer a detailed snapshot of the state's economy, legislators and others are hopeful that the state's brightening financial fortunes will help dent its $6.2 billion projected deficit.

While details of the projected shortfall are closely held by those crafting the forecast, many top legislators and budget hawks think that a string of recent positive economic news could put some extra money into state coffers and help pare the deficit. For instance, former state Management and Budget Commissioner Tom Hanson, who prepared numerous forecasts for Gov. Tim Pawlenty's administration, predicts the state's precarious economic rebound could cut the deficit by $500 million.

The forecast projects state revenues and expenditures in the coming two years, recalibrates the deficit, frames the legislative budget-balancing debate and forms the basis of the budget agreement.

DFL Gov. Mark Dayton and the Republican-controlled Legislature are faced with a profound divide over how best to snuff out the shortfall as a May 23 deadline for adjournment looms. Federal stimulus money has run out, the reserve funds are dry and the state is nearly out of money to pay bills.

Still, there are reasons for optimism.

"The economy is certainly better than in November," state economist Tom Stinson said of the last economic forecast.

The biggest economic improvement: The tax compromise between President Obama and Congress that cut payroll taxes. Economists predict that change will result in more take-home pay and a jolt to the nation's economy.

"These findings are another indication of an improving economy," DEED Commissioner Mark Phillips said.

The most job vacancies were in health care and social assistance, retail trade and manufacturing.

In December, Minnesota's unemployment rate fell slightly to 7 percent, far below the national rate of 9.4 percent.

Still, Stinson cautioned it will take some time for the state to claw its way back from the worst recession since the Great Depression.

"It's still going to be a long, slow pull before we get back to the unemployment rates we saw before the recession," he said.

Oil prices are near the top of the list of warning signs. If gas inches up near $5 a gallon, it will wipe out the benefit of the payroll tax cuts, Stinson said.

High-stakes staredown

With so much on the line politically, legislators and the governor are enmeshed in a high-stakes game of political poker. Nobody expects the economic forecast to make a significant dent in the deficit, which means a mountain of hard choices will fall to elected leaders.

Dayton's budget outline calls for more than $3.3 billion in tax hikes, something Republicans vehemently oppose. Yet two months into the legislative session, Republicans have yet to offer an alternative budget.

Dayton vetoed nearly $900 million in cuts proposed by Republicans, saying the reductions would have indirectly raised property taxes.

"The Republicans have said they want to do things differently, but we haven't seen that," said House Minority Leader Paul Thissen, DFL-Minneapolis.

Deputy Senate Majority Leader Geoff Michel, R-Edina, blamed Dayton for foisting what he called economy-killing tax hikes on the state's highest earners.

"We are growing a little concerned about the disconnect that Minnesota and our new governor is showing in comparison to other states," Michel said.

Stinson cautioned that Minnesota's fiscal fortunes are deeply rooted in the national economy.

If unrest in the Middle East drags down the U.S. economy, Stinson said, it will jerk the chain of the state's economy more than the outcome of any local political skirmish over taxing or cutting.

Assistant Senate Majority Leader David Senjem, R-Rochester, recently met with a group of home builders from his area.

They told him that several years ago they were building homes at the rate of 1,000 a year. This year, they might build 200.

That was all the economic forecasting he needed.

"It doesn't feel real positive to me," Senjem said.