Minnesota could face $1 billion deficit

Faced with a deepening economic slump, state officials are preparing for a budget-buster deficit that could approach $1 billion and force spending cuts or tax increases that might leave few Minnesotans untouched.

While the exact amount remains a secret until the state economic forecast is released Thursday, Gov. Tim Pawlenty left little doubt Tuesday that the tidings will be grim.

"It's going to be bad," Pawlenty said. "Our economy is not in good shape."

Fresh off the first veto override of his governorship, Pawlenty laid into DFLers for passing a $6.6 billion transportation bill -- including gasoline and sales tax increases -- days before the forecast is due.

"When the deficit number is released, you're going to see a major problem," an angry Pawlenty said. "That's why they did this quick."

He warned that the magnitude of Thursday's deficit projection will require spending cuts and that "we will expect Democrats to get involved."

A severe deficit could affect millions of Minnesotans through either cuts in services or steeper taxes and fees as the state seeks to balance its budget.

No one expects Thursday's news to be as bad as the $4.5 billion deficit of 2003. But state officials also have noted that the impact of any cuts would be magnified because the state is well into its two-year budget period, which ends June 2009.

If a budget accord is not reached until May, when the session is scheduled to adjourn, the state will have little more than a year to put its finances back in the black.

The state does have a healthy $1 billion in reserves -- painfully rebuilt after being zeroed out in the previous budget crisis -- but few want to tap too deeply into that.

"This is beyond the point where you can use [budget] reserves to mask the problem," said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis. "We're preparing to deal with some budget cuts here."

Already Pawlenty has imposed a statewide state government hiring freeze and signaled that health and welfare costs will be targets for possible cuts. Pogemiller has instructed his budget chairs to trim their requests and look for places to prune.

House Taxes Chairwoman Ann Lenczewski, DFL-Bloomington, said that "after Thursday, nobody's going to be talking about anything except the deficit."

State economist Tom Stinson said that among the most troubling indicators is the widespread weakness of the Minnesota economy.

"The weakness ... is pretty widely distributed across all sectors," Stinson said in an interview with the Star Tribune. "Construction is the big area of decline, but really, there hasn't been anything other than health care where the performance is better than the national average."

What's more, he said, "the worst is still ahead of us."

Minnesota's economy is expected to weaken further, Stinson said, although the drop "won't be catastrophic. We're not going to fall off the table. But it's going to hurt."

Growing woes

Since then, the litany of the state's financial woes has lengthened. The steepest decline in housing values in 20 years has dramatically shrunk home equity and hit construction hard. Banks are foreclosing on properties across the state at record rates. Personal income growth has dropped and unemployment is up. The Ford plant is gone and Macy's is paring more than 900 jobs as it closes its regional headquarters in Minneapolis. Oil continues to hover around $100 per barrel and consumers are swooning at the uptick in food prices.

Stinson said the forecast does not take into account a possible merger of Northwest and Delta airlines, which could result in further job and tax revenue losses.

Lenczewski said that any ultimate solution likely will rely on a mix of budget cuts, the accounting shifts that no one likes but everyone resorts to and possible elimination of tax exemptions that could yield revenue without raising general tax rates.

"No one's going to like what we're going to have to do," she said.