National recession could yield Minnesota red ink

WASHINGTON - Minnesota's official economic outlook, the basis for budget decisions affecting schools, roads, health care, taxes and more, now projects a national recession this year that could throw the state's finances deeper into the red.

The news comes as Washington lawmakers, cobbling together a stimulus package to kick-start the economy, are ignoring a plea for help from Gov. Tim Pawlenty and the rest of the nation's governors.

The governors have asked Congress for as much as $12 billion in additional block grants and health care assistance to help their budgets weather the hard times.

So far, there's no sign that they will get it.

"It's a big disappointment," said Steve Francisco, federal policy director for the Minnesota Council of Nonprofits, which tracks federal spending on social service programs through the Minnesota Budget Project. "We think it's important for the states. We all know the outlook is not good."

The outlook took a turn for the worse Wednesday.

Tom Stinson, Minnesota's state economist, informed legislators in St. Paul that Global Insight, an international economic research firm that performs budget forecasts for Minnesota and other state governments, now says there's no longer any doubt a recession has arrived.

David Iaia, a senior principal for Global Insight, said the firm hasn't produced its updated state forecast, which is due by Feb. 28. But he said the prediction that the nation will be in a recession at least through the first half of 2008 doesn't bode well for Minnesota.

"Minnesota's economy certainly weakened over the course of 2007 -- year-over-year job growth in December was third worst in the country," Iaia said.

Already last fall Minnesota budget officials had forecast a $373 million budget shortfall over the two-year budget period ending in June 2009. Stinson, in January, predicted the gap would likely be even larger.

Nationally, 17 states have projected shortfalls totaling $31 bil- lion through the 2009 fiscal year. Pawlenty has said he believes a shortfall of the size forecast in November could be resolved without tax hikes or spending cuts.

But Pawlenty, chairman of the National Governors Association, told congressional leaders in a recent letter that deeper revenue reductions and higher public health care costs associated with an economic slowdown could force states to cut spending, just as Congress is trying to put cash in people's hands to stimulate the economy.

The budget crunch could also mean reduced funding for health and welfare programs, make finding new dollars for roads and bridges more difficult and intensify partisan tension in the legislative session.

Budget analysts and members of the bipartisan governors association recall that Washington sent $20 billion to the states in 2003 -- part of an effort to speed the recovery from the 2001 recession.

The governors' current stimulus proposal is essentially the same, except that it asks for $12 billion for Medicaid and block grants instead of $20 billion.

D.C. has other priorities

But even that pared-down aid request has received a cool reception in Washington, where lawmakers considering a $161 billion stimulus package are wrangling over add-ons such as extended unemployment benefits, heating assistance, and food stamps.

A plan favored by Senate Democrats, including Amy Klobuchar of Minnesota, would add renewable energy tax credits, along with additional help for seniors, disabled veterans and the unemployed.

Klobuchar is one of 20 senators who have expressed support for state fiscal relief, but the idea is not part of the stimulus package headed for a Senate vote later this week.

Congressional leaders in both parties say their principal aim is to rush tax rebates of between $500 and $1,200 to most taxpayers as soon a possible. Everything else, some lawmakers argue, should take a back seat.

Debating the deficit

One member of Minnesota's congressional delegation opposes the federal stimulus package, even without adding state aid.

State officials, including Stinson, argue that a recession could add to the federal budget deficit as well.

In an interview last week, Stinson noted that even a modest federal stimulus package could mean the difference between a slight recession and a slight amount of growth. "It could keep us from dealing with a bigger budget problem in the future."

In his remarks to state lawmakers Wednesday, Stinson said Minnesota could be hit hard by recession because the state has no large defense or energy industries to offset economic difficulties.

Tom Hanson, the state's finance commissioner, said in a recent interview that the state's revenue problems are being driven by sluggish sales and corporate income taxes. While putting money directly into taxpayers' hands could help, he said, state fiscal aid would help even more.

"Money from the feds gives us the flexibility to weather a downturn without cutting government assistance," he said. "It's an auxiliary to giving money to citizens. If we end up cutting money out of our Medicaid program, it ends up running counter to what the federal stimulus package is supposed to do."