State officials predict 'historic' budget deficit

The national economy is weak, state tax revenues have declined, and Gov. Tim Pawlenty has been hinting for weeks that a big budget shortfall is on the way.

Last month, Pawlenty predicted a substantial, multi-billion dollar deficit in the state budget. In a conference call with reporters earlier this week, Pawlenty offered an even gloomier prediction.

"I think it's going to be a significant number, probably a historic number," said Pawlenty.

Pawlenty has seen a historic number before. A $4.5 billion shortfall greeted Pawlenty when he when he began his first term as governor in 2003.

Economic conditions are worse today, and 41 states are facing deficits. Pawlenty says he doesn't see Minnesota escaping the trend.

"I think it's clear to even a casual observer that Minnesota -- and almost every state -- is going to have major financial problems," said Pawlenty. "Because the economy has gone through a historic slowdown, and the revenues coming into government are going through a historic slowdown. So as the economy is experiencing historic change, governments are going to have to experience that as well."

Pawlenty will offer his recipe for change in January, when he presents his budget proposal for 2010 and 2011. He'll also release a plan to cut spending immediately to resolve a looming deficit this fiscal year.

"It's difficult to imagine we'd be able to get out of this [deficit] without some additional revenue."

The Republican governor and the Democrats who control the Legislature have to negotiate a solution despite their differences on taxes and spending. They don't have many options.

They drained most of the state's reserve earlier this year to fill a shortfall, leaving just $155 million that could be eaten up by the near-term deficit. There's a cash flow account with a $350 million balance, but some are reluctant to tap that when credit markets are tight.

That leaves spending cuts, higher taxes and the federal government.

Kelliher appealed to President-elect Barack Obama this week, asking for help paying for schools, health care, unemployment and infrastructure. Pawlenty said he's skeptical of federal help, saying such spending would compound the national deficit.

"That's going to come back to haunt us," he said.

The Republican governor remains firmly opposed to any tax increases. But DFL legislative leaders aren't making the same commitment. House Majority Leader Tony Sertich of Chisholm says it's too early to rule out any possible budget fixes.

"There's going to be no silver bullet to this, and no amount of cutting or even raising revenue is going to entirely solve the problem," said Sertich. "So I think it would not be wise for us to take anything off the table right now, and be as creative, innovative and flexible as possible." Some Democrats say the pain of potential budget cuts may make a case for raising taxes.

Carving as much as $5 billion out of a $36 billion budget could result in padlocked state parks, an abbreviated school year, higher property taxes and fewer open days for public facilities like libraries, said Sen. Dick Cohen, DFL-St. Paul, who heads his chamber's Finance Committee.

Cohen said lawmakers will look at raising cigarette taxes, increasing income taxes for those making more than $250,000 a year and lowering the sales tax while expanding it to apply to more items.

"It's difficult to imagine we'd be able to get out of this without some additional revenue," Cohen said.

House and Senate leaders are also discussing a switch to zero-based budgeting. That's a "start-from-scratch" approach that prevents the automatic carry over of spending levels from the current budget.

Senate Majority Leader Larry Pogemiller, DFL- Minneapolis, says finance committees will look at every nook and cranny of state spending for possible cuts.

"The first step is to examine your current spending and see if there aren't efficiencies that you can find, and perhaps make some cuts that you didn't think were wise five or 10 years ago," said Pogemiller. "And then I think you look at revenue after that."

Pogemiller says state government will have to change the way it does business in several areas. He's already suggested an overhaul of economic development programs.

Republicans are also proposing big changes in state government to save money.

Rep. Laura Brod, R-New Prague,is pushing a plan to privatize the Minneapolis-St. Paul Airport, the Minnesota State Lottery and other state assets, ranging from parking ramps to highways. Brod says reform comes easier in tough times.

"W've seen in good times in state government that it's easier just to do what you've done, plus a little more," said Brod. "But when you have times of challenge, everybody is looking at how we restructure, how we do things differently and how we really focus in on the priorities. And I think it's those times that bring together the coalitions that you need to get something done."

Rep. Paul Kohls, R-Victoria, outlined another approach: Freezing state spending at current levels or predicted revenues, whichever are lower. He said the state should be able to pay for its priorities without raising taxes.

"The people paying the bills can't afford to pay more right now," Kohls said.

Minnesota's worst deficits came in 2003 and the early 1980s, according to Minnesota Management and Budget. The $4.2 billion shortfall in the 2004-05 budget accounted for 13.6 percent of the state's general fund -- a proportion that could be rivaled by Thursday's anticipated deficit.

The agency didn't have a comparable figure for the 1981 recession, when forecasting was done differently.

Minnesota's Constitution requires a balanced budget by the end of each two-year budget cycle.

Lawmakers say the new economic forecast, and its projected deficit, is just the beginning of the budget debate. They'll make their final decisions based on the revised forecast they'll receive in February. If the economy is still struggling, that report could easily show an even larger budget hole.

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