Minnesota faces $1.1 billion deficit

Minnesota's latest economic forecast shows the state will face a $1.1 billion deficit in the upcoming two-year budget cycle, state finance officials announced Wednesday.

"We still have some tough decisions and heavy lifting to do," Minnesota Management and Budget Commissioner Jim Schowalter said during a news conference. "Fiscal balance of the state isn't going to happen naturally."

The new analysis of state revenue and spending obligations shows the same pending shortfall that was projected last March.

"FISCAL CLIFF" FEARS

Minnesota Management and Budget officials said Minnesota's economy continues to slowly improve. Revenue for the current biennium, which ends June 30, 2013, is up. But because the current budget relied on one-time money and payment shifts, Schowalter said he's not calling it a surplus.

By law, the state will pay $1.3 billion of the $2.4 billion owed to schools. But those conditions will not continue into the next budget cycle, which begins July 1, 2013.

While state officials acknowledged the slow progress the state's economy is making, they said it's shrouded in risk and uncertainty. The main problem is the "fiscal cliff" scenario unfolding in Washington. If Congress and President Barack Obama don't reach an agreement by the end of the year, taxes will rise and spending cuts will automatically kick in.

"We'll know a lot more if it's good news in a few months," Schowalter said of the forecast.

Additional uncertainty for the state is found in the federal health care reform law, which the Supreme Court upheld earlier this year. Minnesota was among the states that expanded its Medicaid program for the poor under the Affordable Care Act, assuming the federal government would live up to its obligation to provide 100 percent in matching funds. But following the Supreme Court ruling, the federal government hasn't yet provided guidance to states about how much the match will be, said State Budget Director Margaret Kelly.

"Going off the fiscal cliff produces a recession."

"It could be that we receive no match," she said, adding that $4.3 billion would be in question for the next four years.

Kelly said the Legislature could choose to avoid that uncertainty by changing the law so that the state's Medicaid expansion program widened eligibility requirements. The federal Center for Medicare & Medicaid Services has said it will provide 100 percent in matching funds to states that expand Medicaid for individuals with income levels at 133 percent of the federal poverty guidelines. But for states like Minnesota, which only covers individuals at the 75 percent poverty level, matching funds have not been guaranteed.

Expanding eligibility for the program wouldn't have an immediate impact, but the state would start paying a greater share for the program starting in 2017, Kelly said.

Going over the fiscal cliff would not only result in an estimated 5 percent decline in state revenue, but also would bring down the overall economy, State Economist Tom Stinson said. Minnesota's unemployment rate could edge up above 7 percent if a deal isn't reached, he said.

"Going off the fiscal cliff produces a recession," Stinson said.

If a solution is reached, Stinson predicts continued job growth for the state, especially in the housing industry that saw the most job losses during the recession. But he said full recovery is still a couple years away.

"Incomes are increasing, personal income is increasing, so on the income side we are improving," he said. "It's the jobs side that we're not doing so well."

DAYTON: NO MORE GIMMICKS

DFL Gov. Mark Dayton will use the projected numbers to shape a two-year spending proposal that he must unveil by Jan. 22. Dayton said during a news conference following the budget forecast that he thinks Obama and Congress will reach an agreement on the fiscal cliff.

Of his budget proposal, Dayton said tax increases for the state's top earners will be part of his plan. Though he said he's making no commitments on taxing or spending, Dayton said a tax hike on the top 2 percent of earners would bring in roughly $1.1 billion, the size of the projected deficit. He also said the budget plan will contain "no more gimmicks," referring to the one-time money from tobacco bonds and the school payment shifts used in the past.

Legislative leaders will wait until the release of the next economic forecast in early March before making any of their final tax and spending decisions.

But left-leaning interest groups are already urging state lawmakers to find ways to raise revenue instead of erasing the budget deficit with cuts. Both the state House and Senate will be controlled by Democrats when the Legislature convenes in January.

"A decade of imbalanced, cuts-and-debt-only state budgeting means we need to raise revenue to create a long-term balanced budget," tweeted the Alliance for a Better Minnesota, a group supporting Democrats in the Legislature.

AFSCME Council 5, a union representing 43,000 public workers in Minnesota, called on lawmakers to raise $6 billion in revenue to restore cuts backed by Republicans.

"We need $6 billion to dig ourselves out of the hole and pay for the things Minnesotans care about — brainpower, schools, middle-class jobs, safe transportation, and property tax relief," the union's director, Eliot Seide, said in a news release.

Dayton has proposed income tax rate hikes on the wealthy in the past, but DFL legislative leaders have not yet committed to raising taxes. Republican lawmakers have opposed tax increases, saying they hurt job creation.

Republican House Minority Leader Kurt Daudt of Crown said the forecast shows Minnesota's economy continues to improve, so he said raising taxes would be the wrong move.

"Raising taxes at this point would be a big mistake. I think the economic policies of not raising taxes and prioritizing our state spending over the last couple of years have shown to work," Daudt said.

Senate Minority Leader David Hann, R-Eden Prairie, took it a step further. "Maybe it's time to talk about tax cuts to stimulate the economy," he said.

(MPR reporter Elizabeth Dunbar contributed to this report.)

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