Update: $1.1 Billion State Deficit Could Grow To $2.8 Billion

Minnesota’s budget will face a $1.1 billion shortfall, state officials announced today, but that number could grow to $2.8 billion if Congress and the president fail to solve a federal budget problem.

While saying today’s budget announcement was not gloomy, Commissioner Jim Schowalter of Minnesota Management and Budget declared: “There’s no relief in sight for our fiscal woes.”

Senate Majority Leader-elect Tom Bakk, DFL-Cook, said the $1.1 billion deficit grows to $2 billion when inflation is considered.

The budget forecast is used by state leaders to write a new budget for the two years beginning July 1, but the so-called federal “fiscal cliff” leaves what Bakk said is the most uncertain fiscal future he has seen.

Schowalter and State Economist Tom Stinson said there is some good news. The national and state economy continues to grow, they said.

If officials in Washington bridge the fiscal cliff, Stinson said, an improved housing market could spur the state economy.

The other good news to many was that the state will begin paying back $2.4 billion owed schools.

State Budget Director Margaret Kelly said the first half of a $1.3 billion payment will go to schools on Dec. 15.

Legislators and governors in recent years have delayed payments to schools to help solve state budget problems.

Under current law, surplus money in the two-year budget that ends June 30 must be used to repay schools. However, legislators could delay repayment if they act soon after they return for a new session beginning Jan. 8.

Today’s deficit forecast adds to a cloud of uncertainty hanging over the state budget because of action, or inaction, on federal budget issues.

With budget cuts and more than $500 billion in federal tax increases beginning Jan. 1 unless Congress and President Barack Obama act, the national economy could face a recession.

“So you are going to have to do something to stop the tax increases from coming about,” Stinson said in an earlier interview. “You can’t just say, ‘We won’t do anything and it will go way.’ If you don’t do anything you are over the cliff.”

The impact could be gradual, Stinson said, but Americans would begin noticing the higher taxes in their first 2013 paychecks. If nothing is done, he said, consumers gradually will stop spending and businesses will hire fewer people.

“You get started on that vicious spiral,” he said.

Stinson’s staff prepared a report not part of the official budget forecast that showed if the fiscal cliff occurs that Minnesota’s personal income could fall 4 percent in 2015. State unemployment could rise to 7.1 percent in 2014, while national employment would be 9 percent, Stinson said.

The economic slowdown would result in the state losing $1.7 billion beyond the already-projected $1.1 billion deficit. That is about 5 percent of the 2014-2015 state budget.

Gov. Mark Dayton last month said that while he must submit a budget proposal in January, he would be forced to revise it if the fiscal cliff occurs.

A new budget forecast is due out in late February or early March, which likely will mean that Dayton will revise his budget then. Schowalter said that forecast will be more accurate because more will be known about congressional action.

The 2013 legislative session begins Jan. 8, and relatively little budget-related work is expected in the first two months while lawmakers await the later budget report.

The budget forecast provides figures for state officials to craft a budget. The current two-year state budget spends $34 billion in state taxes and fees.

A budget must be in place by July 1 or there could be a government shutdown like in 2011.

Republican legislative leaders took credit for the current budget’s surplus was their frugal budgeting action when they controlled the state House and Senate the last two years. Senate Minority Leader-elect David Hann, R-Eden Prairie, said tax cuts would spur economic growth better than what he expects to be DFL-backed tax increases.

Minutes after the deficit was announced, the state’s largest government employee union asked for higher taxes.

“If Republicans are looking for massive spending cuts, they’ve already done that with a decade of disinvestment,” said Eliot Seide, director of AFSCME Council 5. “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.”

To fund state spending, taxes will be debated.

There is widespread expectation that higher taxes, at least on the state’s richest residents, will be favored by the new Democratic-Farmer-Labor Party legislative majority. Democrat Dayton has been a strong advocate of that, and the 2013 Legislature will mark the first time in two decades that a governor of his party has had a DFL House and Senate.

DFL legislative leaders today would not say if they support tax increases, but Bakk said he expects Dayton’s budget proposal to include more spending cuts.

While twice annual budget forecasts are reported as showing surpluses or deficits, the Minnesota Constitution actually does not allow a deficit. More accurately, the forecast shows what would happen to the state budget if the governor lawmakers made no change from current law.

A budget surplus could have allowed more spending on other programs without raising taxes.

A deficit, on the other hand, must to be fixed by the state raising more revenue or cutting spending. Revenues may mean higher tax rates or just eliminating what politicians like to call loopholes, those tax cuts and credits politicians often approve to help certain classes of businesses and citizens.

Here is a look at Minnesota’s budget forecast for the past decade:

— February 2012, $323 million surplus.

— November 2011, $876 million surplus.

— February 2011, $5 billion deficit.

— November 2010, $399 million surplus.

— February 2010, $994 million deficit.

— November 2009, $1.2 billion deficit.

— February 2009, $4.6 billion deficit.

— November 2008, $426 million deficit.

— February 2008, $935 million deficit.

— November 2007, $373 million deficit.

— February 2007, $1 billion surplus.

— November 2006, $1 billion surplus.

— February 2006, $88 million surplus.

— November 2005, $701 million surplus.

— February 2005, $157 million surplus.

— November 2004, $700 million deficit.

— February 2004, $160 million deficit.

— November 2003, $185 million deficit.

— February 2003, $11 million deficit.

— November 2002, $356 million deficit.