By Don Davis and Danielle Killey
Minnesota’s budget future includes uncertainty, spending cuts and tax increase proposals.
State officials Wednesday announced a $1.1 billion budget shortfall, but warned that number could grow to $2.8 billion if Congress and the president fail to solve a federal budget problem by year’s end. The so-called federal fiscal cliff, a combination of tax increases and spending decreases, could have a major impact on the Minnesota economy, including fewer people holding jobs and personal income dropping 4 percent by 2015, State Economist Tom Stinson said.
Without a federal fix, the state would join the rest of the country in a recession early next year, Stinson said, even though the last recession has not quite ended.
If federal officials fix budget issues, Stinson and Commissioner Jim Schowalter of Minnesota Management and Budget said the state economy will continue to grow, although slower than they would like.
“There’s no relief in sight for our fiscal woes,” Schowalter declared as he announced the deficit.
Senate Majority Leader-elect Tom Bakk, DFL-Cook, said the numbers Schowalter’s staff released do not show the full problem. He said that the $1.1 billion deficit grows to $2 billion when inflation is considered.
State leaders will use Wednesday’s budget forecast to write a 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.
“Forecasters are warning it won’t be pretty,” Stinson said.
Democratic Gov. Mark Dayton told reporters that it is likely he will propose tax increases on Minnesota’s richest 2 percent. He did that two years ago, but Republicans who controlled the state House and Senate rejected the idea.
Dayton said the forecast provides a starting point for forming a budget to present to the Legislature next month.
“We haven’t made any decisions on anything at this point,” Dayton said.
With Democrats in charge of the governor’s office and both legislative chambers for the next two years, a tax increase has a better chance than when Republicans controlled the Legislature the past two years.
Incoming Democratic legislative leaders would not discuss tax and spending specifics.
House Speaker-designate Paul Thissen, DFL-Minneapolis, said the next budget forecast, planned for February, will be more helpful when it comes to nailing down specifics about the state’s spending and revenues.
“The fiscal cliff makes our path a little more murky,” Thissen said.
Minority leader Sen. David Hann, R-Eden Prairie, said the forecast shows Republican fiscal policies have worked. The policies included spending cuts.
“To suggest that we need to grow spending … is not productive,” Hann said.
In other news from the budget forecast, state officials said that a better financial outlook for the two-year budget that ends June 30 means the state can begin repaying $2.4 billion it borrowed from school districts.
State Budget Director Margaret Kelly said the first half of a $1.3 billion payment will go to schools on Dec. 15, with the rest coming early next year.
The added money in the current budget comes from one-time sources, such as borrowing against a late-1990s lawsuit settlement with tobacco companies. Money that helped the current budget does not continue into the next one.
The budget report showed drops in state health-care spending, including some lower costs, reduced enrollment and cost-saving changes, Kelly said.
The current savings in health programs is $196 million, with $185 million expected in the next two years.
Those savings pale compared to the overall state budget. Wednesday’s forecast indicates the next two-year budget will include nearly $36 billion of state revenues.
With federal budget cuts and more than $500 billion in tax increases beginning Jan. 1 unless Congress and President Barack Obama act, the national economy could face a recession.
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.
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.