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First Reading: From worse to bad

Published (3/6/2009)
By Nick Busse
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State Economist Tom Stinson takes a peek at the charts and graphs that illustrate the state budget forecast prior to a March 3 news conference. (Photo by Tom Olmscheid)Lawmakers finally have a definitive number to work with: $4.57 billion.

That’s the size of the budget deficit the Legislature will have to eliminate before its May 18 constitutional adjournment deadline. And while it may not sound like good news — actually, it’s the single largest deficit in state history — it could have been worse.

On March 3, Minnesota Management and Budget Commissioner Tom Hanson presented the state’s February Forecast, which predicts a $6.4 billion gap between what the state is scheduled to spend and what it will collect in revenues over the next biennium.

In what passes for good news in these trying times, Hanson announced that state leaders will only have to deal with $4.57 billion of that gap. The rest, he said, will be filled in by an infusion of $1.8 billion in Medical Assistance funding from the federal stimulus package. The stimulus will also give the state more than enough money to balance out the remainder of the current fiscal year.

“The one-time stimulus helps, but we continue to have an ongoing problem. We’re not out of the woods yet,” Hanson said.

Not by a long shot.

The February Forecast sets the stage for what is sure to be a difficult road ahead in the slightly more than 10 weeks the Legislature has left to do its work. Last year, legislative leaders and Gov. Tim Pawlenty negotiated down to the wire on a fix to a comparatively modest $1 billion deficit — half of which was ultimately resolved using state budget reserves.

This year, the deficit is vastly bigger, the budget reserve is gone, and the options left to state leaders are seemingly fewer.

Rep. Michael Paymar, from bottom, Rep. Phyllis Kahn and Rep. Thomas Huntley follow a budget handout March 4 as State Economist Tom Stinson reviews the February Forecast with members of the House Ways and Means and Finance 
committees. (Photo by Tom Olmscheid)Where things stand

DFL legislative leaders and the governor disagree on whether, as House Speaker Margaret Anderson Kelliher (DFL-Mpls) put it, “all options are on the table” for balancing the state budget. In particular, Pawlenty and DFL lawmakers disagree on the issue of revenue.

Reiterating his oft-repeated position that government “needs to learn to live within its means,” Pawlenty said flat-out that he will veto any tax increases.

“If they plan on raising taxes, we’re going to have a collision,” Pawlenty said.

But according to Kelliher, the “collision” the governor speaks of has already happened.

“This situation is like having a broken leg, and we are in the emergency room,” Kelliher said, comparing the economic crisis to a car crash. “The help that we have gotten from the federal government is like short-term pain medication … and it is certainly helpful, but the underlying problem remains.”

Kelliher said the state needs to look at long-term solutions that balance the budget not only in the next biennium, but also into the future. She said Pawlenty’s proposed budget solutions, such as K-12 accounting shifts and tobacco revenue bonds, are one-time fixes that would just put the state deeper in the hole in the 2012-13 biennium.

“We will propose a budget that is balanced for four years,” Kelliher pledged, adding that DFL budget proposals will have balanced “inflows and outflows.”

To House Minority Leader Marty Seifert (R-Marshall), that sounds like tax increases.

“They need to come out and say whether they’re going to raise taxes or not,” Seifert said. “Let’s have the discussion, let’s have the debate, and let’s get session finished on time.”

Seifert has accused DFLers of inaction on the budget. At a March 2 press conference, he joined other Republicans in accusing the DFL of refusing to hear Republican ideas for solutions, and of wasting 40 percent of the legislative session without proposing any budget fixes.

DFLers say the Republicans are just playing politics.

“It’s a trite political argument that has been tried year after year after year,” said House Majority Leader Tony Sertich (DFL-Chisholm). “The fiscally responsible thing to do is to wait until we get a forecast to get the most accurate data.”

Although the DFL has not released a budget proposal of its own, Pawlenty is having to redo much of his proposal because of the changes wrought by the stimulus and the deteriorating economy.

According to Hanson, a $920 million placeholder in the governor’s original budget plan did not materialize. Instead, the stimulus provides Minnesota with some $800 million in “state stabilization” money that could potentially be used to shore up the General Fund, but only if the Legislature authorizes it and only if the money is used for specific purposes.

No end in sight

The root cause of the state’s budget woes is the worsening recession. At a March 3 briefing, State Economist Tom Stinson said the problem isn’t going away anytime soon.

“This recession is longer and it’s going to be deeper than we thought in November. It’s probably going to be the longest and deepest recession since World War II,” Stinson said.

Stinson said the economic downturn is “broad-based.” Virtually every sector of the economy, from the stocks to consumer spending to the housing market, is not just stagnant but in a state of decline.

What’s worse, Stinson said the recovery – when it comes – is expected to be slow. While many economists think the economy will show signs of improvement possibly in the first quarter of next year, Stinson said the 120,000 jobs the state estimates it will have lost by then will take a lot longer to regain. “Those jobs that have been lost won’t be recovered until 2012.”

As bad as things are, Stinson said they would likely be worse without the federal stimulus, which he predicted would save some 45,000 jobs from being lost in Minnesota alone. However, he cautioned that stimulus money would take some time to trickle out into economy.

At a March 4 joint meeting of the House Finance and Ways and Means committees, Stinson offered his own answer to the taxes vs. spending cuts debate — one that took some members aback.

Speaking about a phenomenon called the “balanced budget multiplier,” Stinson said cutting taxes and spending during a recession can actually make a recession worse by taking more spending out of the economy.

“The implication of that is that it’s better to raise taxes than to cut spending,” Stinson said.

Rep. Mary Kiffmeyer (R-Big Lake) questioned Stinson’s logic, arguing that taxes take money out of the wallets of people who could otherwise use it to buy consumer goods and help get the economy moving again.

Stinson responded that, “If there’s no money put in the wallet in the first place because they lose their job, they’re not spending it for consumer goods either.”

“Would the logic then follow that you might want to tax 100 percent and then everybody would have jobs?” Kiffmeyer asked.

Stinson declined to reply, adding, “I think this has gone far enough.”

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