The crux of the Capitol debate: What does it take for Minnesota to produce a 'balanced budget'?

We know this is the way it's supposed to work: Every two years, the state Legislature and the governor must agree on a balanced budget for the next biennium because the Minnesota Constitution requires it.

We also know the system generally works like this: The Legislature must complete its work by the constitutional deadline (this year, midnight Monday) and present the governor with spending and revenue bills that produce a balanced budget. The governor then either approves or vetoes the bills. If he vetoes key measures, typically a special session would be called until budget-balancing agreements are achieved.

Of course, Gov. Tim Pawlenty threw a wrinkle into the traditional system Thursday by saying that indeed he would sign legislative omnibus bills but then, instead of negotiating differences with legislators, he would use his executive powers of line-item veto and unallotment to bring the budget into balance. He couldn't start the "unallotting" process – cutting revenues from various pieces of legislation – until after July 1, the start of the new fiscal year when the budget for biennium would be declared out of balance. (Unallotment traditionally is used only in cases of fiscal emergency.)

Threat or promise? That's a great unknown. 

Start of new biennium a key date
So finally, we know this: By June 30, the budget for the new biennium must be balanced on paper, or there will be a government shutdown — unless of course, the Legislature's "lights-on'' funding bill is signed by the governor. That legislation would keep bare-bones state government running while the two sides continue to try to hammer out a balanced-budget agreement.

Interestingly, the government must be shut down not because money will have run out – tax revenues would continue to flow into state coffers – but because nobody would have the authority to spend the money because the new budget had not been balanced.

Everything revolves around a balanced budget.

But what does that really mean? Who goes to jail if it isn't balanced?

"I don't think anybody goes to jail," says Tom Stinson, the state's economist. Rather, he says, "People may get out of jail because we won't be able to pay the guards at the prisons."

It should be noted that every state, except Vermont, has a balanced budget requirement, and even in Vermont, the legislature and governor have always agreed to a balanced budget.

But only a few states have any penalties associated with being out of compliance with a balanced budget. Alabama has strictest enforcement laws. If, at the end of a fiscal year, the state has spent more than it's taken in, all spending must stop. Any official who defies this requirement and spends money can be fined $5,000 and sent to prison for two years. According to a 2003 Slate article, no one ever had ever faced those penalties.

There is an underlying threat that you or I or some ragtag political outfit could sue the state if the governor and Legislature didn't fulfill their obligation to balance the budget.

Achieving balanced budgets never easy
But the real bottom line is that these balanced-budget requirements are dutifully met only after much screaming and yelling.  

Since this session began in January in Minnesota, there have been all sorts of political rhetoric surrounding the issue of how to close the projected $4.6 billion deficit for the new biennium.

The latest in-your-face move came Thursday, when the governor announced that he would use his executive powers to solve the budget impasse.

A week ago, Pawlenty vetoed the omnibus tax bill, which would have raised about $1 billion in new revenue. Now, the governor is declaring the Legislature irresponsible for sending him bills that it can't pay for. But rather than veto the spending bills, Pawlenty vowed to sign them and then cut them down to size through line-item vetoes and  unallotment.

The Health and Human Services bill was the first one to face this bold – or, depending on your point of view, arrogant — Pawlenty move. He signed the bill but then started use the line-item veto.  The General Assistance Medical Care program for childless adults took the biggest hit — $381 million. That program covers the very poor.

Earlier in the week, the leaders of the omnibus Health and Human Services conference committee — Sen. Linda Berglin, DFL-Minneapolis, and Rep. Tom Huntley, DFL-Duluth — held what they called an emergency hearing to take testimony on what would happen if taxes were not increased and the governor's budget cuts were followed. An impressive array of people from hospitals, nursing homes and labor organizations testified that the resulting cuts would close some facilities and force the layoff of more than 16,000 workers.

Pawlenty was not impressed when he heard about the testimony.

"Overbaked numbers,'' he said on Wednesday.

It's easy to say things, but this new tactic of vetoes and unallotments  is a dicier proposition. If the dire things that DFLers claim budget cuts will cause come true, it will be clear who is responsible: the governor.

There's still time for agreement
Clearly, that's why the governor still said that he and the Legislature still have time before Monday's deadline to straighten things out in a more traditional fashion. But he repeated over and over that there would be no special sessions and no government shutdown.'

The governor's challenge still does leave the Legislature with counter-moves. The DFL-controlled Senate already is veto-proof, but Pawlenty has assurance from Republican legislative leaders that the House caucus will stand firmly behind him to prevent any override of a veto. The DFL, however,  could test whether that claim is true.

Remember, an override would require only three Republican House supporters if all DFLers follow their leaders. This new Pawlenty tactic puts huge pressure on Republicans who come from districts where hospitals or nursing homes might face closure, or in cases where the need for Local Government Aid, another certain Pawlenty target, is desperately needed.

In other words, the next three days will be filled with more threats, more shouts and more strategy sessions.

And at the root of all is the simple concept of a balanced budget: the same amount of money coming in and going out.

But, in reality, finding agreement on those numbers is very squishy.

"It is based on a set of estimates based on one point in time," said James Schowalter, the state's budget director. "… The data is changing all of the time."

Budget forecasts always in flux
It's Stinson's job to come up with the fulcrum that determines the balance point for the state's revenue-expense seesaw. As the state's economist, he – and four assistants – forecast the amount of revenue that the state can expect.

"As soon as we make a forecast, we know it's not accurate," said Stinson.

That's because, of course, there are constant fluctuations in the economy that can't be accurately predicted.

Already, Schowalter points out, that Minnesota has collected $70 million less than forecast during the past two months.

But Stinson said $70 million is a trivial amount comparatively.

"We're talking about a $35 billion budget,'' he said. "$70 million is about a tenth of a percent. It's a concern, but the world's not coming to an end" with that kind of variance.

Typically, Stinson said, forecasts in his 20 years as the economist have been within 3 percent, plus or minus, of spot-on accuracy.

But we are not in typical times. No matter how gloomy Stinson's forecasts have been in the last year and a half, they've not been gloomy enough. For example, in his November forecast, Stinson had said the state could expect to collect $31.866 billion in the upcoming biennium. By February, he forecast the state could expect $30.78 billion. Given the fact that the governor and the Legislature essentially are arguing over $1 billion, that $1.2 billion dip is substantial.
Economists are forever known as being gloomy. Last year, when Stinson said the state was in a recession, Pawlenty smiled and said that economists always see the glass as half-full.

It turned out, though, that Stinson was right.

But bemoaning negative economists is bipartisan. 

"A few years ago, Roger Moe [then the Senate leader] said he was tired of the dismal forecasts," Stinson recalled with a chuckle. "He said he believed we were so dismal because of Minnesota's winters and seasonal disorder, so he wanted to put some money in the budget and move us to Arizona.''

Anyhow, the magic number that legislators and the governor are dealing with now is $30.78 billion. That's the amount of revenue Stinson and his crew say the state can expect to gather in the new biennium. (Federal stimulus money is not counted in this number. That money is counted as a reduction in expenditures, not an increase in revenue, Stinson explained.)

In effect, any spending beyond $30.78 billion must be revenue-neutral — that is, overall, the additional measures must bring in as much as they spend. The governor wants to spend more than that figure, balancing the extra costs by selling a revenue bond (for nearly $1 billion) and making some accounting shifts. Legislators, too, want to spend more, but they would balance the books with accounting shifts and new taxes.

'Squishy' numbers complicate the task
And again, for all the talk of the absolute necessity of balancing the budget, the numbers are squishy.

Start with Pawlenty's plan. There are no guarantees that the revenue bond would sell — and, of course, it would have to be paid back. And a temporary fix — shifting money from one year to the next — really just pushes the problem forward.

But then, there are no guarantees that the new taxes the DFLers want would create the projected amounts, either, though it should be added that their revenue numbers are not simply pulled out of the air.

Two offices — the research office at the Department of Revenue and the nonpartisan House research staff — can come pretty close to estimating what new taxes might generate. Anything to do with income taxes, for example, can be simulated by studying a sample group 20,000 income tax returns.

There are many in the Legislature who believe that a compromise between the DFL majority and the governor can be reached by generating new revenue from gambling income at "racinos" at the two metro-area racetracks. But the amount of money generated by the increased gambling is very hard to pinpoint, Stinson said.

"You base that on data collected from other [gambling] places that have that," Stinson said.

So again, it comes to this: There's an absolute need to balance a budget, but there's nothing that's absolute about numbers on either side of the equation.

Projection corrections do get made along the way. If, in November, Stinson comes up with a forecast that shows the state will collect even less than in his February forecast, Pawlenty will have the power to "unallot" appropriated funds. He did that last December, when he cut $270 million in state spending from the 2009 budget. 

If the economy suddenly turns around and the state starts collecting more revenue than anticipated, a number of things could happen. There could be legislation passed yet this session that would call for any surpluses to go to specific areas, such as K-12 education or nursing homes. If there is no contingency legislation passed, any surpluses would go into the state's depleted reserve fund.

Stinson did have one hopeful forecast: "There will be better days, hopefully by the end of the year." 

But he added a cloud to even that silver lining.

Big debate over jobs
"In our forecast, we had Minnesota losing 120,000 jobs," said Stinson. "We've [already] lost 100,000. We would normally gain 40,000 jobs a year. That means we're losing three years of job growth."

And in trying to balance the budget, the governor and DFL leaders have been arguing over even the future impact on jobs. By not creating new revenues to balance the budget, DFLers say, there will be even more job losses. Pawlenty counters that raising taxes to balance the budget would be a job killer.

Back and forth they go over balancing the budget with ever-changing numbers. Ultimately, they will find a so-called balance, or else … what?

Stinson, laughing, told of a visit a few years ago by a Russian politician.

"He asked what happens to us if our forecasts are wrong,'' Stinson said. "I think he was thinking Siberia or something." 

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.