Debt now, debt later: Minnesota’s declining economy wreaks havoc on state budget

State economist Tom Stinson
State economist Tom Stinson

As expected, the economic forecast for Minnesota’s general fund budget is appreciably worse than it was just three months ago. Without remedial action, it will amass a $935 million deficit over the remainder of the current 2008-09 biennium and foster another $1.09 billion — $2.1 billion if you count inflation — worth of red ink for the 2010-11 biennium. That is the grim prognosis offered up this morning by Finance Commissioner Tom Hanson, State Economist Tom Stinson and Budget Director Jim Showalter at the State Capitol.

Last November, when the 2008-09 budget deficit was estimated to be just $373 million, Hanson had proclaimed it “a manageable problem and we are well prepared to address it.” Today he characterized the current debt situation as “very concerning but still manageable.”

Immediate concern is warranted. As Showalter noted, most of the major budget activity for fiscal year 2008 has already been completed, including state payments for education and local government aid. Consequently, the vast majority of the $935 million deficit will have to be calibrated against the budgetary needs in fiscal year 2009, a situation akin in proportion to trying to resolve a projected $1.8 billion deficit at the beginning of a biennium.

There are limited resources available to mitigate the damage, most notably one-time monies such as an estimated $653 million in the budget reserve and $350 million in the state’s cash flow account. But Stinson cautioned against using up the reserve this year in light of the ongoing deficits projected in the next biennium, and Hanson emphasized that the cash flow account can’t be tapped if the state is to properly regulate its payments.

There are a variety of accounting shifts — particularly with respect to education payments — and small pots of money such as closing the loophole on foreign operating corporations in Minnesota. And there are spending cuts, beginning with Gov. Tim Pawlenty’s freeze on state employee hiring, and the across-the-board cuts he is expected to propose next week on all administrative areas of state government.

Health care and cuts
With both parties vowing to protect K-12 education and the consensus being that the DFL will not mount a serious challenge to Pawlenty’s statement today that no new taxes will be levied, the brunt of the fiscal pain is expected to be exerted through cuts in the Department of Health and Human Services budget, particularly as it relates to health care. House minority leader Marty Seifert said today that he believes $50 million to $250 million can be saved through a tightening of Medicaid co-payments alone.

Seifert also called on the DFL majority to scale back the size of its bonding bill to conform to the 3 percent ceiling on state general fund revenues that secure favorable ratings from the bonding agencies. Before today’s forecast, that 3 percent ceiling amounted to $965 million, but with the budget shrinking, the new figure is $885 million, minus the $60 million in bonding obligations that have already been approved through passage this week of the transportation bill. (That $60 million is the only place the transportation bill affects the current budget forecast. Nearly all of bill’s new revenue does not go to the general fund, and the bill was passed too recently for budget forecasters to determine the impact of the tens of thousands of jobs it is expected to create.) 

The economist Stinson repeatedly emphasized that the underlying economic problems extend beyond the realm of the current biennium, however. He portrayed a Minnesota economy caught in a double whammy, victimized by the national slump brought on through the housing crisis and the credit crunch, yet without help from the areas of the national economy that are performing well, such as oil exploration and defense-related industries. On the contrary, noted Stinson, a shortage of new housing construction hits Minnesota especially hard due to our relative reliance on lumber and wood products.

Meanwhile, corporate tax collection estimates have declined by 20 percent since the November forecast, and individual income tax receipts have likewise dropped, mostly due to a loss in capital gains revenue.

Uncertain future

Through his dour tone and constant use of the word “uncertainty,” Stinson clearly implied that the $2.1 billion real-dollar deficit projected for the 2010-11 biennium could in fact be larger. Citing the projections by Global Insight, the firm the state uses to gauge national and international economic trends, that the national economy will be in a mild recession in the first two quarters of 2008 but bounce back after that, Stinson said: “Recessions are usually worse than this. There is an enormous amount of uncertainty.”

Stinson agrees with Global Insight that the federal stimulus package, which will pump approximately $2.5 billion into the state economy, will help mitigate against inflation in the third and fourth quarters of 2008 by increasing consumer purchases and thus sales tax receipts. (Those who wish for the state to take similar action and offer rebates to its citizenry forget that the state, unlike the federal government, must balance its budget from year to year.)  “But one of the concerns and cautions is what happens when the stimulus runs out,” Stinson says.

In particular, the economist is openly dubious of Global Insight’s contention that the price of oil will drop to $75 a barrel by this summer and remain low thereafter. Asked point blank if he felt this was a realistic projection, he answered: “No I don’t. They had the price of oil this quarter at $80 a barrel and we know by now that that is just not going to happen.”

Global Insight’s sanguine view of oil prices is significant because the firm projects just a .7 percent growth in the national economy in the first quarter of 2009, after the federal stimulus package has expired.

“This is very weak,” Stinson emphasized. “This could instead be us back in recession again.”

In other words, the $2.1 billion deficit projected for 2010-11 may be overly optimistic. And unlike previous decades when Minnesota could assume that, whatever the ups and downs, the state economy would outperform the national as a whole, the local report is particularly grim.

Asked if he believed that Minnesota economy would continue to underperform the national average in the near future, as it has since 2003, Stinson tightened his lips and then uttered a one-word response: “Yes.”

Britt Robson, formerly a staff writer and senior editor at City Pages, covers the state Capitol and politics. He can be reached at brobson [at] minnpost [dot] com.

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Comments (1)

  1. Submitted by Thomas Swift on 03/03/2008 - 12:21 pm.

    This is an excellent opportunity for the Governor to actually lead. If he needed a justification to do an in-depth audit of the states spending, followed by a bold program of cutting the weeds (he didn’t) this is it.

    This is no less an opportunity for those perfectly abled among us that have come to rely on the government for their day-to-day survival to realize that protecting and encouraging a vibrant business climate is the key to their future health and well-being.

    That epiphany would, of course, be followed by a robust weeding of the majority our left leaning elected officials.

    The days when a politician can pander to the anti-capitalist left while taking credit for the financial rewards that system brings to the society at large are done, at least for now.

    Socialism exists only as long as there are capitalist coat-tails to drag it along.

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