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Minnesota’s budgeting efforts clouded by nation’s fiscal uncertainty

Potential ripple effects from Washington’s fiscal-cliff debate make the state’s budget planning difficult.

Minnesota Management and Budget Commissioner Jim Schowalter and State Economist Tom Stinson at Wednesday's press conference.
MinnPost photo by James Nord

There are so many uncertain factors affecting Minnesota’s next budget cycle that top officials say Wednesday’s forecast offered the least clear economic picture in recent state history.

Minnesota’s projected $1.1 billion deficit for the 2014-15 biennium is a big improvement from chronic budget deficits in Minnesota for the past decade —and particularly last year’s $5 billion-plus shortfall that Gov Mark Dayton and the Republican-controlled Legislature had to resolve for the current biennium.

 This time, though, ripple effects from the economic uncertainly at the federal level make state budget planning difficult.

“In my tenure here, I cannot remember a forecast with so much uncertainty built in,” incoming Senate Majority Leader Tom Bakk, a Democrat, said after its release.

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Minnesota lawmakers are watching federal officials to see if they’ll avert the so-called fiscal cliff, which, if unresolved, could balloon Minnesota’s future deficit to $2.8 billion and cost the state tens of thousands of jobs.

State Economist Tom Stinson noted that the result of those negotiations represent “both the biggest upside and the biggest downside risk to the forecast.”

“The downside impacts are so serious that we did something we haven’t done before: We did an alternative forecast that incorporates … [a] fiscal cliff scenario into our Minnesota economic model,” he said.

In real terms, if the fiscal cliff issue is not resolved, the forecast anticipates a recession that could boost unemployment to 7.1 percent in Minnesota, result in 70,000 fewer new jobs and mean an additional $1.7 billion drop in state revenue.

Dayton, who is expected to release a budget late next month, will use this forecast as the base assumptions for his proposal. But he — and the Legislature — will have to wait till the February forecast for the updated economic predictions.

The state also is waiting to see how federal officials will reimburse Minnesota for expanded coverage of low-income populations on government health-care programs that leaves $4.3 billion potentially hanging in the balance.

Even if the fiscal cliff is resolved, entitlement cuts that come as part of a national compromise package also could affect Minnesota’s bottom line.

State officials and legislators will have to wait a couple of more months to get a good idea of what economic shape Minnesota is in.

As Stinson put it, “By February, we’re going to know a lot more.”

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Not a negative forecast

Despite the uncertainty, lawmakers said this budget forecast isn’t as gloomy as it perhaps first appears.

The projected $1.3 billion surplus for the current biennium — revenue growth that won’t continue into the next budget cycle — will help repay school districts for the $2.4 billion in borrowing that was in past budget fixes. How to pay back the remaining balance remains is unresolved as DFL legislative majorities and a DFL governor control state government for the first time in 22 years.

“The fiscal cliff is ‘ultimate gloom,’ but this isn’t a negative forecast,” Stinson said. “This is a forecast that shows the economy continuing to dig its way out of a recession, slowly improving.”

Incoming Senate Majority Leader Tom Bakk
MinnPost photo by James NordIncoming Senate Majority Leader Tom Bakk: “In my tenure here, I cannot remember a forecast with so much uncertainty built in.”

Dayton and DFL and Republican legislative leaders all agreed that the ability to make a substantial repayment to schools is a positive development for the state.

“The forecast contains some good news, some bad news and a lot of uncertainty,” Dayton told reporters, referring to the school repayment, the deficit, and the fiscal cliff.

Minnesota spent less on education and health and human services this biennium — lower expenditures that are expected to continue for the remainder of the budget year. At the same time, revenues for this budget cycle are projected to drop $68 million from the last projection, to $35.8 billion.

Stinson said that if the fiscal cliff can be avoided, housing and construction would represent two strong economic engines moving the state forward.

“That will provide jobs for people who’ve had a very hard time,” he said, noting stubbornly high unemployment in the construction industry.

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Budget structurally unbalanced

DFL lawmakers and the governor are aiming to end the use of  one-time accounting gimmicks that budget officials have long criticized as a reason for Minnesota’s chronic budget deficits.

Make no mistake, Minnesota Management and Budget Commissioner Jim Schowalter said. “The [state budget’s] structural imbalance is the underlying story.”

“Our state budget has been on a rollercoaster of deficits for the past decade,” House Speaker-designate Paul Thissen, also a Democrat, said. “In that time, we have seen the effects of shortsighted budgeting by both parties in the face of both economic and ideological obstacles.”

Democrats also blame Republican lawmakers for the most recent school aid shift and frontloading tobacco settlement revenue to patch budget holes in the current biennium.

“There is just a lot of avoidance, and a lot of gimmicks, and a lot of unwillingness to take responsibility for the situation that faced them at that moment in time,” Dayton said. “We are not going to perpetuate that. We’re going to make tough decisions. There will be unpopular decisions, there will be hard decisions, but that’s what we’re going to do.”

Throughout the day, though, specifics from anyone were hard to find.

Tax hikes will likely make up at least part of the DFL plan to handle  the projected $1.1 billion shortfall, although legislative leaders and Dayton did not commit to any specifics.

Talk of major “tax reform” has dominated DFL talking points since they started shifting into a leadership role after the November elections. Caucus leaders, though, have not said whether the overhaul would be revenue-neutral or an actual increase.

Shortly after the forecast was released, the AFSCME Council 5, Minnesota’s largest public employee union, called for a $6 billion tax hike.

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Dayton said reporters “can expect that it’s very likely” that a tax increase on the top 2 percent of Minnesotans — which could raise about $1 billion — will be included in his budget.

Bakk confirmed that idea but declined to make any promises about future policy.

Dayton, too, was cautious.

Gov. Mark Dayton
MinnPost photo by James NordGov. Mark Dayton said reporters “can expect that it’s very likely” that a tax increase on the top 2 percent of Minnesotans will be included in his budget.

“I’m not making any commitments because, again, this is the starting point for us,” the governor said. “We’ve talked broadly about the revenues side, and we’ve talked broadly about the expenditure side, but we’ve been waiting for this number. This gives us our mark.”

Republicans, outsted from control in last month’s elections, urged the DFL-controlled  Legislature to “look at the approach that the Republican majorities took” last cycle when it comes to job creation and deficit reduction. They said the spending increases built into the forecast are adequate moving forward.

“We don’t believe that we need tax increases,” incoming GOP Senate Minority Leader David Hann said. “Do they really mean [tax] reform, or is it code for a tax rate increase?”

“Our challenge to the DFL is: Let’s live within those means,” House Minority Leader-designate Kurt Daudt said, adding that if Democrats wanted to “shoot for the stars,” they should consider lowering taxes.

Republicans this election cycle campaigned on their success in turning Minnesota’s previous $5 billion deficit into the current surplus.

“In many ways, [the forecast] represents a confirmation of the wisdom of the Republican majorities’ approach to managing the state’s fiscal situation that we inherited two years ago,” Hann said.

Vikings stadium funding

One other passage in the budget forecast drew a lot of attention Wednesday because it affects the financing plan for the new Vikings stadium.

A reserve fund to safeguard bond payments for the state’s share of the stadium financing is projected to net about half of the new gambling revenue that officials expected. The anticipated revenue was reduced from the earlier estimate of $34 million to $16 million for fiscal year 2013.

The fund’s anticipated revenue also been reduced by about $9 million each biennium through 2017. The state is expected to cover $348 million of the $975 million stadium.

Tom Barrett, executive director of the state’s Gambling Control Board, said that vendors have been slower to roll out the new types of electronic gaming approved for chartable gambling as part of last session’s stadium deal. Complying with stringent background checks and technical standards has contributed to that time lag, he said.

Barrett said about 75 locations offer electronic pull-tabs. The control board initially expected about  300 establishments would have bought in by now. It ultimately expects 2,500 sites to upgrade to the new games. Electronic Linked Bingo, also approved last session, isn’t yet operational in the state.

“Would we like to see more sites offering electronic formats to charities?” Barrett said. “You bet.”

But Michele Kelm-Helgen, the governor’s lead negotiator on the stadium deal who now heads planning for the project, said the reserve forecasts aren’t extremely consequential.

Despite lower-than-expected projections, “The state had much higher coverage than what’s needed for the bonds to be repaid,” she said. The reduced take for fiscal year 2013, for example, doesn’t affect bond payments because there aren’t any scheduled for that year.

Under current projections, the state’s cushion will end up at $47 million, rather than $83 million, by the end 0f 2017, she said.

Dayton shared that sentiment, saying, ““I think we’ll catch up. We’re slightly behind now, but we’ll get there.”