The latest economic forecast puts the state's budget deficit at $935 million, much higher than projected three months ago.
Governor Tim Pawlenty Thursday called the deficit "serious but solvable" and is vowing not to raise taxes to close the gap.
"As you've heard me say many times, we do not have a tax problem in Minnesota, we have a spending problem. We are over-spending the money coming in and that needs to be addressed. We have to live within our means and tighten our belts, just like families are needing to do in these tough economic times, just like individual Minnesotans are doing, just like businesses are doing and government needs to do that as well," Pawlenty said. "There is nothing inconsistent with that in terms of what everybody else is doing in this economy."
By law, the budget must be balanced by June 2009. The administration is still developing a budget plan. Pawlenty is indicating he wll propose 2 to 3 percent cuts to some state programs and trimming Department of Education funding. He also said that he was open to cutting some taxes to foster job growth.
The governor promised not to cut funding to schools or aid to nursing homes.
Charlie Kyte, Executive Director of the Minnesota Association of School Administrators, said the worst may be yet to come.
"From where we sit as school districts, we are finding it very very difficult to operate right now. We know it's going to be more difficult next year and it's somewhat disheartening to think that you are going to have quality education programs without the dollars to finance them," said Kyte.
Kyte said he is counting on the governor to keep his promise to spare education, but that past budget cuts are already making it tough for schools to make ends meet.
On paper, the projected budget gap is less than 3 percent of the state's two-year, $34.7 billion budget. But officials say it's actually much worse, because most of this year's spending is already done and protecting schools from cuts will take billions of dollars out of the mix.
Observers say that means cuts to health and human services, one of the largest segments of the state budget.
But Nan Madden, Minnesota Budget Project Director at the Minnesota Council of Non-Profits, said it would be a mistake to cut funding to the kinds of programs that help people during a recession.
"We definitely don't think we should be reducing the services that Minnesotans rely on at the time when they are most needed. The state's healthcare programs, employment services, childcare assistance, those are all areas that took a big hit in 2003 and we think that's the wrong place to look." Madden said. "That seems like the absolute last place you want to look in a struggling economy is to be cutting exactly the programs that help people find and keep jobs."
The non-profit sector makes up about 10 percent of the state's economy. Madden said it's time for lawmakers to consider raising taxes to boost revenue.
"Really, what is needed to fundamentally change fairness in the tax system, you need to look at the income tax and particularly income taxes on the highest income earners," Madden said.
A state study last year found Minnesotans at the highest income levels pay a reduced state and local effective tax rate, and that rate is projected to drop further.
During the last budget session, Governor Tim Pawlenty vetoed a DFL-backed plan that would have raised income taxes on people in the highest income brackets. And this time, DFL leaders are also vowing not to push for tax increases.
The head of the Minnesota Association for Professional Employees, Jim Monroe, said this approach no longer makes sense.
"You can only cut so far before the problems increase. it's proven at the national level, you can't bond for the future or put off costs. That's why our deficit at the national level has gone to the size it has and we've followed the same track in Minnesota under the current administration," he said.
Still, Monroe said Minnesotans can't afford more property tax hikes. Anyway, he said, state payroll makes up such a small portion of the overall budget that job cuts wouldn't help much.
Pawlenty has not committed to laying off state workers. But he said he's considering letting go of some positions through attrition. The state has roughly $1 billion in rainy-day reserves, but the governor is promising not to rely too heavily on that to make up the shortfall.
The state economist has also warned against doing that, in case the recession lasts longer than expected.
Governor Pawlenty is expected to lay out details of his budget plan next week. In the meantime, DFL leaders say they are working on coming up with ways to raise revenue.