State finance officials say Minnesota's current two-year budget has a $1.2 billion hole that needs to be plugged.
A new economic forecast released Wednesday blames the projected deficit on a still struggling economy and lower than expected tax collections. And the long-range financial picture looks even bleaker.
Minnesota's constitutional requirement for a balanced two-year budget was accomplished in an unusual fashion earlier this year, when Gov. Tim Pawlenty and DFL legislative leaders failed to reach a budget deal.
The Republican governor used his executive authority to cut spending unilaterally, and he also delayed state payments to school districts. But the fix didn't last long.
Minnesota Management and Budget Commissioner Tom Hanson says the projected shortfall of $1.2 billion, just five months into the biennium, is due to weakness in the economy. He says 70 percent of the problem is income tax collections coming in lower than expected.
"Unemployment is up and wages are dramatically down from what we forecasted in February," said Hanson.
The state's red ink gets potentially deeper in the following two-year budget. Forecast projections for 2012-2013 show a $5.4 billion deficit. But Hanson says that number could be significantly smaller if legislators make the governor's unilateral cuts permanent, and if they spread out the payback of those delayed school payments.
State economist Tom Stinson says the forecast is not cheerful, but he sees some improvement ahead on the job front. Specifically, Stinson says some relief is expected as soon as March with the addition of federal census jobs. He also expects some new jobs in construction, health care and the hospitality sector.
"The story is one of gradually climbing out of a very deep hole that we've been in. And it's going to just be a very slow progression upward," said Stinson.
Gov. Pawlenty described the current deficit as "significant but solvable," as long as the state lives within its means. Pawlenty said he plans to work with the DFL-controlled Legislature to find spending cuts that can be approved quickly when the 2010 session begins in February.
With the state paying out more than $40 million a day from the general fund, Pawlenty said time matters.
"There will come a point in time where we need them to act, need them to join with us to act, or we'll have to take a different path," said Pawlenty.
That path could be Pawlenty cutting the budget again on his own. He said such a move might be necessary in the coming weeks to cut a portion of local government aid that is scheduled to be paid later this month. Pawlenty also said the state must become more job friendly.
"That's going to include holding the line on taxes," said Pawlenty. "Costs are one measure of where people decide to deploy capital, build buildings, add jobs, buy equipment, do all the things it takes to keep a private economy moving forward. And Minnesota has to be more cost competitive in that regard, amongst other things."
While proclaiming a budget solution can come from spending cuts alone, Pawlenty said he would spare some budget areas, including veterans programs.
DFL Senate Majority Leader Larry Pogemiller of Minneapolis says he wants to find a solution to the current deficit as well as the long-term problem. Pogemiller wants all spending on the table.
"The governor will have to accept cuts to some of his pet projects, also. He absolutely will have to," said Pogemiller. "The severity of this problem means that there is no sacred cow, even if it's something the governor suggested. I don't mean that to be challenging or combative. I just mean it to be realistic."
Pogemiller also wants new revenue on the table, but he did not offer any specific tax increase. He called Pawlenty's continued opposition to tax increases "unwise."
Democrats also want a focus on job creation. But most of their efforts are aimed at passing a public works construction bill. Pogemiller also renewed his call for new leadership in the state agency responsible for economic development.
Politics will likely play a large role in next year's session. All 201 legislators are up for election in November. Several lawmakers are running for governor, and Pawlenty may be preparing for a possible White House campaign in 2012.