ST. PAUL -- Minnesota's budget deficit is expected to hit $4.5 billion over the next 2 1/2 years, state finance officials told legislators Wednesday.
The dismal revenue forecast hands Gov.-elect Tim Pawlenty an immediate challenge when he takes office in Jan. 6. He must find a way to cover a $356 million deficit for the remaining seven months of this budget cycle and tackle a $4.2 billion problem for the two years after that -- all while keeping to his promise not to raise taxes.
"I can't overstate how tough this is going to be," Pawlenty, a Republican, said Tuesday on WCCO Radio.
He said he would present a budget plan that cuts or freezes spending for some programs, merges or abolishes agencies, encourages early retirement or forces layoffs among state workers, farms some state functions out to nonprofits and redirects money from the state's settlement with tobacco companies.
Senate Finance Chairman Richard Cohen, DFL-St. Paul, said solving the problem will be "extremely difficult." He said enacting all of Pawlenty's proposed fixes still wouldn't erase the deficit entirely.
The projected deficit is the difference between revenue and tax collections and state spending commitments. The state budget for 2004-05 is slated to grow to $30 billion even before the Legislature and Pawlenty take any action.
The problem is $2.9 billion worse than state economists thought it would be at the end of the 2002 session. A weak stock market, a slow rebounding economy and higher-than-expected spending in some areas are the reasons for the increase, forecasters said.
The fall economic forecast is one of two done a year. While Pawlenty intends to use this one as a baseline for a budget he will submit to the Legislature by mid-February, some House leaders have said they plan to wait until a new snapshot is taken before they get to work on the 2004-05 budget. Another forecast traditionally comes out in late February or early March.
"The February forecast isn't going to get better," Cohen said. "Anyone who thinks that is engaging in fanciful thinking bordering on delusional thinking."
Almost every state is trying to patch budget gaps stemming from the 2001 economic recession.
In Minnesota, the recession resulted in thousands of job losses, stagnant wages and lagging tax collections. Falling stock prices, for instance, meant fewer people had to pay taxes on capital gains. The forecast summary states that lower capital gains income is to blame for more than half of the shortfall.
Another reason Minnesota's shortfall is so big is that the economic slowdown increased demand for welfare and medical care that the state provides to poor people.
The summary noted that the economic growth outlook is strong but doesn't take into account what could happen if the country goes to war with Iraq.
This forecast could have been worse if it was done in the same way as previous ones. In the past, across-the-board inflation was automatically tacked on to state spending. But lawmakers passed a bill over Gov. Jesse Ventura's veto last session to prohibit finance officials from assuming inflation in the forecast.
Legislators, particularly House Republicans, wanted to take state spending off autopilot, as they put it. They want each program to compete every two years for those dollars.
While Pawlenty has signed a no-new-tax pledge, many of the 201 legislators have not. That includes several top House Republicans, including Speaker Steve Sviggum and Majority Leader Erik Paulsen.
Marcia Avner, policy director at the Minnesota Council of Nonprofits, said a tax hike may enter the picture once lawmakers realize the magnitude of the problem.
"It's easy to be against taxes, but when you start looking at the specific cuts that need to be made it's not always easy either," she said.
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