The budget forecast delivered by state finance officials on Wednesday is perhaps the bleakest outlook in Minnesota’s history.
“This is the worst, without a question,” said Jay Kiedrowski, a senior fellow at the University of Minnesota’s Humphrey Institute of Public Affairs.
As the state’s chief financial officer under Gov. Rudy Perpich in the 1980s, Kiedrowski dealt hands-on with the fallout from another major recession.
What’s compounding the current shortfall is that it comes on the heels of already deep budget cuts and under a governor who refuses to raise revenues, he said.
The trends, if left unchecked, will have widespread consequences, from larger K-12 class sizes and higher college tuition rates to bumpier roads and fewer police officers.
“It’s a sad day for Minnnesota,” said Kiedrowski.
The Minnesota Management and Budget Office projected on Wednesday the state is on track for a $1.2 billion budget shortfall for the current two-year budget cycle, which ends June 30, 2011. Most of that, about 70 percent, is due to income tax revenues coming in at a slower pace than expected when the governor and Legislature set the budget last spring.
The $1.2 billion deficit equals about 4 percent of the state’s budget, Kiedrowski said. However, combined with $4.6 billion in spending cuts made by the governor and Legislature before the budget year began and the total cuts represent about 20 percent of the previous state budget.
In other words, for every five dollars the state had to spend last year, it now has just four dollars, he explained.
“I think the governor and the Legislature are going to have a near impossible task trying to find a way to cut that much money out of state government,” Kiedrowski said.
The previous budget cuts have left school districts borrowing money, police departments benching officers and public hospitals turning away patients. The $1.2 billion figure wouldn’t be so imposing “if it weren’t for the fact that the wiggle room is just gone,” said Dane Smith, president of Growth & Justice, a progressive think tank. “There’s no margin for error.”
Another factor that’s making the problem much worse, Kiedrowski said, is Gov. Tim Pawlenty’s budget “gimmicks” and his stubbornness on taxes.
The projected state budget deficit after 2011 has ballooned to at least $5.4 billion after inflation, much of which can be blamed on Pawlenty’s use of short-term fixes and funding shifts to balance the current budget, Kiedrowski said. He cited the governor’s school funding shift, in which $1.7 billion is being withheld from schools until the first day of the next budget year.
“It’s like a person deferring a mortgage payment until January so they can claim they have more money in December,” Kiedrowski said.
In the past, Republican governors including Al Quie, Perpich, and Arne Carlson, have all been willing to increase taxes when it was necessary to balance the budget.
“Gov. Pawlenty is the first Minnesota governor faced with these circumstances that has refused to increase taxes one dollar,” Kiedrowski said.
Pawlenty reiterated that position on Wednesday, saying in a statement following the forecast that state government needs to live within its means and hold the line on taxes.
Kiedrowski traces the state’s budget problems back to the late ’90s when, under Gov. Jesse Ventura, the Legislature permanently cut income taxes while simultaneously increasing spending with dollars rolling in during good economic times.
“As we got into the 2000s, it became clear we overdid it on both the tax and the spending sides,” Kiedrowski said. “We never truly had a balanced budget since.”
Peggy Ingison, who was the state’s budget director from 1996 to 2004, said she believes a “structural imbalance” emerged more recently, in the past couple of years.
“I think we’ve managed to balance our budget, but not necessarily for the long term,” said Ingison, who is now chief financial officer for Minneapolis Public Schools.
Ingison wasn’t prepared to call this the worst deficit forecast the state has ever faced. We’ve had billion-dollar deficits in the past, she said, but the previous budget cuts and the severe national recession make this scenario unique in the state’s history.
“I think we’ve got a long-term problem, and we might not fix it overnight,” she said, “but to the extent we keep pushing it out I think it pretty irresponsible.”
The deficit situation isn’t unique among other states. Minnesota is one of 36 states to report mid-year budget deficits this year, according to Elizabeth McNichol, senior fellow at the Center on Budget Policy Priorities. The average shortfall was 28 percent of a state’s budget. Minnesota was below that threshold going into Wednesday.
“All the states are hurting at the moment,” McNichol said.
Kiedrowski worries Minnesota’s future may look something like California, where revenue problems have ruined the state’s credit rating and stunted its once thriving economy.
“These are not good financial practices,” Kiedrowski said. “Businesses doing it this way would go out of business.”