Minnesota facing projected $188 million deficit

Minnesota's political leaders say that a $188 million budget deficit over the next 18 months is cause for concern but not panic.

State budget officials attributed the shortfall, identified in a new state economic forecast released Tuesday, to slower-than-expected economic growth along with tax and spending decisions made by the Legislature earlier this year.

The forecast found that Minnesota has continued to add jobs and hold its low unemployment rate over the past year. But growth has nevertheless been slower than expected here and across the country, and budget experts are uncertain about how new federal policies on taxes, trade and immigration could impact the state.

Meanwhile, DFL Gov. Mark Dayton and Republican majorities in the Legislature used much of the state's $1.65 billion surplus projected earlier this year to cut taxes, prop up the state's individual insurance market and increase spending to a range of state programs — leaving little wiggle room if the economy slows down after years of growth.

"It's not a 'sky is falling' kind of budget deficit, but it is concerning," said Myron Frans, commissioner of the Minnesota Management and Budget office.

The $188 million deficit represents a tiny fraction of the state's $46 billion, two-year budget. But officials project that the budget hole, if left unchecked, could grow to $586 million in the next two-year budget cycle, from 2020 to 2021.

The deficit anticipated for the current budget cycle may actually be slightly bigger, because the Legislature is currently operating without a budget and is expected to approve more funding for itself when the new session starts in February.

By adding in that money, which was line-item vetoed by Dayton earlier this year, the projected deficit would grow to $302 million.

Leaders of both parties said the forecast won't prompt major shifts to their priorities for the upcoming legislative session, particularly because a number of factors could dramatically shift the numbers between now and February. For example: the forecast, drafted with the help of an outside economic consultant, was written before a major tax reform bill began making its way through the U.S. House and Senate.

And if federal lawmakers approve funding for the Children's Health Insurance Program (CHIP), which is currently expired and awaiting reauthorization, then Minnesota's projected deficit would plummet to $10 million.

Republican leaders of the state House and Senate said they've been promised that the federal government won't leave Minnesota on the hook for the CHIP funding, and they believe that passage of the federal tax bill would result in a surplus for Minnesota. House Speaker Kurt Daudt, R-Crown, said the forecast was "overly pessimistic" and didn't properly reflect Minnesota's growing economy.

The speaker repeated his earlier suggestions that the Dayton administration may have manipulated the forecast to reflect a deficit as a political move.

"I'm not blaming the governor that we have a deficit today," Daudt said. "I'm saying that I don't believe we do have a deficit today because these are not accurate numbers that reflect the environment we're in right now."

Dayton agreed that the dimmer economic projection wasn't a reflection of an economic downturn in Minnesota, but of a shift from the much rosier picture anticipated earlier this year.

Dayton reiterated his long-standing position that GOP-led effort to pass a $650 million tax-cut bill this year was "excessive," but said the surplus also dried up because of other spending on necessary state services, like education, and on helping people facing massive insurance premium increases on the individual health market.

The DFL governor said he was "disappointed" to see a forecast deficit after years of surpluses during his time in office. But he and legislative leaders should be able to sort out the problem during the legislative session, Dayton said, adding that he hopes to repair relationships strained over the past year largely stemming from his monthslong legal battle with GOP legislative leaders over his veto of legislative funding.

"We all share a responsibility to the people of Minnesota to work together for their best interest," Dayton said. "I pledge to do my part to contribute to that goal."

The state has enough money on hand in its rainy day fund to cover the budget gap, but Frans cautioned the governor and lawmakers against rushing to spend that money. He said those funds should be reserved for true emergencies, like an economic downturn or a major federal policy change that could force the state to come up with more money.

"Today's forecast is more of a mist than a downpour," Frans said.

Because the Legislature passed a two-year budget this year, any proposals to change it would amount to specific tweaks. Dayton said he'd wait to draw up any plans until the state provides its next budget and economic projections in February.

Senate Majority Leader Paul Gazelka, R-Nisswa, said he's convinced that report will look considerably different from the one offered Tuesday.

"I'm optimistic," Gazelka said. "I see in everything around this signs of good things happening, and we're going to see that in February."

But with next year's election for governor and state House looming, reactions to Tuesday's forecast made it clear that future budget forecasts will be a major political talking point. Republican leaders advocated for expanding tax cuts and trimming back state spending, while DFLers blamed the GOP's focus on tax reductions for the uncertain outlook.

"Elections have consequences and hopefully people will keep that in mind as we move to 2018," said House Minority Leader Melissa Hortman, DFL-Brooklyn Park.

Erin Golden • 612-673-4790