Every option on table for deficit, Gov. Tim Walz says

Gov. Tim Walz said he is considering every option as he stares down Minnesota's worst budget deficit in a decade.

Reorganizing state government. Budget cuts. Tax increases. Draining reserves. Legalizing recreational marijuana.

"The only way to do it is to put every possible scenario on the table," Walz said. He is preparing for an estimated $2.3 billion gap in the current budget and potential $5 billion hole the following two years, according to new state estimates.

The outcome of the 2020 election could shape how state government solves the financial crunch. The DFL governor must partner with state legislators to come up with a solution, and the makeup of the entire House and Senate is on Tuesday's ballot.

Republicans are aiming to hang on to their narrow majority in the Senate and flip the House, where Democrats hold significantly more seats. GOP legislators have been pushing Walz to act sooner to trim state government spending.

The governor froze hiring for nonessential positions in April, which has saved roughly $9 million in general fund spending so far. He also reduced his cabinet members' pay by 10% and has eliminated some Corrections Department jobs. But lawmakers have repeatedly said additional cuts are needed.

"We have to be willing to tighten the belt. I believe we can do it. I think we should have started in April. That's my biggest complaint about the governor, that he didn't take action early," said Republican Senate Majority Leader Paul Gazelka, who advocated for a 5% cut across all state agencies. Walz said in an interview Friday that budget cuts cannot be the only solution. Personnel costs are a comparatively small part of the state's budget, while the bulk of the money goes to education and health care programs, he noted.

"We certainly may have to [make cuts], I have said that all along. But I want us to think more creatively," he said. He has asked leaders of the 24 state agencies to look for ways to reconfigure government to handle Minnesotans' increased needs without spending more money. Walz, a former teacher, campaigned on goals of improving schools and addressing the educational opportunity gap.

He remains committed to addressing equity in education, but said that prompts a question: "Are we going to have a conversation about where those revenues are going to come from?" He said Minnesotans need to talk about raising certain taxes to support education. House Speaker Melissa Hortman, DFL-Brooklyn Park, called a tax proposal aimed at corporate loopholes a "no-brainer." Democrats unsuccessfully advocated for the change in 2019. Their plan focused on businesses using tax havens overseas.

Minnesota is already a high tax state, said Gazelka, arguing against tax increases in the next budget. "This is a good reason for people to vote for Senate Republicans, so we have a seat at the table when we're trying to balance the budget," he said.

Debates over the shortfall will center on four options, Hortman said. The state can use money from its reserves, generate revenue through taxes, cut spending and make budgetary shifts such as delaying certain payments or pulling from other funds. Gazelka said it will be necessary to use all of the $2.4 billion in the state's reserves. "That will be the first thing to go," he said, noting the state has other pots of money it could dip into to help cover expenses.

Walz said his administration is still trying to determine how much of the reserves to use and when. During the last recession, Walz said he was critical of former GOP Gov. Tim Pawlenty for using school "shifts" where the state temporarily withholds part of its payments for school districts to help address its deficit. "I can see why they did it," Walz said. "I'm not saying one way or another. … Those folks at that time laid everything on the table and made the best decisions possible."

The new Minnesota Management and Budget Commissioner Jim Schowalter will help guide those decisions. When former Commissioner Myron Frans left in September, Walz hired Schowalter, who was former Democratic Gov. Mark Dayton's budget adviser in 2011 when Minnesota faced a $6.2 billion deficit.

State leaders got a little good news recently when revenue from the past few months came in nearly 13% higher than anticipated. But they are waiting on an in-depth look at Minnesota's potential financial future. Minnesota's economist and state budget officials usually give that forecast in early December.

There are still many unknowns that could alter the projection. If a COVID-19 vaccine is widely available and used, it could help turn around the state's economy sooner. Another federal coronavirus relief package with state and local government aid could provide an additional cushion. Minnesota received more than $2 billion from the last relief package. About half of that went to state coffers, most of which has been spent.

Despite the uncertainty, the upcoming forecast will shape Walz's next two-year budget for 2022-23. He will present his plan in January, then work with legislators to strike a deal before the legislative session ends in May. Those negotiations could look very different if Democrats hold the House and seize control of the Senate. Walz said he wants to work with a DFL Legislature on their shared priorities, including addressing climate change and legalizing recreational marijuana. He called legalization a criminal justice reform priority that could also generate revenue — although Hortman noted it would likely be several years before the state would see a financial benefit.

"I also recognize that as the governor you got to be bad cop sometimes," Walz added. "And I've got to balance the budget and that piece of it will, I think, create a healthy tension and a healthy dynamic."

Hortman was in the Legislature in 2013 and 2014 when Democrats controlled the Legislature and governor's office. She said with one-party control they would spend more time debating the details of measures, such as paid family and medical leave and gun control.

Like Walz, Hortman said education would be a priority for any spending increases. They both want to devote more money to home health care workers who look after the elderly and people with disabilities. Those workers have pressed for a $15 minimum wage. For Gazelka, preventing increased government spending is the priority.

If Republicans maintain their control of the Senate, cooperation between Gazelka and Walz will be paramount. Their relationship has been strained as Walz has used emergency powers to handle the pandemic, bypassing the Legislature. Partly in response, Senate Republicans voted to remove two of Walz's commissioners.

Walz now says he is hopeful about their ability to work together after legislators recently passed a nearly $1.9 billion public works infrastructure package. That deal included significant borrowing to cover state projects and some additional spending Walz wanted. House GOP Minority Leader Kurt Daudt and other Republicans opposed the measure, which Daudt said would add to the state budget deficit.

"It's messaging," Walz said of opposition to the bill, which passed just weeks ahead of Election Day. He said not taking care of the state's long-term needs would have been "reckless." Gazelka voted for the bill, as did most GOP senators and nearly half of the House Republicans. The Senate majority leader said the borrowing bill was one of the state's only options to stimulate its lagging economy.

Staff writer Briana Bierschbach contributed to this report.