How bad is Minnesota's budget deficit? Mega-bad

Minnesota is headed toward a historic budget deficit that could rock state government -- and the people who depend on it -- down to its core.

State budget officials will release a two-year economic projection today that is expected to show Minnesota facing a deficit of anywhere from $4.5 billion to as much as $6 billion. At the upper end, the red ink would equal nearly 17 percent of the state's total budget.

"This is without question going to be the worst deficit in modern history," said Senate Finance Committee Chairman Dick Cohen, DFL-St. Paul. "We're heading into a terrible storm, and we have nothing left to face it with."

The state's budget reserve stands at a wafer-thin $153 million -- about one-tenth of the minimum recommended amount -- and that is about to disappear as the state attempts to head off its most immediate crisis: a short-term deficit for the remainder of the current budget period, which ends on June 30.

Gov. Tim Pawlenty said that immediate shortfall will be "noteworthy" but will be dwarfed in size and scope by the two-year deficit projection. Budget officials have not publicly stated the amount, but Cohen and others say they are anticipating $5 billion. "I would not be shocked to see $6 billion," Cohen said.

Unlike the federal government, the state is constitutionally required to balance its budget, a constraint that will force elected officials to consider options they've never looked at before.

"We can't tax our way out of this problem," said Senate Taxes Chairman Tom Bakk, DFL-Cook. "You cannot raise taxes by that much. You can't cut the state budget by that much, either. I would argue that everything -- every spending program, every tax -- has to be on the table. This will require a major reprioritization of programs."

Health care, schools, prisons, road projects, local government aid, all could come under the budget knife in the coming months.

"This isn't one of those things where you can tinker around the edges," Bakk said.

Worse than before

Minnesota has weathered mega-deficits before, most notably in 2003, when it stared down a $4.2 billion shortfall. The state's budget still bears the scars from that one -- year-to-year actual reductions in K-12 spending, cuts in health-care rolls, a thousand nicks from fee increases, higher property taxes.

The state avoided deeper pain by availing itself of several sizable pots of money, including about $1 billion in endowments from its 1998 settlement with tobacco companies.

This time, the cupboards are virtually bare and the downturn comes amid a national financial meltdown.

Tom Hanson, commissioner of Minnesota Management and Budget (formerly known as the Department of Finance), said his staff has been frantically plugging in new numbers as economic conditions change, sometimes hourly.

The conclusion? "This recession is going to be longer and deeper than any in a generation," Hanson said. "We're going to be slow coming out of it."

Pawlenty has warned that he plans to take immediate action to stanch the flow of revenues out the door even as the deficits pile up. From a gathering in Philadelphia where he and other governors met Tuesday with President-elect Barack Obama, Pawlenty said that he will meet with leaders in the DFL-controlled House but is prepared to reduce spending in this budget period single-handedly if necessary. When faced with an immediate deficit, the governor has the power to "unallot," or rescind previously approved spending.

That could mean swift cuts in health care and social services, an area Pawlenty has repeatedly said is spiraling out of control. Bakk agrees.

Health and Human services went up 14 percent in the last budget, he said. "That spending somehow has to get under control. Health care is going to bankrupt this state."

Other options

Few options will bring in much on their own. A 75-cent increase in the cigarette tax would yield $300 million.

A 5 percent across-the-board spending cut would yield $1.8 billion, Cohen said, but that includes K-12, Take K-12 out of the mix, he said, and you'd have to cut everything else 17 percent to achieve the same savings.

Some old ideas, previously rejected, may get dusted off in the hunt for revenue. State gambling casino, anyone? Slots in bars? "I've heard talk about both already," Cohen said.

Sen. Geoff Michel, R-Edina, and Rep. Laura Brod, R-New Prague, on Wednesday pitched privatization of some state assets, specifically the Minneapolis-St. Paul International Airport and the Minnesota State Lottery.

Chicago recently privatized its secondary airport, Midway, Michel said, which fetched a cool $2.5 billion. DFLers have said such a proposal could compromise national security.

One controversial source of immediate funds could be the state's newly passed constitutional amendment raising the state sales tax by 3/8 of 1 percent. The revenue, projected at $300 million annually, is dedicated to environment and the arts. Using that money to shore up the budget would prompt criticism and challenges, but the alternative, some legislators say, is allowing new spending on arts and lakes while schools lay off teachers and families lose health care.

"I've never been at as much of a loss as I am with this one," said Cohen, who together with Bakk is tasked with crafting the Senate's budget proposal. Pawlenty's budget proposal is due in late January.

Bright spot

A possible infusion of federal funds, in the form of a stimulus package aimed at states, could help, Hanson said, although Pawlenty has already registered his disapproval of federal deficit spending. Hanson noted that the state's national forecaster, Global Insight, is building the prospect of such a package into its assumptions.

"We're going to need all the help we can get," Bakk said.

Patricia Lopez • 651-222-1288