Minnesota is $5.2 billion in the hole

Warning that Minnesotans are facing a time of "pain and sacrifice," officials Thursday said they would slash state spending and rethink the role of government in the aftermath of a towering deficit that tops $5.2 billion over the next two and a half years.

Gov. Tim Pawlenty said that most states in the country are staring into budget shortfalls and, along with DFL legislative leaders, noted that within the hardship of budget cuts lies an opportunity to reinvent government and invigorate the state's moribund economy.

Government will have to change "in a historic way," he said. As part of that, he said, "there's no question that there will be spending cuts in programs that have existed for a while."

For starters, Pawlenty said he is ordering state agencies to cut 10 percent of discretionary spending. Only public safety, corrections, the military and veterans affairs will be spared.

Leaders of the DFL-controlled House and Senate said they will take a knife to the state budget and the pain could be substantial.

"We can work our way back to prosperity," House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said Thursday. "We are going to start by making cuts."

Key legislators will begin meeting next week to craft the first round of cuts needed to reverse the state's most immediate problem: a deficit of $426 million in the current budget period, which ends in seven months. Pawlenty and DFL leaders will meet for breakfast at the governor's residence this morning to begin work toward an agreement on short term cuts. But Pawlenty has served notice that if progress drags beyond a few weeks, he will make the cuts himself - a gubernatorial prerogative in times of budget crisis known as unallotment.

Cuts, not increases

Long-range, Pawlenty said, he will propose a reshaping of health care, K-12 education spending and the tax system itself, which he called outdated. Such wholesale overhauls have been attempted before by both political parties, but the specter of far-reaching deficits is expected to sharpen the incentive for dramatic change.

Even the K-12 budget, considered sacrosanct most years, will be rebuilt "from zero," Pawlenty said. Kelliher appeared to back up that proposal, saying that legislators will use zero-based budgeting to winnow spending.

One option appeared to draw little interest from either the Republican governor or DFL leaders: raising taxes.

Pawlenty flat-out rejected any tax increases, while Kelliher steered clear of the subject, saying "we are most interested in making cuts."

Health care could be a prime target for cuts, as it has been in previous downturns. Much of the unspent funds for the budget period that ends June 30 are in health care, K-12 schools and local government aids. Long-term, health care is one of the fastest-growing parts of the state budget.

Those cuts may be lessened by a federal stimulus package that could be used not only to alleviate expected cuts in state spending, but also to jump-start job development through bricks-and-mortar projects.

That kind of spending would carry the added bonus of improving a badly aging infrastructure, although Pawlenty had sharp words for the federal government's offer.

"The U.S. federal government is broke," Pawlenty said crisply at a Capitol news conference. He described the various Washington bailouts and stimulus proposals as "a very elaborate Ponzi scheme" that he called "reckless and irresponsible." Nevertheless, Pawlenty said, he would make sure Minnesota got its share and "I don't feel bad about accepting," because the state is a net contributor to the federal government through taxes paid.

Who loses

A few other early revenue-raising schemes may face some resistance. Pawlenty threw cold water on Republican legislative proposals to sell off the Minneapolis-St. Paul airport and to privatize the Minnesota State Lottery. The first is prohibited by federal law, he said, while the administration of the second is built into the state's constitution.

Pawlenty said he would not revisit gambling proposals such as a state casino or slots in bars and said the Vikings should not consider their quest for a new stadium among the state's priorities.

DFL leaders said their biggest task will be to spark job growth and wrestle down spending.

"Nothing is off the table," said House Majority Leader Tony Sertich, DFL-Chisholm. But the focus, he said, should be on whatever will stimulate job growth.

House Minority Leader Marty Seifert, R-Marshall, said that government should begin by cutting red tape, citing the example of a St. Cloud bus company that had to wait three years for a permit to spray-paint their buses.

Senate Minority Leader Dave Senjem, R-Rochester, said that new technology could yield savings as well. "I think there's many applications where a kiosk can replace a person and [we have] the motivation to look at those kinds of things," he said.

It could be worse

Minnesota's long-term budget picture is every bit as bleak as officials had feared.

"The economy has body-slammed our state budget," said Tom Hanson, commissioner of management and budget.

Inflation, which by law is no longer an official part of the state's forecast, will add $650 million to the two-year deficit of $4.8 billion, bringing the total effective deficit to about $5.2 billion. If the short-term deficit is included, the state's red ink tops a staggering $5.8 billion over the next 18 months.

A rebound should start in 2010, but, Stinson said, the economy has endured "massive losses of wealth" and recovery will be slow.

However, he said, as bad as the news is, it's nowhere close to another Great Depression, despite the recent dark predictions of auto industry chieftains in Washington. Unemployment could reach 8 percent, he said, but would come nowhere near the Depression-era jobless rate of 25 percent.

Unfortunately, Stinson said, the news "could be noticeably worse" before the budget period ends.

The prolonged recession will test the mettle of Minnesotans, Kelliher said, but should also be the catalyst for experimentation.

"We need the best and brightest thinkers," she said. "People need to run to the Capitol and bring their best ideas."

Staff writer Kevin Duchschere contributed to this report.

Patricia Lopez • 651-222-1288