$1.1B state budget shortfall predicted

Officials prepared an alternative budget solution in case of the ‘fiscal cliff.’

by Jessica Lee

The Minnesota state government is expected to face a $1.1 billion deficit this upcoming biennium, officials announced Wednesday.

Minnesota Management and Budget officials outlined the 2014-15 biennial budget, which included an alternative solution in response to the “ultimate gloom of the fiscal cliff.”

The future of the state’s economy is “clouded with uncertainty,” officials said, and rests in the hands of President Barack Obama and Congress.

If they don’t mandate changes regarding federal tax hikes and spending regulations at the national level, a fiscal cliff could take place and send Minnesota and the nation into a recession.

The severity of the deficit could negatively affect University of Minnesota President Eric Kaler’s $1.2 billion biennial budget request

Richard Pfutzenreuter, the University’s chief financial officer, said “it’s just simply too early to panic” and things will be clearer when “the dust settles on the fiscal cliff.”

“They will definitely face budget challenges at the Legislature this year. That’s clear from the forecast,” Pfutzenreuter said. “But I think this forecast is probably more preliminary than in the past because of the uncertainty of the fiscal cliff and what might happen.”

State economist Tom Stinson and his staff created a first-time “alternate forecast” infused with data from Global Insight — an organization that provides expertise on financial information — to prepare Minnesota for the worst.

“The downside of this is so serious we did something that we haven’t done before,” Stinson said at a press conference Wednesday.

Stinson said in a worst-case scenario, the federal government’s lack of action could cause a recession beginning in January 2013 and last for seven to nine months.

“If we fix the problem and we fix it in a responsible manner, that’s going to be good for the nation’s economy, the state’s economy,” Stinson said. “If we kick the can down the road … that will turn back into something we don’t want.”

Cuts would most likely begin with local government aid, said David Schultz, a law professor at Hamline University. He said higher education is “probably somewhere about third in priority in terms of being protected.”

“I wouldn’t say that higher ed is in a great position, but I certainly wouldn’t say it’s in the worse position in the world in terms of the first one that might see cuts,” Schultz said.

Pfutzenreuter said the budget deficit means it’s even more important for the University to let legislators and Democratic-Farmer-Labor Gov. Mark Dayton know the importance of the University’s biennial budget request for 2014-15.

“The [University] may not get the same favorable treatment that one would have hoped, let’s say a couple months ago when we thought we were running a reasonable surplus,” Schultz said.

Pfutzenreuter said without the state’s support and the passing of the request, it would be difficult for the University to keep tuition low. In Kaler’s proposed budget, he vowed to freeze tuition for in-state students for two years in exchange for more legislative funding.

“We need help from the state in our budget request to make that happen,” Pfutzenreuter said.

Schultz said he doesn’t expect Kaler to get his full requested amount from the state and he “wouldn’t be surprised if, again, some tuition still goes up as a result because the [University] doesn’t get all that it wants.”

“I don’t think at this point the president’s plan is guaranteed a passing,” Schultz said. “I think it still has some legs, but with $1.1 billion in the hole, they’re going to be looking for places to pass on some of those [requests] and come up with revenues.”

MMB Commissioner Jim Schowalter said legislators have their work cut out for them.

“There is no relief in sight for our fiscal woes,” Schowalter said. “Our projections show that the state still has some heavy lifting to do to make sure the budget is balanced.”

The “risky fiscal cliff” would add an additional $1.7 billion to the state’s already $1.1 billion shortfall and raise the unemployment rate to 7 percent — a 1.2 percent increase from the current rate.

DFL leaders addressed the press after the forecast’s release Wednesday.

“As we move forward with resolving the state’s budget issues for the next two years, I think we all need to be mindful of the decisions we make …” said Sen. Tom Bakk, the newly elected majority leader.

The balance from the current budget will be used to make a dent in the $2.4 billion the state borrowed from K-12 education last biennium. The estimates would decrease the outstanding debt by $1.3 billion.

Bakk said over the upcoming months, he hopes there will be an “honest conversation” about the fiscal crisis with Minnesotans, businesses and residents alike.

“Our state’s budget has been on a roller coaster of deficits in the last decade,” said Rep. Paul Thissen, the incoming House Speaker.

Dayton’s budget proposal will be released next month. Wednesday’s forecast will help him finalize his recommendations.

“I think the forecast was a cautious and a responsible forecast and the real number will appear in probably early March, late February, when the state does another forecast,” Pfutzenreuter said, “and we can hope that things become clearer and the economy doesn’t fall apart.”

-Bryna Godar contributed to this report.