Minnesota’s looming $4.56 billion budget deficit resulted from a combination of decreased revenue projections and increased spending forecasts – particularly for health care – state economist Tom Stinson told a legislative commission Thursday.

Because of the economy’s slow recovery, the Finance Department expects revenue for the state’s general fund to fall $668 million short of estimates from the end of the last legislative session.

Most of the revenue shortfall for the 2002-03 biennium results from the stock market’s poor performance, according to the department’s November forecast.

Capital gains revenue – taxes on earnings in the stock market – fell by more than half in tax year 2001, and the department expects it to decline another 16 percent in the current tax year.

However, the forecast projects a $62 million increase in sales tax revenue over end-of-session predictions.

“It’s not as volatile a source as the income tax,” Stinson told the Legislative Commission on Planning and Fiscal Policy.

On the expenditure side, the forecast projects an additional $76 million in spending during the 2002-03 fiscal year over end-of-session estimates.

The largest single component of that increase is a projected additional $107 million in health care spending. The forecast predicts lower spending in other areas – such as a projected $1 million drop in higher education spending – will partially offset the rising health care expenditures.

2004-05 projections

The November forecast is the state’s first attempt to predict its 2004-05 budget situation, although state agencies have been using less precise long-term models to develop planning estimates for their programs.

The current forecast removes $1.6 billion in projected revenue from the amount forecast at the end of the last legislative session. It also predicts $926 million in additional spending and a $296 million drop in projected budget reserves since the end-of-session figures.

The bottom line for the state, according to the forecast, is a projected $4.56 billion deficit at the end of fiscal year 2004-05, $2.9 billion more than the $1.65 billion deficit predicted at the close of the legislative session.

The forecast predicts this deficit will materialize despite a projected $1.9 billion revenue increase resulting from higher income tax, sales tax, corporate income tax, state property tax and tobacco settlement receipts than in the 2002-03 biennium.

Stinson defended the forecast’s accuracy before lawmakers but said three things could change the projections: more tax money than expected from Christmas shopping, tax withholding increases because of holiday employee bonuses or capital gains tax information due in mid-January.

Stinson also said the forecast does not account for a possible war with Iraq. He said economists have told him informally that a war could result in a bad economic quarter, and an extended war might push the economy into recession.

he 2001 recession impacted Minnesota’s economy more than most, according to the Finance Department report, but a recent National Governors Association report finds almost every state in fiscal crisis.

Amid declining revenues, states collectively enacted the largest net tax increase since 1992, the report found.

States’ total year-end balances in the 2003 fiscal year fell 70 percent from their peak in 2000.

State health care costs nationwide grew 13 percent last year and now account for approximately 30 percent of state spending, the report found.

Minnesota’s health care spending is expected to increase 23.2 percent between the 2002-03 and 2004-05 biennia.

epublican Gov.-elect Tim Pawlenty will come into office in January facing not only the deficit but also his campaign promise to solve the state’s financial woes without raising taxes.

“Minnesota does not have a tax problem,” Pawlenty told The Associated Press. “We have a spending problem.”

At Thursday’s presentation, Democratic Sen. Larry Pogemiller, who represents the University’s Minneapolis campus area, asked Stinson if Pawlenty’s comment was accurate.

“I think what the governor-elect is talking about is how to solve the problem, not where the problem came from,” Stinson said.