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Commissioner Tom Hanson of Minnesota Management and Budget listens to a reporter's question Tuesday after he announced a budget deficit of about $4.6 billion. Pioneer Photo/Don Davis

Federal money helps lower state budget deficit to $4.6 billion

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Federal money may have saved Minnesota's budget this year, and will help the next two-year spending cycle, but state leaders warn that economic problems are far from over.

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Economic stimulus funds approved last month by Congress and President Barack Obama lowered Minnesota's projected 2010-11 budget deficit from $4.8 billion to $4.6 billion. But 2012-13 deficit is expected to be even larger.

On the other hand, federal funds mean no deficit is expected in the current budget, with four months remaining.

Much of the federal help in the next two years goes to Minnesota health care programs for the poor. Beyond that $1.8 billion, Gov. Tim Pawlenty said, up to $800 million more could be used elsewhere in state government.

"Federal stimulus health money, I want to emphasize, is one-time money," Commissioner Tom Hanson of Minnesota Management and Budget said. "It is not a permanent solution."

Tuesday's budget forecast was the real beginning of discussion about the two-year budget that begins July 1.

The next step in what now is predicted to be a $36.9 billion budget comes within two weeks, when Pawlenty promises to release an adjustment to the budget proposal he released in late January.

Even before Pawlenty presents his updated budget, Democrats who control the Legislature promise to begin crafting their own budget plan. From there, legislative committees will go through the budget proposals in depth.

The Legislature must adjourn by May 18, but some lawmakers already are saying a special summer session will be needed to finish budget work after that.

Before the Tuesday budget announcement, many in the know -- including Pawlenty -- predicted a deficit of $6 billion to $7 billion. The deficit would have been $6.4 billion if not for federal money.

State Economist Tom Stinson offered little hope for a quick recovery.

"We are in the worst recession of the post (World War II) era," he said. "But it will come to an end. It may take another stimulus package, but it will come to an end."

Until that turnaround happens, Stinson and Hanson said, revenues to state coffers will continue to fall.

The new federal money more than cancels out a $1.2 billion drop in revenue since a December economic report.

Individual income taxes are expected to drop $701 million in 2010-11, with corporate taxes down $230 million and sales taxes off $203 million.

Spending is not expected to rise much in any category other than state-funded health care.

Federal money used to help the state budget is just part of that coming to Minnesota. All told, about $9 billion is expected to flow to the state, mostly in the form of individual tax breaks.

About $4.6 billion in federal money will be given to state and local governments, but much of that is targeted for specific programs and cannot be used to reduce the deficit. State and federal officials still are trying to figure out what strings are attached to the money and are not sure how Minnesota can spend some of it.

Reaction to Tuesday's budget announcement was predictable - Republican Pawlenty said now is not the time to raise taxes, Democratic legislative leaders hinted at tax increases and labor leaders said now is the time to spend money to keep their members working.

"This is a challenging (budget) forecast, but it reflects a challenging economy," Pawlenty said.

While Pawlenty repeated his opposition to what he considered an overly large federal spending package, he expressed no hesitation to accept the funds. He said the package could save or create 55,000 Minnesota jobs.

The Republican said that if his budget proposal passes, it will be the first time in state history that one budget is smaller than the one it replaces.

Pawlenty warned legislators to ignore his no-tax-increase mantra at their peril: "If they insist on raising taxes, we are going to have a collision."

House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said it is too late to avoid that collision, but Kelliher and other DFL leaders repeatedly refused to say if they will propose raising taxes.

Democrats say that Pawlenty is playing games by opposing tax increases because his policies have led to higher property taxes, fees and tuitions.

"He is playing word games," Kelliher said.

If Democratic lawmakers dodged the tax-increase question, DFL supporter Elliot Siede did not.

Seide, director of the Association of Federal, State County and Municipal Employees Council 5, said the state needs to raise $1 billion by raising income taxes on the richest Minnesotans.

"When is the governor of this state going to stop providing welfare for the wealthy?" Seide asked.

He complained that the governor's budget would cost 3,400 state employees their jobs, which he said will especially hurt rural Minnesota because so much of its economy depends on public employees.

Republican legislative leaders generally sided with Pawlenty, but said they will have their own budget-balancing ideas, too.

"The Legislature should approach the budget with the perspective that we have a $6.4 billion deficit," said House Minority Leader Marty Seifert, R-Marshall. "The so-called federal stimulus money is just a shot of cortisone, and it doesn't change the fact that we need to perform reconstructive surgery on the state budget."

Sen. David Tomassoni, DFL-Chisholm, said that while he appreciates federal help, lawmakers have their work cut out.

"The state's deficit has grown nearly $2 billion in just three months," Tomassoni said. "This economy is in a downward spiral, which means the Legislature must not only focus on fixing this budget shortfall, but on creating new policies that will bring economic recovery and long-term success for Minnesota."

The state long has delayed implementing solutions to economic problems, he added. "We can't delay our problems any longer. This year, we must demand solutions that will fix the immediate deficit and respond to a changing economy."

Don Davis works for Forum Communications Co., which owns the Bemidji Pioneer.

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