State reports slight surplus

ST. PAUL -- Minnesota legislators return to the State Capitol today with a little fiscal breathing room, but a court decision could erase the modest surplus.

The state Finance Department released a budget forecast Tuesday showing an $88 million surplus in the current two-year, $31.2 billion budget. However, a court challenge to last year's cigarette fee could eat up the surplus and much of a $317 million tax relief account.

Still, the report marked a turnaround from 2002 when legislators had to make deep cuts in programs to balance the budget in light of a nearly $4.6 billion deficit.

"For the first time in a long time, we are able to show a positive balance on the bottom line," Finance Commissioner Peggy Ingison said.

Reaction among Republicans and Democrats appeared to come from different planets.

"It represents the state being in about as strong a fiscal position that it ever has been," Gov. Tim Pawlenty, a Republican, said.

"That's flat wrong," responded Sen. Richard Cohen, DFL-St. Paul, of the Senate Finance Committee, adding that the budget is not strong at all.

Tuesday's budget forecast, which legislators use to decide how much to spend, could not answer one question - how much money, if any, will be available from the new 75-cent-a-pack charge on cigarettes.

Cigarette makers and distributors sued the state, saying a 1998 agreement between big tobacco companies and the state forbid new fees on smokes. A district court sided with the tobacco companies, but an appeal is pending in the state Supreme Court.

If the court agrees with the tobacco companies, the state will lose an estimated $370 million, Ingison said. However, how to deal with that splits policymakers, including friends Pawlenty and House Speaker Steve Sviggum.

Sviggum, R-Kenyon, said an adverse court decision would mean rethinking property tax relief and other programs his Republican caucus supports.

Pawlenty said the lawsuit is something to consider, "but it is not a make-or-break issue."

Wayne Cox of Minnesotans for Tax Justice said the lawsuit question is significant.

"I call it an asterisk forecast," Cox said. "Minnesota really won't know its financial picture until the courts act, possibly late in the legislative session. Its hands will be tied until then."

If the decision goes against the state, it could eat up the $88 million surplus and $317 million that is supposed to go to tax relief.

The surplus was not bigger because the state lags behind other states in creating jobs, but State Economist Tom Stinson did not have an answer as to why.

"The real question is if this is a momentary period of underperformance ... or if this is the beginning of a longer trend," Stinson said.

Cohen said he knew why the job market was down.

"We are losing the good-paying jobs and we are creating the McDonalds (jobs)," the senator said.

Fewer jobs meant less tax money going into the state treasury. Spending was down slightly, helping make the small surplus.

The legislative session begins at noon today and under the State Constitution must end by May 22. The main job this year is approving a public works construction bill, mostly funded by the state selling bonds.

Tuesday's budget report shows the state could afford to borrow $990 million, which Sen. Keith Langseth said is a possibility. The Glyndon DFLer, chairman of the committee that picks public works projects, had planned a bill borrowing $965 million.

Pawlenty said his plan to borrow $811 million is big enough, but he has left open the possibility of supporting a bigger bill.

The budget forecast showed the state can continue to speed up payments to school districts, as required to law. State leaders had delayed more than $1 billion in payments to help end the deficit.

Some lawmakers say they would change the law so they could spend some of that school money on other programs. However, Sen. LeRoy Stumpf, who heads the Senate Education Finance Division, said legislators should not go back on their word to the schools.

"Our children deserve that commitment from us as elected officials," the Plummer Democrat said.

Rep. Frank Moe, DFL-Bemidji, called the slight surplus good news, but that lawmakers still need to be cautious.

"The budget has definitely come a long way since the deficit projections in 2003," Moe said. "We're far better off now that we've balanced the budget and paid back the money borrowed from schools to balance previous budgets."

Still, job growth is weaker than expected, plus the court's potential ruling on the cigarette charge hangs over lawmakers, he said.

"We're not out of the woods yet," Moe said. "We've paid back the state's credit card, let's not start running it up again."