Minnesota’s Budget Deficit: Significant Yet Solvable?
By: KEVIN P. GOODNO
December 4, 2009
Minnesota’s state budget forecast was released on Wednesday, December 2. Some have been referring to that day as Black Wednesday – not because it signifies that the state is in the “black” – but due to the pall that the deficit has cast over the capitol. This year’s forecast poses extreme challenges for our state budget.
Typically, the November forecast will help define the content and outline of the upcoming session. The magnitude and timing of the 2009 forecast and its $1.203 billion deficit will not only set the framework for the upcoming session, it will likely define the issues for our 2010 elections and impact a number of political careers, both negatively and positively.
The Forecast Explained
For the current biennium ending June 30, 2011 (FY2010-11), the state deficit is projected to be $1.203 billion. This deficit is primarily the result of $1.156 billion in lower-than-expected revenues; combined with a $91 million deficit from the previous biennium and lower-than-expected spending of $44 million. As explained in the forecast document (see attached link), most forecasters agree that the “Great Recession” is over because the country has seen positive real GDP growth in the third quarter of 2009. This growth was accurately forecasted last February. However, job losses and income projections were not as accurate, resulting in a deficit of $1.203 billion.
View the 2009 November Forecast
The $1.203 Billion Problem
Minnesota operates on a two-year budget cycle, or biennium. Our state constitution requires that Minnesota’s budget be balanced for the current biennium; therefore, state leaders have a $1.203 billion shortfall to address before June 30, 2011 (the end of our current biennium). Resolving the $1.203 billion budget deficit can be accomplished by legislative action, unallotment by the governor, or a combination of the two.
On February 4, the 2010 legislative session will begin and legislators will begin to tackle the forecasted deficit as well as a state bonding bill. Legislators have until the constitutionally mandated May 17, 2010 adjournment date to do so. After this date, the Governor may call a special session of the legislature, if necessary.
If the Legislature fails to balance the budget for the current biennium or if the Governor deems unilateral action is necessary, the Governor currently has the statutory authority to unallot, or take back state funds that were authorized to be spent but that have not yet been legally committed. Unallotment can only take place after the Commissioner of the Minnesota Management and Budget Department has considered the state’s budget reserve and determined that the budget will be in deficit.
After the forecast was announced, Governor Pawlenty issued a press release calling the deficit “significant, but solvable.” He went on to request that “legislative leaders start committee hearings immediately to craft budget reductions that could be enacted promptly at the beginning of the legislative session.” He also left unallotment, prior to the legislative session, as a possible partial solution as he “directed his cabinet members to begin working with legislators to discuss that potential unallotment [of local government aid] and other possible solutions.” Additionally, the governor ordered state government agencies to place a hold on spending, targeting 3 percent of unspent operating funds in the current budget period.
Governor Pawlenty’s press release lays out a possible scenario, through implication, on how the deficit may be resolved.
- First, it appears that the governor will likely unallot a portion of the Local Government Aid payments that are due to be made at the end of this calendar year.
- Second, it appears that he will allow the legislature to act prior to further unallotments. He may either make his own proposal for balancing the budget and present it to the legislature for action, or he may “request” that the legislature develop its own solution (as can be inferred from his Press Release).
- Finally, if the legislature is not making sufficient progress in solving the deficit problem, the governor, as he did at the end of last session, may act unilaterally by unalloting. If the governor proposed a budget solution to the legislature that solution would likely be a roadmap to where the unallotments would be made.
One potential problem with the above scenario is that there is currently a lawsuit challenging the validity of the unallotment process followed by the governor earlier this year. If the courts intervene and find the unallotment process invalid, the governor and legislature will have to agree to a solution, which would appear very difficult, if not impossible prior to the elections. It is also possible that a legislative/governor fix could be delayed until the next legislative session with a new array of legislators and a new governor.
Reaching an Agreement
Obtaining a legislative solution that meets the governor’s requirements will be difficult because the governor will not support anything that can be portrayed as a tax increase. This is consistent with the position he took during the 2009 session and with his appeal to many prospective GOP presidential electors. At the same time, the legislature and its leadership have been just as adamant that a solution to the deficit requires a balanced approach of tax increases, spending reductions, and finding more government efficiencies.
To further complicate matters, in this election year, with various officials vying for political party support, they will be less likely to be swayed to the “political center” in search of a compromise for risk of damaging their respective endorsement chances among the party faithful.
Finally, there are fewer “easy” budget balancing options. For example, the budget reserve was depleted at the end of the 2009 session when it was used for the prior deficit as a prerequisite to the governor’s unallotment actions. Another factor to consider is that as of January 1, 2010 there is only 75% (18 months) of the biennium remaining and much of the spending has either been committed or will not be immediately available because of notice requirements or system changes. This typically leaves “grant” programs the most exposed for potential budget cuts. If for some reason a budget fix is not enacted prior to the elections, this challenge becomes even more pronounced.
Thinking Ahead: After this Biennium
In addition to the challenges posed by the current biennium, the next biennium will likely be even more vexing. For the 2012-2013 biennium, the projected structural shortfall has now climbed an additional $995 million to a whopping $5.426 billion. (These projections assume current law and do not take into consideration inflation or any statutory changes that may take place during the 2010 legislative session.) The important takeaway from this planning estimate is that the deficit is currently viewed as a long-term problem: it will not resolve itself without more permanent systemic changes. For example, although one-time shifts or the use of budget reserves may be helpful in solving a budget deficit in one biennium, those temporary solutions will not help with the next biennium.
Unlike the 2010-2011 Biennium, there is no constitutional mandate that the state budget be balanced in the outlying biennium. So, it is possible that the legislature may adjourn with a balanced 2010-2011 budget, but that the 2012-2013 budget projections would still show a deficit. This is not out of the realm of possibility as that is what has happened the past two sessions.
Before the legislature will take final action in addressing the deficit, another forecast will be released in February. Let’s hope that the economy will bounce back faster than expected and be reflected in that forecast.