The February forecast: Good news on deficit, bad news on economy

The state’s 2010-2011 general fund deficit dropped by more than $200 million on Tuesday in the semi-annual economic forecast.

That was rightly viewed as good news by Gov. Tim Pawlenty’s administration and many legislators, who need to plug a shortfall that stood at $1.2 billion before the new budget projections were released.

But there’s little joy at the Capitol for anybody hoping that a shrinking deficit points to an economy that’s growing again.

Only $25 million of the $209 million budget improvement — or about 11 percent — occurred as a result of increased revenue collections. And the tax revenue sector that saw the largest uptick, the corporate income tax, increased by $127 million from last November’s forecast because of a mistaken assumption in previous forecasts that was corrected, according to state economist Tom Stinson.

“It’s not that we have more in the way of expected payments,” Stinson said.

Spending reductions to the tune of $184 million are the main reason the deficit shrank. That includes $83 million in one-time federal health care funding that wasn’t previously expected.

The political tensions between Republican Pawlenty and DFL legislative leaders in the House and Senate don’t show any signs of improving, either.

DFL leaders, in their reaction to the forecast, proposed a process to create a supplemental budget in three separate installments beginning with the areas of relative mutual agreement, like higher education and public safety. That would be followed by health and human services in the second installment and then by local government aids and credits and K-12 education spending.

Pawlenty, however, said he wants DFLers to present a complete budget by March 17. He said the DFLer’s plan is an “odd” process that stalls the budget negotiations until the end of session.

“I think it’s another way of saying, ‘We don’t want to do the hard stuff until the last minute,’” Pawlenty said.

Pawlenty has already proposed a supplemental budget that professes to close the deficit. But Senate Majority Leader Larry Pogemiller, DFL-Mineapolis, pointed out that Pawlenty’s plan relies on nearly $400 million from the federal government that hasn’t yet been approved in Washington.

“Counting on $400 million from the federal government in the next two months — I’m not sure that’s a good bet,” Pogemiller said.

Lawmakers are now looking at a $994 million general fund shortfall for 2010-2011.

That near-term deficit represents 3.2 percent of the state’s $31.1 billion in projected spending.

A much deeper problem lies ahead in 2012-2013. The projected shortfall in the out years increased by $363 million to $5.78 billion. Lawmakers, however, don’t have to pass a 2012-2013 budget until next year. The out-years deficit increases by another $1.18 billion if inflation is factored in.

Stinson said he thinks the economic recession is over. But he added that several factors indicate a “long, slow recovery.”

Despite the meager revenue increase in the forecast, revenue is still down $1.1 billion from the end of the 2009 legislative session last May.

Within the revenue numbers, individual income tax collections continued to worsen by $47 million from November. The income tax projection has dropped by $874 million since the end of the legislative session. Corporate income taxes have improved by $127 million since November due to the new adjustment for refunds.

The forecast’s analysis states that Minnesota’s labor market was “stuck in neutral” at the beginning of the year. Regarding the mood of consumers, Stinson said, “I think that people are beginning to get more confident. We’re seeing people’s savings rate go down a little bit and spending increase.”