Fresh revenue gaps from a sinking economy could throw the Capitol right back into gridlock ahead of 2012 elections
The February 2011 budget forecast that knocked $1.2 billion off the state’s recent budget deficit came with no shortage of caveats. Nearly half the rosier revenue picture was attributable to predicted capital gains collections, which are notoriously volatile. Rising gas prices were also a threat to the economy. But employment assumptions were probably pessimistic, officials pointed out: A stronger recovery could mean even better numbers by November.
Fast forward to August, and those relatively routine caveats have been overwhelmed by wild stock market swings, credit rating downgrades, persistent unemployment and the increasing probability of a double-dip recession. With an eye toward this fall, even the most even-keeled observers are beginning to worry about what the state’s revenue and budget picture might look like when the November forecast sets the stage for the 2012 legislative session.
“If we were to do the forecast right now, it’s likely that it would be lower,” state economist Tom Stinson said of revenue projections last week, giving the usual stipulations that there is no full picture until the forecast is complete. “There’s a lot more downside risk than there is upside.”
Economic handicappers of all stripes have been downgrading their 18-month projections for growth uniformly in recent weeks. Such consensus is rare, Stinson says. Global Insight, the state’s guiding economic light, says there’s a 40 percent chance the economy will underperform the baseline that informed the February forecast.
Deficits in nominally non-budget years aren’t necessarily unusual. But depending on the size and scope of the problem that re-emerges, the repercussions can have far-reaching implications for both policy and political aims at the Capitol.
The shortened timetable of the upcoming session alone is a complicating factor when a budget deficit re-emerges. The forecast comes in November, and by January the administration is expected to have its proposed fix on the table. Lawmakers return around the same time, with the expectation that they will adjourn by April, ready to hit the campaign trail ahead of that year’s elections.
What that means is that a deficit of any significance can easily crowd out non-budget policy plans that lawmakers may have held in reserve during fiscal fights the session before.
“The bigger the budget problem, the more attention it gets,” one longtime fiscal analyst said. “That usually does tend to overshadow everything else.”
A crowding out of other agenda items and a return to political gridlock arguably couldn’t come at a worse time for either side. With legislative district maps still up in the air and the sting of a historic government shutdown fresh in voters’ minds, both parties will be ultra-conscious of the approaching elections as they jockey for the political upper hand.
Substantive, campaign-ready successes will be at a premium for legislators, but those plans could be among the first victims if a significant deficit takes hold.
“In an election year, you’ve got the constituencies back home,” one GOP lobbyist said, pointing to all-important spring endorsing conventions as well as the general election. “That will definitely be a factor.”
Observers point to the recent “Reform 2.0” press conference held by the House GOP caucus and Gov. Mark Dayton’s jobs tour as early signs of political positioning after the shutdown and budget deal left both sides bruised among supporters and detractors alike. One lobbyist went so far as to say they are purposefully making pushes now before the budget overwhelms the agenda.
“Once session happens in a supplemental year, it happens really fast,” the lobbyist said. “That’s not a lot of time to resolve a deficit.”
While another budget fight could stop cold the policy promises of both sides, the political implications are equally dire. Republicans say both caucuses – but particularly the House GOP – are feeling pressure from conservative activists over the budget deal struck with Dayton. Another deficit and subsequent deal could hamper their ability to atone for those perceived sins.
“That’s why you saw the [Reform 2.0] press conference,” another lobbyist said. “That was an effort from Republican leadership to address the concerns of some of their members.”
A deficit doesn’t necessarily rule out any policy changes or agenda items, of course, even if it does complicate their pursuit. A centerpiece of the Reform 2.0 news conference was a proposed constitutional amendment to require a legislative supermajority to pass any tax increases, a measure that conveniently comes with no price tag. (It’s widely believed that the House leadership promised to give priority to the amendment in 2012 to secure the votes of budget hard-liners last month. Rep. Steve Drazkowski said as much in a post-special session letter to constituents.)
For Dayton, too, a session mired in a replay of 2011’s budget fight could be politically complicated as he looks to 2012. The governor’s stated goal for the remainder of his term is job creation, but with resurgent bad blood possible and little money to work with, doing much of anything becomes a more complicated matter.
In 2004, the state found itself in a similar position: fresh off a recession, with a badly lagging recovery and a first-term governor who just closed a budget gap only to see it re-emerge. There was no bonding bill then, and while the deficit wasn’t enough to force drastic action, it did draw attention.
Running out the clock, so to speak, likely isn’t an option for Dayton, either. The specter of a shutdown is no longer in play, and unallotment returns as an executive branch recourse. But any hope that a possible November DFL sweep into the majorities could lay the groundwork for a tax increase in 2013 to address the lingering deficit likely wouldn’t provide revenue quickly enough to close the gap, a fiscal analyst said.
The main question looking ahead to 2012, then, is how big a potential deficit might be. By early September, MMB will release an updated revenue picture, the first and latest since the shutdown interrupted analysis in July. Another will come in October, and in the meantime all eyes will remain on the economic tea leaves for any indication as to how high a potential deficit might go.
For now, most say it’s too early to venture a guess, but lobbyist and Pawlenty-era MMB Commissioner Tom Hanson said that when the number is below $500 million, “it’s a little easier to cobble together a solution.”
But if it goes higher? “They’re going to be really challenged,” he said. “It depends on the magnitude.”