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For DFLers preparing to take the reins of both legislative chambers, there was good news in Minnesota’s November economic forecast. And the forecast’s bad news — well, that was good news for Democratic leadership too.

Forecast eases pressures on DFL leadership

Gov. Mark Dayton on Wednesday defended his proposal to raise the tax rate on high incomes. “We’re looking at a serious deficit in the state and a catastrophic deficit at the federal level,” he said. “Somebody’s got to do something about it. And it can’t all be cuts.” (FILE photo: Peter Bartz-Gallagher)

School shift paydown, steady deficit figure will help moderate expectations

For DFLers preparing to take the reins of both legislative chambers, there was good news in Minnesota’s November economic forecast. And the forecast’s bad news — well, that was good news for Democratic leadership too.

The positive news is that a $1.3 billion surplus for the current 2012-2013 budget period will automatically be used to buy down a chunk of the $2.4 billion
K-12 school aid shift. The $1.3 billion comes after roughly $320 million was applied to the shift buyback in the February forecast, making the current amount borrowed from schools less than $1 billion and easier to stomach.

The negative news — that the upcoming biennium still holds out a $1.1 billion deficit — also has its uses, in a political sense. A number of Capitol insiders who watched the numbers roll out on Wednesday saw the deficit as a way for DFL legislative leaders to tamp down the expectations of legions of interests with their hands out for appropriations in the next budget. The projected deficit for 2014-2015 stayed the same as in the last economic forecast, in February, rather than declining.

“It probably does give people pause as to what is realistic to ask for, given that the state has this deficit,” said Gary Carlson, director of inter-governmental relations at the League of Minnesota Cities. But lobbying at the Capitol could ramp up over the need to play defense as the result of the ongoing deficit.

“It also means they will be heavily lobbied by all these groups to not be part of any budgetary solution that involves cutbacks,” Carlson said.

The budget deficit didn’t entirely wash away calls for new spending, though. Most unions and progressive interest groups sent out news releases calling for a “fair” budget without making specific pronouncements on taxes and spending. The one exception was the public employees union AFSCME Council 5, which came out of the gate immediately after the forecast numbers were released calling for $6 billion in new revenue. Eliot Seide, AFSCME’s executive director, called to “fairly raise” $6 billion in revenue.

“If Republicans are looking for massive spending cuts, they’ve already done that with a decade of disinvestment,” Seide said. “We need $6 billion to dig ourselves out of the hole and pay for the things Minnesotans care about — brainpower schools, middle-class jobs, safe transportation, and property-tax relief.”

DFL leaders in the last two weeks alone have been inundated with new advisory task force reports calling for big funding boosts on major issues like funding for education and transportation. The pressure to deliver on those issues is significant. Legislative leaders can point to the fiscal challenges in the next biennium as a way to manage expectations. Senate Majority Leader Tom Bakk, DFL-Cook, reacted to the forecast by calling attention to the upcoming budget battle.

“I’m generally pleased that we are making some headway in paying off the school shift,” Bakk said. “But what continues to nag me some is we still have a fiscal crisis ahead of us in the next biennium, with inflation, something just north of $2 billion to resolve. I do hope that over the course of the winter and the spring, we are able to have that honest conversation with Minnesotans about resolving this constant fiscal crisis we find ourselves in.”

One improvement in the state’s fiscal situation from the recent past is that the rainy-day funds are full and comprise nearly $1 billion. The budget reserve account contains $644 million and the cash flow account has $355 million. While lawmakers will probably face pressure to drain the budget reserve rather than make cuts, one lobbyist noted such a move would be a one-time fix that wouldn’t solve the state’s structural problems.

“I know that Bakk is talking about doing a structural fix, and using those [reserve] moneys to help offset the deficit isn’t a structural solution to the budgetary challenges,” the lobbyist said.
The forecast noted that the state’s budget has been put off-balance by the temporary budget fixes of the past. For example, lawmakers in 2011 patched the deficit in the current budget in part by borrowing money that’s backed by future payments owed to the state from the 1998 court settlement with tobacco companies. MMB’s forecast document observed that the budget remains imbalanced into the future even as revenues have been growing.

“Tax revenues for the coming biennium are forecast to increase nearly $1.7 billion over the current biennium,” according to the document. “Underlying growth in current law spending for K-12 education and health and human services will be about $1.5 billion, slightly below the growth in taxes.
“However, a $1.1 billion shortfall remains, largely because non-tax revenues and transfers are expected to be well below amounts projected in the current biennium, and debt service costs significantly higher. This comes from the use of one-time resources to balance the FY 2012-13 budget, including one-time tobacco bond savings which artificially reduced debt service in FY 2012-13.”

MMB Commissioner Jim Schowalter said the state’s structural budget problems are the central fiscal challenge for lawmakers.

“We’ve had three successive positive forecasts in the last few years,” Schowalter said. “Really the structural imbalance is the underlying story. Despite those changes, we see that $1.1 billion remains the challenge going ahead.”

In addition to dealing with the demands for increased revenue and spending, DFL leaders also appear to have a ways to go before they reach unity on the issue of taxes with DFL Gov. Mark Dayton.
Dayton was asked during his Wednesday news conference if he was concerned about increasing income taxes on the wealthy at the same time that the George W. Bush-era federal tax cuts could expire due to the so-called fiscal cliff that federal lawmakers are currently trying to resolve. Dayton responded by noting that the country experienced economic growth before the Bush tax cuts were enacted. He also noted the same economic growth happened in Minnesota before Gov. Jesse Ventura cut taxes in 1999.

“I understand the very wealthiest people don’t want to pay any more in taxes,” Dayton said. “But they are paying less than they did 20 years ago. We’re looking at a serious deficit in the state and a catastrophic deficit at the federal level. Somebody’s got to do something about it. And it can’t all be cuts.”

Neither Bakk nor his House counterpart Speaker-elect Paul Thissen, DFL-Minneapolis, would make a firm commitment to raise rates as part of a budget deal. Bakk instead said the state’s tax system has become too reliant on local property taxes and is in need of reform.

“As we try to put some balance back into the revenue system and reduce the reliance on property taxes, there will have to be some revenue [that] comes from some place,” Bakk said. “Some taxes may go down. Some may go up or be broadened. We don’t know what that looks like yet.”

The fiscal cliff, in which taxes will automatically increase and spending cuts will automatically occur unless a deal is reached in Washington, D.C., casts a pall of uncertainty over the state’s budget prospects. MMB officials took the unprecedented move of issuing an alternative forecast that projected a scenario in which the country falls off the fiscal cliff at the beginning of the year. The result is a recession for at least seven months and $1.7 billion added to the $1.1 billion state budget deficit.

“In my tenure here, I cannot remember a forecast with so much uncertainty,” Bakk said.

About Charley Shaw

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