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After two months of negligible action at the Capitol, serious work will now begin on the main agenda for the 2013 legislative session: crafting a budget for the next biennium.

February surprise: Deficit shrinks 40 percent

Gov. Mark Dayton plans to deliver a revised budget the week of March 11. His initial proposal, which included $2.1 billion in increased taxes, has received a tepid response. (Staff photo: Peter Bartz-Gallagher)

Improved budget outlook may fuel demand for new spending

After two months of negligible action at the Capitol, serious work will now begin on the main agenda for the 2013 legislative session: crafting a budget for the next biennium.

The February forecast released on Thursday contained unexpectedly strong economic data, with the state’s projected deficit dropping by $463 million. That leaves the remaining budget shortfall at $627 million.
“I was surprised this morning,” Gov. Mark Dayton said at a press conference on Thursday. “Most people were.”
The budget figures also improved for the current biennium by $295 million. That includes $217 million in increased revenues, mostly from additional income taxes, and $63 million in reduced spending, primarily in the area of health and human services.

Those funds are already statutorily allocated, with $5 million slotted to fill up the state’s reserves. The remaining $290 million will go toward paying back the school shift. That means the state will owe $801 million in school aid payments, down from a high of $2.4 billion.

Dayton indicated that he will deliver a revised budget the week of March 11. His initial proposal, which included $2.1 billion in increased taxes, has received a tepid response. In particular, his plan to impose taxes on business-to-business services, such as legal or accounting bills, has been widely derided — even by some of his fellow Democrats.

Dayton didn’t back down from that plan on Thursday, but he’s repeatedly stated a willingness to consider alternatives. He repeated, however, the need for additional investments in education and other areas. “[Otherwise] we’re going to just be on this glide path of less commitment and expect better results,” Dayton said. “I don’t think that’s realistic.”

Dayton did suggest two areas where he’d like to see additional spending given the state’s improved fiscal condition: the property tax refund for renters and an upfront sales tax exemption on capital equipment purchases.

D.C. politics cloud outlook

Despite the largely positive news, fiscal uncertainties in Washington continue to make predicting the state’s economic outlook a dodgy endeavor. The forecast assumes that $85 billion in federal budget cuts set to begin on March 1 — what’s known as the “sequestration” — will continue for two months before some kind of deal is brokered in Washington. That’s based on a projection from Global Insight, a national consulting firm that the state relies on for macroeconomic guidance.

State economist Tom Stinson acknowledged that it’s impossible to project with any certainty how the budgetary standoff in Washington will play out. “There’s no magic to it,” Stinson said of the two-month assumption. But he also pointed out that even if all the cuts remain in place, they are only expected to reduce economic growth by 0.5 percent in the next fiscal year. “The point is, it’s not going to bring the economy to its knees,” Stinson said.

The main piece of bad news in the forecast is a continuing shortfall in revenues from the electronic pulltabs that are expected to pay the state’s share of construction costs for a new Minnesota Vikings stadium. Initial estimates were that the state would receive nearly $150 million in revenue from the charitable gambling expansion in the 2014-15 biennium — a number that many scoffed at as unreasonably high. That’s now been reduced to roughly $60 million in the current forecast. In large part, that’s because initial estimates that roughly 900 bars would offer the games have proven far off-base. So far only about 130 bars have added electronic pulltabs.

“The critics of the numbers are correct,” acknowledged Minnesota Management and Budget Commissioner Jim Schowalter. “We’re pulling the forecast down so that the estimates of the revenues are lower than previous estimates.”

But Dayton insisted that there’s no need at this point to search for an alternative revenue scheme to finance the stadium. “No bonds have yet been sold to finance the new stadium, and none will be until August,” Dayton said. “It’s not an insurmountable problem, but it is a problem.”

The state’s longer-term financial picture also looks significantly improved. The forecast shows a nearly $800 million surplus for the 2016-17 biennium. But that figure fails to take into account inflation. When that’s factored in, the state actually shows a projected deficit of roughly $1.5 billion for the next two-year budget cycle. In addition, the projected surplus makes no accounting for the $700 million in revenues from tobacco bonds that were used to plug a fiscal hole in the current biennium and must be paid back over time with interest.

The focus will now turn to the DFL-controlled Legislature. Budget targets for finance committees are expected to be released prior to the Easter/Passover break at the end of March. DFL legislative leaders indicated on Thursday that they expect to have budget bills on the floor by the end of April.

Spending demands

While the forecast is undoubtedly good news for DFLers, who control all levers of power at the Capitol for the first time in two decades, they will also likely face increased pressure from various interest groups to spend more money. There is already pent-up demand, from years of stagnant funding or cuts, for increased spending. K-12 education groups have also pressed hard for more funding, even in excess of the additional $300 million that Dayton has proposed. Nursing homes are seeking a 5 percent rate hike, while the public defender system is looking for a 13 percent increase in funding.

House Speaker Paul Thissen downplayed such tensions in assessing how the improved forecast alters the dynamic within his caucus. “Just because the forecast improves shouldn’t also mean that we are releasing people to spend more money,” Thissen said. “I don’t think this necessarily changes the amount of investments we need to make. It may create some more flexibility. ”

Republicans called the forecast a vindication of their policy of holding the line on taxes while in control of the Legislature over the past two years. “It shows that the policies that we put in place over the last couple of years worked, that the economy in Minnesota is recovering, and Minnesota is headed in the right direction,” said House Minority Leader Kurt Daudt.

Daudt also said that raising taxes, as outlined in Dayton’s budget, could derail the progress that’s been made. “We don’t think he needs a revised budget,” Daudt said. “We think he needs to go back to the drawing board.”
But Republicans will have little say in the budget that’s ultimately produced. That’s because DFLers — barring an intra-party revolt — have the votes to pass the budget of their choosing. They’ve repeatedly vowed to come up with a solution to the chronic deficits that have plagued the state for more than a decade.
“We’re going to continue down the road of doing significant tax reform to try and improve the stability in Minnesota’s economy,” said Senate Majority Leader Tom Bakk. “We need to position Minnesota in a better place structurally for [when] we hit that next economic downturn.”

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