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Minnesota faces battle over how to balance $6.2 billion deficit

ST. PAUL -- Minnesotans should not feel an impact from a growing state budget deficit, at least not for a few months.

When legislators return to the Capitol on Jan. 4, they will debate the next two-year budget and an issue that does matter to Minnesotans: raising taxes vs. cutting state programs.

State leaders' jobs became more difficult Thursday when finance officials announced the state would face a $6.2 billion deficit in the two years beginning next July 1. The main job of lawmakers and the new governor next year will be writing a budget to take that into account.

The predicament is that policymakers already have dealt with budget deficits for years. As Commissioner Steve Sviggum of Minnesota Management and Budget said, "There are very few cards left to play."

Policymakers did not know specifically how they would deal with the problem on Thursday, having been elected or re-elected just a month earlier, but general comments split along predictable party lines: Democrats like the idea of raising taxes while Republicans favor cutting spending.

The problem is simple: State spending is projected to rise 27.5 percent while revenues such as taxes are on track to go up 5 percent.

Former U.S. Sen. Mark Dayton, who holds a commanding lead in a governor race recount, said the 27.5 percent spending increase would just keep state services at the same level as now. For instance, the Democrat said, more money is needed to fund an expected 14,000 more students in Minnesota schools; keeping education funding level, he has said, would result in less money per pupil because the same funds would have to cover more students.

While Dayton said he continues to favor raising taxes on the rich as part of the solution, he said that he has only just begun meetings to provide him with budget background and has not begun formulating a full budget plan.

Republican Gov. Tim Pawlenty, a probable presidential candidate, and Republican legislative leaders said that the state needs to live within the revenues already on the books. The 5 percent more revenue does not represent a tax rate increase, but just more money coming, for instance, from Minnesotans' higher incomes.

Dayton and other Democrats blamed Pawlenty, in part, for the budget problem, saying he forced local governments to raise property taxes while he refused to increase state taxes such as those on income.

"He has left us in a terrible situation," Dayton said about the governor who is to leave office Jan. 3.

Pawlenty, meanwhile, dismissed the so-called deficit: "It is fictional."

He called the budget situation "very manageable."

The governor repeatedly has mentioned that all states other than North Dakota and maybe one other face similar budget problems.

Sviggum, on the job three hours before releasing the budget forecast, said there were "no big surprises" in the new report.

Indeed, all of the higher state spending factors have been debated for months:

-- $2.3 billion to replace federal funds used to balance the state budget.

-- $2.3 billion to repay a delay in the state paying schools.

-- $660 million to restore funding to programs cut recently.

-- $2 billion in increased needs for education, health and other services.

House speaker-designate Kurt Zellers, R-Maple Grove, said newly empowered Republicans will fight to keep spending close to $30 billion over two years instead of the $38.6 billion it would be if the Legislature accepts planned increases. Republicans would not give specifics about what they would cut from projected spending.

"There are going to be some tough times," Zellers said.

The good news, especially for rural communities, is that no budget cuts are expected before July 1.

"Local governments don't have to scramble now," Rep. Morrie Lanning, R-Moorhead, said because a feared cut in local government aid will not be needed to balance the budget.

Pawlenty has cut local aid at this time of year in the past, when it became obvious that the budget otherwise would be in the red. That forced cities, in particular, to make large program cuts within a matter of days.

While it is good news that local government funds will not be raided to balance the budget, Lanning added, problems remain as legislators deal with the coming budget. Especially bad are rising health-care costs, which Lanning said "eat up" natural revenue increases.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.