Posted: 12/11/02

State budget deficit is massive

T.W. Budig
ECM Capitol Reporter

Whatever adjective is affixed ó massive or mega-honker ó the stateís projected budget deficit can live up to it.

State officials last week revealed the November economic forecast that shows the state facing a $4.6 billion projected budget deficit for next biennium.

ìWe were prepared for something quite not of this magnitude,î said state economist Tom Stinson.

Lumped into the $4.6 billion deficit for 2004-05 is a $356 million projected deficit for 2002-03 that must be addressed by June 30, 2003.

State officials point to several factors that helped to drive state finances into the red. The biggest factor, explained Stinson, was the impact of the recent stock market decline.

More than half of lost state revenue from individual income tax returns was attributable to lower capital gain realizations, he noted.

Capital gain realizations fell by 55 percent in tax year 2001 ó from about $9 billion to about $4 billion, Stinson said.

State officials also cite higher than expected spending in human services ó healthcare costs are projected to grow 23 percent next biennium ó and an economy languishing in recovery as other factors stoking the deficit.

(K-12 spending is expected to increase about six percent in 2004-05).

good and bad news

Stinson described the November forecast as one with more downside potential and upside, but some of the forecast seems heartening.

For instance, state officials explained that the revenue downfall should not be attributed to an ailing economic outlook.

Indeed, Global Insight (formerly DRI), the stateís economic forecaster, currently predicts strong economic growth nationally with no recession through 2007.

But thereís a lingering tarnish.

Forecasters do not take into account the possibility of war with Iraq or potential for another terrorist attack.

Such events could flatten economic growth rates, Stinson noted. And the impact could be more severe, he explained.

And future growth rates are not as strong as the rates witnessed in the late 1990s ó a unique, supercharged economy, explained Stinson.

ìWe are not going to grow out way out of this problem,î he said.

Other factors

Indeed, Minnesota lost more jobs than the national average during the recent recession. More than 38,000 manufacturing jobs were lost is less than 30 months.

Eighty percent of Minnesota manufacturing jobs gained during the 1990s were lost.

All told, state revenue is expected to grow by about 6.6 percent ($27 billion) in 2004-05 while projected spending is expected to reach $31 billion, an increase of about 14 percent ó an inexact figure ó over the current biennium.

ìThat math doesnít work,î Governor-elect Tim Pawlenty said last week.

People would be shocked to learn that revenues are expected to increase while a $4.6 billion deficit is projected, he said.

In fact, it could be argued the deficit is actually bigger.

Since no budget yet exists for 2004-05, forecasters assumed the extension of current programs. And as the Legislature deemed, additional cost for inflation was not taken into account.

Were a 2.5 percent inflation rate assumed, the $4.6 billion projected budget deficit for 2004-05 would grow by an additional billion.

Minnesotaís budget woes arenít unique, Stinson said. Many states are facing the same problems, he said.

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