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Cuts part of $1 billion budget fix

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Detroit Lakes, 56501

Detroit Lakes Minnesota 511 Washington Avenue 56501

ST. PAUL - Minnesotans can expect state government budget cuts like they have not seen for five years, thanks to a tanking national economy.

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Classrooms apparently will be exempt from the reductions, but it will be weeks before legislators decide how to plug a $935 million budget gap.

The deficit Finance Department officials announced Thursday is "series, but solvable," Gov. Tim Pawlenty said.

Some money to fill the budget gap will come from reserves set aside at the end of last year's legislative session, Pawlenty and legislative leaders said. They also agree there will be cuts in state programs, with Democrats in charge of the Legislature strongly hinting they will target Republican Pawlenty's departments.

Pawlenty plans to release his new budget recommendations next week. Legislative leaders said they will look those over for at least three weeks before coming up with their own plan.

The governor said he will ask agencies under him to look at cuts of 2 percent to 3 percent. He already has put into place a partial hiring freeze.

Some dedicated funds with surpluses, such as one funding health care programs, could be used for other areas under Pawlenty's revised budget plan.

Pawlenty and legislative leaders agreed to spare public school classrooms from cuts, although the state Education Department could take a hit along with other departments.

Public works projects could suffer in light of Thursday's deficit announcement. Pawlenty said hockey arenas, for instance, are likely losers.

Ice rinks in Bemidji and Crookston were among those on the chopping block.

"They can wait," said Pawlenty, a serious hockey fan.

But the governor said a Duluth Entertainment Convention Center expansion, mostly for hockey, should proceed.

Funding for the project has been sought three straight years. The governor and lawmakers generally agreed to it each time, but it never found its way into law.

"The DECC has been grandfathered in," Pawlenty said of the most discussed of all recent public works projects.

If the Democratic-Farmer-Labor Party-controlled Legislature approves other arenas, "that will be a problem," Pawlenty said.

The governor and lawmakers earlier agreed to spend $965 million on public works projects, mostly funded by the state selling bonds. But in light of the new, tighter, budget and lawmakers including some bonds in a transportation funding bill, Pawlenty now insists on reducing the total spending to $825 million.

House bonding Chairwoman Alice Hausman, DFL-St. Paul, said she thinks the Crookston ice rink should proceed because it needs to be moved due to flooding. And it is in bad shape.

"It is the worst arena we have seen," she said.

House Majority Leader Tony Sertich, DFL-Chisholm, called the bonding bill a "jobs bill" and encouraged as much spending there as possible. While Democrats say public works spending would add jobs soon, non-partisan State Economist Tom Stinson said such measures tend not to produce immediate results.

Overall, Pawlenty and legislative leaders refused to be specific about what they might cut or anything else about how they would fix the deficit.

Pawlenty was clear that he would refuse to approve tax increases, and DFL leaders appeared to agree that overall increases are unlikely. However, House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said lawmakers may look at closing what they consider loopholes in current tax law to collect more money.

Projected state revenue dropped $1.3 billion in the past year, causing the shortfall.

It is not an actual deficit; lawmakers and the governor have until June 20, 2009, to fill the gap. And Pawlenty emphasized it is not as big a problem as he inherited in taking office five years ago, when the gap was nearly $4.6 billion. He also said a less-than-$1 billion deficit is fairly small compared to the state's $34.7 billion, two-year budget - less than 3 percent.

Finance Department officials say about two-thirds of this year's portion of the budget has been spent, meaning most of the cuts and other changes will have to come in the budget's second year.

On Thursday, no one called for draining the state's $1 billion in budget reserves, but leaders agreed some of that money should be used for deficit repair.

Stinson warned against cutting reserves too deeply because the economy - which he says is in a recession for the first half of this year - could get worse and the state may need those funds.

"The story of this forecast is a worsening national economy," Finance Commissioner Tom Hanson said.

State businesses now are predicted to pay $456 million less than expected a year ago, for a nearly 21 percent drop in corporate income taxes. While that is the leading revenue problem, sales taxes are predicted to be $322 million lower and individual income taxes are slipping $282 million.

Total revenues are seen 3.8 percent lower than projected a year ago. The state's spending changed little from earlier expectations.

State leaders use the budget forecast released twice a year to set state budgets.

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Reaction to the budget report was somber.

"Today's announcement is a very disturbing addition to several months' worth of grim economic news," Sen. Gary Kubly, DFL-Granite Falls, said Thursday. "It's clear that it's going to take a combination of solutions to solve this deficit. The Legislature takes seriously the challenge of balancing fiscally responsible budget decisions with innovative investments that will help position the state for a successful future."

Like most Democrats, Kubly said jobs are a key area of concern.

"Frankly, our economy has been failing because of shortsighted decisions made by the Pawlenty administration," Kubly said. "For five years, this governor has either ignored or vetoed dozens of bipartisan bills that make long-term investments in critical job-creating programs and policies."

Sen. Tom Bakk, DFL-Cook, said more jobs are needed and the recently passed transportation bill will be a significant step forward. It is expected to provide at least 33,000 new jobs a year for the next 10 years, Bakk said. Also, he said, the public works bill should help.

"The bonding bill provides a prime opportunity to make significant investments in our state's public infrastructure, all while creating hundreds of new employment opportunities in every corner of the state," Bakk said. "It's the economic stimulus this state desperately needs right now."

Sertich is ready to see Pawlenty's budget plan.

"We look forward to sharpening our pencils," he said.

He disagreed with Pawlenty, who often says the state has a spending problem, not a revenue problem.

House Minority Leader Mart Seifert, R-Marshall, said Democrats ignored deficit warning signs.

"The 85 Democrats in charge of the Minnesota House overspent, overtaxed and overregulated last sessions, and kicked off this session with the largest tax increase in modern Minnesota history," Seifert said about a $6.6 billion transportation bill lawmakers passed Monday over a Pawlenty veto.

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